---

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 March 31, 2008
|                                             
|OR                                           
|                                             
|o                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _____

Commission file number 001-32326

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

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

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

(732) 635-1500(Registrants telephone number, including area code)

(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(Do not check if smaller
  reporting company) | Smaller reporting company  o

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

Yes
          o                    No
          x

The number of
the registrants common units outstanding as of April 30, 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 MARCH 31, 2008 
TABLE OF CONTENTS

|           |                                                                                                                                                  |    |          | 
|---------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | -- | -------- | 
|           |                                                                                                                                                  |    | Page No.
|           |                                                                                                                                                  |    |         
|           | PART IFINANCIAL
INFORMATION                                                                                                                     |    |          | 
|           |                                                                                                                                                  |    |          | 
|Item 1.    | Financial Statements                                                                                                                             |    | 1        | 
|           |                                                                                                                                                  |    |          | 
|           | Unaudited Condensed Consolidated Balance
  Sheets as of March 31, 2008 and December 31, 2007                                                     |    | 1        | 
|           |                                                                                                                                                  |    |          | 
|           | Unaudited Condensed Consolidated Statements
  of Operations and Comprehensive Income for the three month periods ended
  March 31, 2008 and 2007 |    | 2        | 
|           |                                                                                                                                                  |    |          | 
|           | Unaudited Condensed Consolidated Statement
  of Changes in Partners Capital for the three-month period ended March 31,
  2008                   |    | 3        | 
|           |                                                                                                                                                  |    |          | 
|           | Unaudited Condensed Consolidated Statements
  of Cash Flows for the three-month periods ended March 31, 2008 and 2007                            |    | 4        | 
|           |                                                                                                                                                  |    |          | 
|           | Notes to Unaudited Condensed Consolidated
  Financial Statements                                                                                 |    | 5        | 
|           |                                                                                                                                                  |    |          | 
|Item 2.    | Managements Discussion and Analysis of
  Financial Condition and Results of Operations                                                          |    | 22       | 
|           |                                                                                                                                                  |    |          | 
|Item 3.    | Quantitative and Qualitative Disclosures
  About Market Risk                                                                                     |    | 37       | 
|           |                                                                                                                                                  |    |          | 
|Item 4.    | Controls and Procedures                                                                                                                          |    | 38       | 
|           |                                                                                                                                                  |    |          | 
|           | PART IIOTHER
INFORMATION                                                                                                                        |    |          | 
|           |                                                                                                                                                  |    |          | 
|Item 1.    | Legal Proceedings                                                                                                                                |    | 39       | 
|           |                                                                                                                                                  |    |          | 
|Item 1A.   | Risk Factors                                                                                                                                     |    | 39       | 
|           |                                                                                                                                                  |    |          | 
|Item 2.    | Unregistered Sales of Equity Securities and
  Use of Proceeds                                                                                    |    | 46       | 
|           |                                                                                                                                                  |    |          | 
|Item 3.    | Defaults Upon Senior Securities                                                                                                                  |    | 47       | 
|           |                                                                                                                                                  |    |          | 
|Item 4.    | Submission of Matters to a Vote of Security
  Holders                                                                                            |    | 47       | 
|           |                                                                                                                                                  |    |          | 
|Item 5.    | Other Information                                                                                                                                |    | 47       | 
|           |                                                                                                                                                  |    |          | 
|Item 6.    | Exhibits                                                                                                                                         |    | 47       | 
|           |                                                                                                                                                  |    |          | 
|SIGNATURES |                                                                                                                                                  | 48 |         

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
March 31, 2008 and December 31, 2007
(in thousands)

|                                                          |  |           |         |              |   |         |  
|--------------------------------------------------------- |  | --------- | ------- | ------------ | - | ------- | -
|                                                          |  | March 31, |         | December 31, |  
|                                                          |  | 2008      |         | 2007         |  
|                                                          |  |           |         |              |  
|Assets                                                    |  |           |         |              |   |         |  
|Current assets                                            |  |           |         |              |   |         |  
|Cash and
  equivalents                                    |  | $         | 24,022  |              | $ | 21,604  |  
|Current
  portion of restricted cash and equivalents      |  |           | 79,093  |              |   | 113,960 |  
|Accounts
  receivable, net                                |  |           | 11,053  |              |   | 11,934  |  
|Prepaid
  expenses and other current assets               |  |           | 8,700   |              |   | 10,683  |  
|                                                          |  |           |         |              |   |         |  
|Total current
  assets                                    |  |           | 122,868 |              |   | 158,181 |  
|Restricted
  cash and equivalents, net of current portion |  |           | 7,189   |              |   | 11,322  |  
|Vessels and
  equipment, net                              |  |           | 554,715 |              |   | 489,464 |  
|Deferred
  financing costs, net                           |  |           | 17,928  |              |   | 19,019  |  
|Other assets                                              |  |           | 4,457   |              |   | 5,042   |  
|                                                          |  |           |         |              |   |         |  
|Total assets                                              |  | $         | 707,157 |              | $ | 683,028 |  
|                                                          |  |           |         |              |   |         |  
|                                                          |  |           |         |              |   |         |  
|                                                          |  |           |         |              |   |         |  
|Liabilities and Partners Capital                         |  |           |         |              |   |         |  
|Current
  liabilities                                     |  |           |         |              |   |         |  
|Current
  portion of long-term debt                       |  | $         | 3,100   |              | $ | 3,100   |  
|Accounts
  payable                                        |  |           | 10,221  |              |   | 9,668   |  
|Due to affiliates                                         |  |           | 2,725   |              |   | 3,393   |  
|Deferred
  revenue                                        |  |           |        |              |   | 1,193   |  
|Accrued
  expenses and other liabilities                  |  |           | 21,539  |              |   | 31,325  |  
|                                                          |  |           |         |              |   |         |  
|Total current
  liabilities                               |  |           | 37,585  |              |   | 48,679  |  
|Long-term
  debt, net of current portion                  |  |           | 486,047 |              |   | 456,927 |  
|Deferred
  income taxes                                   |  |           | 1,664   |              |   | 2,145   |  
|Other
  liabilities                                       |  |           | 19,516  |              |   | 10,920  |  
|                                                          |  |           |         |              |   |         |  
|Total
  liabilities                                       |  |           | 544,812 |              |   | 518,671 |  
|                                                          |  |           |         |              |   |         |  
|                                                          |  |           |         |              |   |         |  
|Noncontrolling
  interest in Joint Venture                |  |           | 50,856  |              |   | 33,324  |  
|                                                          |  |           |         |              |   |         |  
|                                                          |  |           |         |              |   |         |  
|Commitments
  and contingencies (Note 14)                 |  |           |         |              |   |         |  
|                                                          |  |           |         |              |   |         |  
|Partners Capital                                         |  |           |         |              |   |         |  
|Partners
  capital                                       |  |           | 128,422 |              |   | 139,263 |  
|Accumulated
  other comprehensive loss                    |  |           | (16,933 | )            |   | (8,230  | )
|                                                          |  |           |         |              |   |         |  
|Total
  partners capital                                 |  |           | 111,489 |              |   | 131,033 |  
|                                                          |  |           |         |              |   |         |  
|Total
  liabilities and partners capital                 |  | $         | 707,157 |              | $ | 683,028 |  
|                                                          |  |           |         |              |   |         |  

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

1

---



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 
  March 31, |        
|                                                                |  |                                         |        
|                                                                |  | 2008                                    |         | 2007 |  
|                                                                |  |                                         |         |      |  
|                                                                |  |                                         |         |      |   |        |  
|Revenues                                                        |  | $                                       | 51,504  |      | $ | 42,082 |  
|                                                                |  |                                         |         |      |   |        |  
|Operating expenses                                              |  |                                         |         |      |   |        |  
|Vessel
  operating expenses                                     |  |                                         | 17,021  |      |   | 14,918 |  
|Voyage
  expenses                                               |  |                                         | 13,679  |      |   | 7,437  |  
|General and
  administrative expenses                           |  |                                         | 3,994   |      |   | 3,765  |  
|Depreciation
  and amortization                                 |  |                                         | 10,504  |      |   | 9,048  |  
|Other expense
  (income)                                        |  |                                         | 5,787   |      |   | (3,486 | )
|                                                                |  |                                         |         |      |   |        |  
|Total
  operating expenses, net                                 |  |                                         | 50,985  |      |   | 31,682 |  
|                                                                |  |                                         |         |      |   |        |  
|Operating
  income                                              |  |                                         | 519     |      |   | 10,400 |  
|Interest
  expense                                              |  |                                         | 7,891   |      |   | 6,917  |  
|Interest
  income                                               |  |                                         | (1,040  | )    |   | (2,675 | )
|Net gains on
  derivative financial instruments                 |  |                                         | (442    | )    |   |       |  
|                                                                |  |                                         |         |      |   |        |  
|(Loss) income
  before income taxes and noncontrolling interest |  |                                         | (5,890  | )    |   | 6,158  |  
|Provision for
  income taxes                                    |  |                                         | 292     |      |   | 420    |  
|                                                                |  |                                         |         |      |   |        |  
|(Loss) income
  before noncontrolling interest                  |  |                                         | (6,182  | )    |   | 5,738  |  
|Noncontrolling
  interest in Joint Venture losses               |  |                                         | 404     |      |   | 11     |  
|                                                                |  |                                         |         |      |   |        |  
|Net (loss)
  income                                             |  |                                         | (5,778  | )    |   | 5,749  |  
|Other comprehensive loss                                        |  |                                         |         |      |   |        |  
|Fair market
  value adjustment for derivatives                  |  |                                         | (8,703  | )    |   | (925   | )
|                                                                |  |                                         |         |      |   |        |  
|Comprehensive
  (loss) income                                   |  | $                                       | (14,481 | )    | $ | 4,824  |  
|                                                                |  |                                         |         |      |   |        |  
|                                                                |  |                                         |         |      |   |        |  
|General
  partners interest in net (loss) income               |  | $                                       | (116    | )    | $ | 115    |  
|Limited partners interest in net (loss) income                 |  |                                         |         |      |   |        |  
|Net (loss)
  income                                             |  | $                                       | (5,662  | )    | $ | 5,634  |  
|Net (loss)
  income per unit - basic and diluted                |  | $                                       | (0.31   | )    | $ | 0.31   |  
|Weighted
  average units outstanding - basic and diluted        |  |                                         | 18,234  |      |   | 18,234 |  

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

2

---



U.S. Shipping Partners L.P.Unaudited Condensed Consolidated Statement of Changes in
Partners Capital
Three Months Ended March 31, 2008
(in thousands)

|                                               |  |                    |        |              |   |         |             |               |       |         |   |         |   |       |      |   |   |         |   |   |         |  
|---------------------------------------------- |  | ------------------ | ------ | ------------ | - | ------- | ----------- | ------------- | ----- | ------- | - | ------- | - | ----- | ---- | - | - | ------- | - | - | ------- | -
|                                               |  | Partners Capital  |        |              |   |         |             |              
|                                               |  |                    |        |              |   |         |             |              
|                                               |  | Limited
  Partners |        |              |   |         | Accumulated |               |       |         |  
|                                               |  |                    |        |              |   |         | Other       |               |       |         |  
|                                               |  | Common             |        | Subordinated |   | General |             | Comprehensive |       |         |  
|                                               |  | Units              |        | $            |   | Units   |             | $             |       | Partner |   | Loss    |   | Total |     
|                                               |  |                    |        |              |   |         |             |               |       |         |   |         |   |       |     
|Balance
  at December 31, 2007                 |  |                    | 11,341 |              | $ | 157,683 |             |               | 6,900 |         | $ | (18,936 | ) | $     | 516  |   | $ | (8,230  | ) | $ | 131,033 |  
|Net loss                                       |  |                    |       |              |   | (3,519  | )           |               |      |         |   | (2,143  | ) |       | (116 | ) |   |        |   |   | (5,778  | )
|Amortization of
  deferred equity compensation |  |                    |       |              |   | 37      |             |               |      |         |   |        |   |       |     |   |   |        |   |   | 37      |  
|Fair market
  value adjustment for derivatives |  |                    |       |              |   |        |             |               |      |         |   |        |   |       |     |   |   | (8,703  | ) |   | (8,703  | )
|Cash distributions                             |  |                    |       |              |   | (5,100  | )           |               |      |         |   |        |   |       |     |   |   |        |   |   | (5,100  | )
|                                               |  |                    |        |              |   |         |             |               |       |         |   |         |   |       |      |   |   |         |   |   |         |  
|Balance
  at March 31, 2008                    |  |                    | 11,341 |              | $ | 149,101 |             |               | 6,900 |         | $ | (21,079 | ) | $     | 400  |   | $ | (16,933 | ) | $ | 111,489 |  
|                                               |  |                    |        |              |   |         |             |               |       |         |   |         |   |       |      |   |   |         |   |   |         |  

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 Cash Flows
(in thousands)

|                                                                                                          |  |                            |         |      |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | -
|                                                                                                          |  | For the Three Months Ended |        
|                                                                                                          |  |                            |        
|                                                                                                          |  | March 31,                  |        
|                                                                                                          |  |                            |        
|                                                                                                          |  | 2008                       |         | 2007 |  
|                                                                                                          |  |                            |         |      |  
|Cash flows from operating activities                                                                      |  |                            |         |      |   |         |  
|Net (loss)
  income                                                                                       |  | $                          | (5,778  | )    | $ | 5,749   |  
|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 |  |                            | 10,968  |      |   | 9,452   |  
|Impairment of
  construction-in-progress                                                                  |  |                            | 5,720   |      |   |        |  
|Loss on sale of
  surplus equipment                                                                       |  |                            | 67      |      |   |        |  
|Equity
  compensation                                                                                     |  |                            | 37      |      |   |        |  
|(Benefit)
  provision for accounts receivable                                                             |  |                            | (90     | )    |   | 89      |  
|Noncontrolling
  interest in Joint Venture loss                                                           |  |                            | (404    | )    |   | (11     | )
|Net gain on
  derivative financial instruments                                                            |  |                            | (442    | )    |   |        |  
|Deferred income
  taxes                                                                                   |  |                            | 192     |      |   | (314    | )
|Capitalized
  drydock costs                                                                               |  |                            | (1,965  | )    |   | (4,664  | )
|Changes in
  assets and liabilities:                                                                      |  |                            |         |      |   |         |  
|Accounts
  receivable                                                                                     |  |                            | 1,162   |      |   | (2,199  | )
|Prepaid
  expenses and other current assets                                                               |  |                            | 1,178   |      |   | (338    | )
|Other assets                                                                                              |  |                            | (1      | )    |   | (136    | )
|Accounts
  payable                                                                                        |  |                            | (1,182  | )    |   | 3,772   |  
|Deferred
  revenue                                                                                        |  |                            | (1,193  | )    |   | (38     | )
|Accrued
  expenses and other liabilities                                                                  |  |                            | (4,762  | )    |   | (2,924  | )
|                                                                                                          |  |                            |         |      |   |         |  
|Net cash
  provided by operating activities                                                               |  |                            | 3,507   |      |   | 8,438   |  
|                                                                                                          |  |                            |         |      |   |         |  
|                                                                                                          |  |                            |         |      |   |         |  
|Cash flows from investing activities                                                                      |  |                            |         |      |   |         |  
|Change in
  restricted cash and equivalents, net                                                          |  |                            | 39,000  |      |   | 5,715   |  
|Sale of surplus
  equipment                                                                               |  |                            | 138     |      |   |        |  
|Construction of
  vessels and equipment                                                                   |  |                            | (82,183 | )    |   | (25,260 | )
|Purchase of
  interest rate cap                                                                           |  |                            |        |      |   | (1,924  | )
|Payments to
  Hess, net                                                                                   |  |                            |        |      |   | (447    | )
|                                                                                                          |  |                            |         |      |   |         |  
|Net cash used
  in investing activities                                                                   |  |                            | (43,045 | )    |   | (21,916 | )
|                                                                                                          |  |                            |         |      |   |         |  
|                                                                                                          |  |                            |         |      |   |         |  
|Cash flows from financing activities                                                                      |  |                            |         |      |   |         |  
|Proceeds from
  borrowings                                                                                |  |                            |        |      |   | 18,000  |  
|Proceeds from
  Joint Venture revolver borrowings                                                         |  |                            | 29,895  |      |   | 1,982   |  
|Contribution by
  noncontrolling interest equity investors in Joint Venture                               |  |                            | 17,936  |      |   | 2,344   |  
|Repayment of
  debt                                                                                       |  |                            | (775    | )    |   | (685    | )
|Distributions to
  partners                                                                               |  |                            | (5,100  | )    |   | (8,373  | )
|                                                                                                          |  |                            |         |      |   |         |  
|Net cash
  provided by financing activities                                                               |  |                            | 41,956  |      |   | 13,268  |  
|                                                                                                          |  |                            |         |      |   |         |  
|                                                                                                          |  |                            |         |      |   |         |  
|Net increase
  (decrease) in cash and cash equivalents                                                    |  |                            | 2,418   |      |   | (210    | )
|Cash and cash
  equivalents at beginning of period                                                        |  |                            | 21,604  |      |   | 2,686   |  
|                                                                                                          |  |                            |         |      |   |         |  
|Cash and cash
  equivalents at end of period                                                              |  | $                          | 24,022  |      | $ | 2,476   |  
|                                                                                                          |  |                            |         |      |   |         |  

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

4

---



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 one articulated tug barge
(ATB).  The Partnerships first ATB, the ATB Freeport, was delivered
in June 2007 and entered service in July 2007.
Additionally, the Partnership has contracted to construct four
additional ATBs which are scheduled for delivery in August 2008, November 2008,
August 2009 and December 2010, although the Partnership has the option to
cancel the last ATB prior to June 30, 2008.
Based on current market conditions, the Partnership currently expects to
exercise its option to cancel the last ATB in June 2008.  See Note 6 for additional discussion on the
option to cancel.

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 entered into contracts to transport grain to
Africa.  These transactions are not
subject to the provisions of the Jones Act, but U.S Flag vessels are given
preference for these voyages.

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 second quarter of 2009, the second
tanker later in 2009, two tankers in 2010, one tanker in 2011, 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 (Products Investor or 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 $42,129 has already been made and
the remaining $27,871 is in escrow.

In
the opinion of management, these financial statements reflect all adjustments
necessary, consisting of normal recurring entries, for a fair statement 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 did not declare a distribution on its subordinated units and
general partner units with respect to the quarters ended March 31, 2008 or
December 31, 2007.  It was previously
anticipated that the ITBs would operate primarily in the spot market in 2008,
increasing the volatility of the Partnerships revenues and working capital
requirements, and decreasing the predictability of its cash flows.  However, in late March and early April 2008,
market conditions in the spot market deteriorated significantly 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 the Partnerships vessels are at record 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).
Additionally, one of the Partnerships customers terminated a charter of
an ITB earlier than had been expected, and this ITB entered the spot market.  Due to these market shifts, the ITBs have
recently incurred idle periods greater than, and charter rates below, the
Partnerships previous expectations.

5

---



Additionally, the Partnership has observed modest decreased demand for
the domestic coastwise transportation of chemical products served by its
chemical transporting vessels, which the Partnership believes is primarily due
to its customers working off inventory levels due to the decline in economic
activity.  As a result, the
Partnerships cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions and, unless there is a significant
improvement in utilization of, and charter rates for, the ITBs and a resumption
of growth in the Partnerships chemical business, and/or an amendment to the
Partnerships financial covenants, it is possible that the Partnership will
fall out of 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) measured at the end of
the second quarter of 2008 and likely that the Partnership will fall out of
compliance with these same covenants measured at the end of the third quarter
of 2008, although the Partnership expects to generate sufficient cash to make
interest payments and scheduled principal payments on its debt.  The Partnership is currently in compliance
with all its financial covenants as of the end of the first quarter of 2008.

Upon
the occurrence of a covenant breach, the Partnership will be unable to make
distributions on its common units until it has cured such breach (although any
unpaid distributions will accrue).  In
addition, a breach of the Partnerships loan covenants would give the lenders
under the Senior Credit Facility the right to demand immediate payment of the
Partnerships loans under the Senior Credit Facility and cause cross defaults
under 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.

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 the financial resources of the Partnership.

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.  Assuming that the debt is
not accelerated, the Partnership believes that it will have sufficient
liquidity to meet ongoing operations for the remainder of 2008 and into the
first half of 2009.  The Partnerships
lenders right to demand immediate payment of the Partnerships outstanding
indebtedness upon the occurrence of a default under the Senior Credit Facility,
coupled with a substantial doubt about the Partnerships ability to repay this
indebtedness immediately and accordingly in such circumstances to continue as a
going concern, leads to the need to successfully renegotiate its existing, or
secure alternative, financing arrangements.
To mitigate this risk, the Partnership is pursuing strategic
alternatives to avoid default, including obtaining amendments to, or waivers of
compliance with, certain of its financial ratio covenants, obtaining new equity
or selling the business.  Although there
can be no assurance, the Partnership believes it will be successful in doing
so.  The successful consummation of any
one or more of these alternatives on terms acceptable to the Partnership or a
significant improvement in utilization of, and charter rates for, the ITBs and
a resumption of growth in the Partnerships chemical business would make the
likelihood of defaulting under these covenants remote.

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.
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:

| |    |                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------
| | 1. | May be
  applied instrument by instrument, with a few exceptions, such as investments
  otherwise accounted for by the equity method

6

---



| |    |                                                                            
| | -- | ---------------------------------------------------------------------------
| | 2. | Is
  irrevocable (unless a new election date occurs)                       
| |    |                                                                            
| | 3. | Is applied
  only to entire instruments and not to portions of instruments.

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

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

4.             Net
Income per Unit

Basic
net income per unit is determined by dividing net income, after deducting the
amount of net income allocated to the general partners interest, by the
weighted average number of units outstanding during the period.  Diluted
net income per unit is calculated in the same manner as net income per unit,
except that the weighted average number of outstanding units is increased to
include the dilutive effect of outstanding unit options or phantom units.

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

|                                                                      |  |                                        |        |      |  |        | 
|--------------------------------------------------------------------- |  | -------------------------------------- | ------ | ---- |  | ------ | 
|                                                                      |  | For the Three Months Ended
  March 31, |       
|                                                                      |  |                                        |       
|                                                                      |  | 2008                                   |        | 2007 | 
|                                                                      |  |                                        |        |      | 
|                                                                      |  |                                        |        |      |  |        | 
|Weighted
  average units outstanding for basic net income per unit    |  |                                        | 18,234 |      |  | 18,234 | 
|                                                                      |  |                                        |        |      |  |        | 
|Dilutive
  effect of restricted units                                 |  |                                        |       |      |  |       | 
|                                                                      |  |                                        |        |      |  |        | 
|                                                                      |  |                                        |        |      |  |        | 
|Weighted
  average units outstanding for dilutive net income per unit |  |                                        | 18,234 |      |  | 18,234 | 
|                                                                      |  |                                        |        |      |  |        | 

7

---



Excluded
from the calculation of dilutive net income per unit for the three months ended
March 31, 2008 are 6,405 restricted units that, if included, would have an
anti-dilutive effect.

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 March
31, 2008 and December 31, 2007, the ATB Escrow balance was $58,411 and $85,453,
respectively, and the Joint Venture Escrow balance was $27,871 and $39,829,
respectively. Additionally, amounts drawn on the ATB Escrow account for items
expected to be paid in the second quarter of 2008 were $21,105, and are
included in cash and equivalents on the Unaudited Condensed Consolidated
Balance Sheets at March 31, 2008 as they were no longer legally restricted as
to use at March 31, 2008. Similar amounts included in cash and equivalents
totaled $13,369 at December 31, 2007. Amounts the Partnership projects will be
used to satisfy obligations due during the next twelve months are classified as
current restricted cash and equivalents, with the remainder classified as
noncurrent restricted cash and equivalents.

6. Vessels and Equipment

Vessels
and equipment consist of the following:

|                                                                               |  |                  |         |                     |   |         | 
|------------------------------------------------------------------------------ |  | ---------------- | ------- | ------------------- | - | ------- | 
|                                                                               |  | March 31,
  2008 |         | December 31,
  2007 |  
|                                                                               |  |                  |         |                     |  
|Vessels                                                                        |  | $                | 348,314 |                     | $ | 348,368 | 
|Office
  furniture, equipment and other                                        |  |                  | 448     |                     |   | 448     | 
|                                                                               |  |                  |         |                     |   |         | 
|                                                                               |  |                  | 348,762 |                     |   | 348,816 | 
|Less:
  Accumulated depreciation                                               |  |                  | 112,831 |                     |   | 106,810 | 
|                                                                               |  |                  |         |                     |   |         | 
|                                                                               |  |                  | 235,931 |                     |   | 242,006 | 
|Construction
  in progress-ATBs                                               |  |                  | 130,665 |                     |   | 111,321 | 
|Construction
  in progress-tankers                                             |  |                  | 157,651 |                     |   | 101,141 | 
|Capitalized
  drydock expenditures, net of amortization of $26,656 and $22,172 |  |                  | 30,468  |                     |   | 34,996  | 
|                                                                               |  |                  |         |                     |   |         | 
|Total
  vessels and equipment, net                                             |  | $                | 554,715 |                     | $ | 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: ITBs and the Sea Venture to their mandatory retirement
from the transport of petroleum products as required by OPA 90, between 2012
and 2014; 10 years for the Chemical Pioneer, the Charleston and the Houston
and 30 years for the ATB Freeport, based on their estimated
useful lives. 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.

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. 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. If the ITBs are permitted to continue in the
UWILD Program, the Partnership will need to conduct an enhanced survey, which
will result in the vessel being off-hire, and not earning revenue, for an
additional 12 days each time a survey is conducted. In addition, vessels may
have to be drydocked in the event of accidents or other unforeseen damage. The
Partnerships recently constructed ATB Freeport and all of the newbuild ATBs
and product tankers qualify for the UWILD Program.

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 March 31, 2008 and December 31, 2007, the Partnership
has recognized approximately $816 and $745 as a receivable for the insurance
proceeds based upon the estimated repair costs, respectively. There were no
drydocks in progress at March 31, 2008 or December 31, 2007. Capitalized
drydock expenditures of $571 and $2,433 were accrued at March 31, 2008 and
December 31, 2007, respectively. During the three months ended March 31, 2008,
the Partnership reduced previously recorded estimates of drydock costs by $147.

8

---



Depreciation
of vessels and equipment for the three months ended March 31, 2008 and March
31, 2007 was $6,020 and $5,591, respectively. Amortization of drydocking
expenditures was $4,484 and $3,457 for the three months ended March 31, 2008
and March 31, 2007, respectively.

At
March 31, 2008 and December 31, 2007, Construction in progress-ATBs includes
capitalized interest of $9,994 and $7,793, respectively, and accrued invoices
of $3,593 and $1,237, respectively. At March 31, 2008 and December 31, 2007,
Construction in progress-tankers of the Joint Venture includes capitalized
interest of $13,769 and $11,266, respectively, and accrued liabilities of
$11,974 and $15,589, respectively.

The
Partnership has entered into contracts to construct four additional ATB units.
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. However, the Partnership has
the option to cancel the fourth barge prior to June 30, 2008 (the Cancellation
Option). 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 includes an option to construct and deliver an additional tug, which
must be exercised by June 30, 2008. This tug, if constructed, will be combined
with the fourth barge referenced above. The total construction cost anticipated
for the first three new ATB units is approximately $66,000 to $69,000 per unit
(subject to modifications and changes in the cost of steel), in each case
inclusive of owner furnished equipment, but exclusive of capitalized interest. The capitalized interest as of March 31,
2008 relating to the first three ATB units is $9,994. The Partnership
expects that the first two of these ATB units will be completed in August 2008
and November 2008, respectively, and the third ATB unit to be completed in
August 2009. As of March 31, 2008, the
Partnership made payments totaling $120,671 related to the first three
newbuilds and had in escrow approximately $58,411, plus $21,105 of funds drawn
from the escrow account in anticipation of payments due in the second quarter
of 2008. These escrowed amounts and funds drawn represent the estimated cost to
substantially complete construction of the first three ATBs under construction
at MMG and Eastern.

During
the quarter ended March 31, 2008, the Partnership has determined that the
fourth ATB unit referenced above is impaired. While the Partnership has obtained
financing for construction of the first three ATB units, it has not obtained
financing for the fourth ATB unit. Based on current market conditions, the
Partnership expects to exercise the Cancellation Option for the fourth barge in
June 2008, and it does not expect to exercise its option to construct the
fourth tug, although it continues to pursue charters for the operation of, and
financing for the construction of, the vessel. Accordingly, the Partnership has
assessed the fair value of the construction in progress of the fourth ATB unit
at zero, resulting in a non-cash impairment charge of $5,720 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. In addition, the Partnership may be required to
make additional payments for certain owner furnished equipment if they exercise
the Cancellation Option, but would have no further financial obligations with
regard to either the tug or the barge.

On
October 25, 2007, Products Investor and NASSCO contractually accelerated the
delivery dates for the first five tankers that NASSCO is constructing for the
Joint Venture. The revised delivery schedule is for the first tanker to be
delivered in the second quarter of 2009, the second tanker to be delivered in
the fourth quarter of 2009, the third and fourth tankers to be delivered in
2010, and the fifth tanker to be delivered in 2011. 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
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. In the current period, the
Partnership has not recorded any charges as a result of changes in the carrying
value of any of the Partnerships vessels.

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
months ended March 31, 2008 and March 31, 2007, deferred financing costs of the
Partnership (excluding those of the Joint Venture) of $464 and $404,
respectively, were amortized and included in interest expense in the
accompanying Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income, and a portion is included in construction in
progress-ATBs as part of the capitalized interest portion of the Partnerships
ongoing project to construct ATBs.

9

---



For the three months ended March 31, 2008
and March 31, 2007 deferred financing costs of $627 and $620, 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.

8. Accrued Expenses and Other Liabilities

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

|                          |  |                  |        |                     |   |        | 
|------------------------- |  | ---------------- | ------ | ------------------- | - | ------ | 
|                          |  | March 31,
  2008 |        | December 31,
  2007 |  
|                          |  |                  |        |                     |  
|Construction
  of vessels |  | $                | 12,142 |                     | $ | 16,977 | 
|Interest                  |  |                  | 2,022  |                     |   | 5,218  | 
|Insurance
  claims        |  |                  | 2,076  |                     |   | 2,520  | 
|Accrued fuel
  charges    |  |                  | 1,542  |                     |   | 2,080  | 
|Taxes
  payable           |  |                  | 1,364  |                     |   | 1,947  | 
|Other                     |  |                  | 2,393  |                     |   | 2,583  | 
|                          |  |                  |        |                     |   |        | 
|                          |  | $                | 21,539 |                     | $ | 31,325 | 
|                          |  |                  |        |                     |   |        | 

9. Debt

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

|                                                                                                                                                            |  |                  |         |                     |   |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------------- | - | ------- | 
|                                                                                                                                                            |  | March 31,
  2008 |         | December 31,
  2007 |  
|                                                                                                                                                            |  |                  |         |                     |  
|Third Amended and Restated Credit Facility
  - Term, bearing interest at LIBOR plus 3.5% (6.2% at March 31, 2008 and 8.3%
  at December 31, 2007)           |  | $                | 305,022 |                     | $ | 305,797 | 
|Third Amended and Restated Credit Facility
  - Revolving Notes bearing interest at LIBOR plus 3.5% (6.2% at March 31,
  2008 and 8.3% at December 31, 2007) |  |                  | 13,000  |                     |   | 13,000  | 
|13% Senior Secured Notes due 2014                                                                                                                           |  |                  | 100,000 |                     |   | 100,000 | 
|                                                                                                                                                            |  |                  |         |                     |   |         | 
|Revolving Notes Facility - Joint Venture,
  bearing interest at LIBOR plus 4.5% (7.3% at March 31, 2008 and 9.3% December
  31, 2007)                       |  |                  | 71,125  |                     |   | 41,230  | 
|                                                                                                                                                            |  |                  |         |                     |   |         | 
|Total                                                                                                                                                       |  |                  | 489,147 |                     |   | 460,027 | 
|Less: Current portion of long-term debt                                                                                                                     |  |                  | 3,100   |                     |   | 3,100   | 
|                                                                                                                                                            |  |                  |         |                     |   |         | 
|Long-term debt                                                                                                                                              |  | $                | 486,047 |                     | $ | 456,927 | 
|                                                                                                                                                            |  |                  |         |                     |   |         | 

Capitalized
interest for the three months ended March 31, 2008 and March 31, 2007 was
$5,249 and $4,500, respectively.

The
Partnerships cash flows and liquidity have come under increasing pressure due
to the current difficult market conditions and, unless there is a significant
improvement in utilization of, and charter rates for, the ITBs and a resumption
of growth in the Partnerships chemical business, and/or an amendment to the
Partnerships financial covenants, it is possible that the Partnership will
fall out of compliance with certain financial covenants relating to leverage
(debt to EBITDA) and fixed charge and interest coverage under its Senior
Credit Facility measured at the end of the second quarter of 2008 and likely
that the Partnership will fall out of compliance with these same covenants
measured at the end of the third quarter of 2008, although the Partnership expects to generate sufficient cash
to make interest payments and scheduled principal payments on its debt. The Partnership is currently in
compliance with all its financial covenants as of the end of the first quarter
of 2008. See Note 2 for additional
discussion.

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 $1,114 in the current period, which is net of
a $202 reserve recorded as part of the $1,113 valuation allowance discussed
below.

10

---



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 current period.

The
Partnership provides deferred income taxes for the tax effects of differences
between the financial reporting and tax bases 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 certain deferred tax assets that existed as of March 31, 2008 are not
likely to be realized and, accordingly, provided valuation allowances totaling
$1,113 for these deferred tax assets. There were no such allowances as of
December 31, 2007. At March 31, 2008 and December 31, 2007, the Partnership had
net deferred tax assets of $37 and $713, respectively. At March 31, 2008 and
December 31, 2007, the Partnership had net deferred tax liabilities of $1,664
and $2,145, respectively.

At
March 31, 2008 and December 31, 2007, the Partnership had $820 and $729 of
unrecognized tax benefits, respectively. At March 31, 2008 and December
31, 2007, the Partnership had approximately $106 and $99, respectively, of
accrued interest and penalties related to uncertain tax positions. In
the three month period ended March 31, 2008 and 2007, the Partnerships
Unaudited Condensed Consolidated Statement of Operations included $98 and $140
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.

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
and 157-2. 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. 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 and the adoption did not
have an impact on the Partnerships financial statements. 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 endeavors to utilize the best available information in measuring
fair value. The Partnership has determined that all of its financial assets and
financial liabilities are valued using Level 2 inputs as of March 31, 2008 in
the fair value hierarchy described as follows:

Valuation Hierarchy

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

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

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

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

11

---



The
financial assets and liabilities carried at fair value measured via Level 2
inputs on a recurring basis as of March 31, 2008 include:

| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| | · | Foreign currency forward
  contracts with a fair market asset value of $1,506.
|
| | · | An interest rate cap with
  a fair market asset value of $1,686.              
|
| | · | An interest rate swap with
  a fair market liability value of $11,360.        
|
| | · | An interest rate swap with
  a fair market liability value of $7,230.         

Valuation Techniques

The
fair value of the foreign currency forward contracts is based on dealer quotes
of market forward rates and reflects the amount the Partnership would receive
or pay at their maturity dates for contracts involving the same currencies and
maturity dates.

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.

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 $11,360 at March 31, 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 $7,230 at March 31, 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.

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. The fair market value of the foreign currency forward contracts
at March 31, 2008 and December 31, 2007 was a gain of $1,506 and $955,
respectively. 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 this owner-furnished equipment six months ahead of the original
forecasted expenditure date. Accordingly, changes in fair value of the contract
related to this expenditure subsequent to the date of the March payment,
totaling a gain of $23, are included in earnings, since the forecasted hedging
relationship no longer exists. In addition, two of the forecasted payments were
contractually extended, rendering the contracts designated as cash flow hedges
of these forecasted payments ineffective. Accordingly, the full fair value of
these contracts, totaling a gain of $683, was recognized in earnings. Of the
total fair value of foreign exchange gains of $1,506 at March 31, 2008, $800
was recorded in other comprehensive income at March 31, 2008, and $706 was
recorded in earnings for the three month period ended March 31, 2008. 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.

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 March 31, 2008 and December 31, 2007 was a
receivable of $1,686 and $1,950, respectively, and is recorded in Other
Assets on the Unaudited Condensed Consolidated Balance Sheets. A decrease in
the fair value of the instrument of $264 for the three months ended March 31,
2008 is recorded as a loss on derivative financial
instruments in the accompanying Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Income.

12

---



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

On
February 7, 2008, the Board of Directors of the general partner declared and
the Partnership announced its 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 2, 2007, the Partnership issued to each of the non-employee directors of
its general partner, who are not employed by Sterling Investment Partners,
2,000 restricted common units under the Long-Term Incentive Plan for a total
grant of 8,000 units. Each directors right to receive distributions on the
restricted units vested as to 500 units on each of April 2, 2007, July 1, 2007,
October 1, 2007 and January 1, 2008. The value of the restricted units as
determined on the date of issuance was $151, which has been fully recognized in
earnings as of March 31, 2008.

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 $14,523 and $12,708, for the three months
ended March 31, 2008 and March 31, 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 Chairman and Chief Executive
Officer 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
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 March 31,
2008 and 2007, the Partnership paid $107 and $102, respectively in connection
with the lease and received $80 and $77, respectively, from its related
parties.

13

---



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 March 31, 2008 and 2007, the Partnership recorded $334 and
$17, 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 months ended
March 31, 2008 Product Manager recognized $334 in fees for these site
supervision activities, which were eliminated in consolidation.

The
Blackstone Group and Affiliates

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 March 31, 2008 and
2007, the Joint Venture has paid interest of $1,738 and $1,202, 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 will be 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 $12,000 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 6,899,968 of the Partnerships
subordinated units.

14. Commitments and Contingencies

Claims
and Litigation

At
March 31, 2008 and December 31, 2007, the Partnership has a liability for total
claims exposure, both insured and uninsured, of $2,076 and $2,520,
respectively, and a corresponding receivable from the insurance carrier of
$3,068 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
thereunder. Legal costs associated with such claims are expensed as incurred.

14

---



ATB
Commitments

The
Partnership has entered into contracts to construct four additional ATB units.
In 2006, the Partnership entered into a contract with 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. However, the
Partnership has the option, exercisable at any time prior to June 30, 2008, to
cancel the last barge. In 2006, the Partnership entered into a contract for the
construction of three tugs with Eastern, which will be joined with the barges
to complete three new ATB units. The contract with Eastern includes an option
to construct and deliver an additional tug, which must be exercised by June 30,
2008. This tug, if constructed, will be combined with the fourth barge
referenced above. The total construction cost anticipated for the first three
new ATB units is approximately $66,000 to $69,000 per unit (subject to
modifications and changes in the cost of steel), in each case inclusive of
owner furnished equipment, but exclusive of capitalized interest. The capitalized interest as of March 31,
2008 relating to the first three ATB units is $9,994. The Partnership
expects that the first two of these ATB units will be completed in August 2008
and November 2008, respectively, and the third ATB unit to be completed in
August 2009. As of March 31, 2008, the
Partnership made payments totaling $120,671 related to the first three
newbuilds and had in escrow approximately $58,411, plus $21,105 of funds drawn
from the escrow account in anticipation of payments due in the second quarter
of 2008. These escrowed amounts and funds drawn represent the estimated cost to
substantially complete construction of the first three ATBs under construction
at MMG and Eastern.

During
the quarter ended March 31, 2008, the Partnership has determined that the
fourth ATB unit referenced above is impaired. While the Partnership has
obtained financing for construction of the first three ATB units, it has not
obtained financing for the fourth ATB unit. Based on current market conditions,
the Partnership expects to exercise the Cancellation Option for the fourth
barge in June 2008, and it does not expect to exercise its option to construct
the fourth tug, although it continues to pursue charters for the operation of,
and financing for the construction of, the vessel. Accordingly, the Partnership
has assessed the fair value of the construction in progress of the fourth ATB
unit at zero. In addition, the Partnership may be required to make additional
payments for certain owner furnished equipment if they exercise the
Cancellation Option, but would have 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 $42,129 was paid through March 31, 2008. The
Partnerships remaining commitment of $27,871 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. 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.

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. The Joint Venture
has the right to elect to have rights and obligations under the NASSCO contract
to construct up to four additional tankers assigned to the Joint Venture at
specified times. NASSCO released Product Carriers from any obligation under the
construction contract relating to the first five tankers and will release
Product Carriers from any obligation under the construction contract relating
to tankers six through nine to the extent the rights with respect to such
tankers are assigned to the Joint Venture. 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 $10,000 (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.

15

---



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, which true-up is currently ongoing. The
net amounts received or paid by the Partnership were considered contingent
purchase price during the term of the Support Agreement. At the conclusion of
the Support Agreement in September 2007, the net amount received was treated as
a purchase price adjustment to the six ITBs acquired by the Partnership from
Hess in September 2002.

The
cumulative net amount that was recorded as a reduction in the purchase price of
the six ITBs was $8,568 upon the expiration of the Support Agreement in
September 2007.

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
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.

16

---



U.S. Shipping Partners L.P. 
Unaudited Consolidating Balance Sheet 
As of March 31, 2008 
(in thousands)

|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ------- |  | - | -------- | - | - | ------- | -
|                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total   | 
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         | 
|Assets                                                  |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current assets                                          |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Cash and equivalents                                    |  | $        |        |                       | $ |                         |   | $                                 | 24,017  |             | $ | 5       |  | $ |         |   | $ | 24,022  |  
|Current portion of restricted cash and equivalents      |  |          |        |                       |   |                         |   |                                   | 79,093  |             |   |        |  |   |         |   |   | 79,093  |  
|Accounts receivable, net                                |  |          |        |                       |   |                         |   |                                   | 11,053  |             |   |        |  |   |         |   |   | 11,053  |  
|Prepaid expenses and other current assets               |  |          |        |                       |   |                         |   |                                   | 8,586   |             |   | 114     |  |   |         |   |   | 8,700   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total current assets                                    |  |          |        |                       |   |                         |   |                                   | 122,749 |             |   | 119     |  |   |         |   |   | 122,868 |  
|Investment in subsidiaries, net                         |  |          | 254,216 |                       |   |                         |   |                                   |        |             |   |        |  |   | (254,216 | ) |   |        |  
|Intercompany receivable                                 |  |          | 283,258 |                       |   | 73,465                   |   |                                   |        |             |   |        |  |   | (356,723 | ) |   |        |  
|Restricted cash and equivalents, net of current portion |  |          |        |                       |   |                         |   |                                   | 7,189   |             |   |        |  |   |         |   |   | 7,189   |  
|Vessels and equipment, net                              |  |          |        |                       |   |                         |   |                                   | 397,064 |             |   | 157,651 |  |   |         |   |   | 554,715 |  
|Deferred financing costs, net                           |  |          | 9,123   |                       |   | 3,951                    |   |                                   |        |             |   | 8,805   |  |   | (3,951   | ) |   | 17,928  |  
|Other assets                                            |  |          | 1,505   |                       |   |                         |   |                                   | 1,266   |             |   | 1,686   |  |   |         |   |   | 4,457   |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total assets                                            |  | $        | 548,102 |                       | $ | 77,416                   |   | $                                 | 528,268 |             | $ | 168,261 |  | $ | (614,890 | ) | $ | 707,157 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Liabilities and Partners Capital                       |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current liabilities                                     |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Current portion of long-term debt                       |  | $        | 3,100   |                       | $ |                         |   | $                                 |        |             | $ |        |  | $ |         |   | $ | 3,100   |  
|Accounts payable                                        |  |          |        |                       |   |                         |   |                                   | 10,221  |             |   |        |  |   |         |   |   | 10,221  |  
|Due to affiliates                                       |  |          |        |                       |   |                         |   |                                   | 2,508   |             |   | 217     |  |   |         |   |   | 2,725   |  
|Deferred revenue                                        |  |          |        |                       |   |                         |   |                                   |        |             |   |        |  |   |         |   |   |        |  
|Accrued expenses and other liabilities                  |  |          |        |                       |   |                         |   |                                   | 9,143   |             |   | 12,396  |  |   |         |   |   | 21,539  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total current liabilities                               |  |          | 3,100   |                       |   |                         |   |                                   | 21,872  |             |   | 12,613  |  |   |         |   |   | 37,585  |  
|Intercompany payable                                    |  |          |        |                       |   |                         |   |                                   | 283,258 |             |   |        |  |   | (283,258 | ) |   |        |  
|Long-term debt, net of current portion                  |  |          | 414,923 |                       |   | 100,000                  |   |                                   |        |             |   | 71,124  |  |   | (100,000 | ) |   | 486,047 |  
|Advances from Hess, net                                 |  |          |        |                       |   |                         |   |                                   |        |             |   |        |  |   |         |   |   |        |  
|Deferred income taxes                                   |  |          |        |                       |   |                         |   |                                   | 1,664   |             |   |        |  |   |         |   |   | 1,664   |  
|Other liabilities                                       |  |          | 18,590  |                       |   |                         |   |                                   | 926     |             |   |        |  |   |         |   |   | 19,516  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities                                       |  |          | 436,613 |                       |   | 100,000                  |   |                                   | 307,720 |             |   | 83,737  |  |   | (383,258 | ) |   | 544,812 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Noncontrolling interest in Joint Venture                |  |          |        |                       |   |                         |   |                                   |        |             |   | 50,856  |  |   |         |   |   | 50,856  |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Commitments and contingencies                           |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Partners Capital                                       |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Partners capital                                       |  |          | 128,422 |                       |   | (22,584                  | ) |                                   | 220,548 |             |   | 33,668  |  |   | (231,632 | ) |   | 128,422 |  
|Deferred equity compensation                            |  |          |        |                       |   |                         |   |                                   |        |             |   |        |  |   |         |   |   |        |  
|Accumulated other comprehensive loss                    |  |          | (16,933 | )                     |   |                         |   |                                   |        |             |   |        |  |   |         |   |   | (16,933 | )
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total partners capital                                 |  |          | 111,489 |                       |   | (22,584                  | ) |                                   | 220,548 |             |   | 33,668  |  |   | (231,632 | ) |   | 111,489 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  
|Total liabilities and partners capital                 |  | $        | 548,102 |                       | $ | 77,416                   |   | $                                 | 528,268 |             | $ | 168,261 |  | $ | (614,890 | ) | $ | 707,157 |  
|                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |         |  |   |          |   |   |         |  

* 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.

17

---



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.

18

---



U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations 
Three Months Ended March 31, 2008 
(in thousands)

|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|------------------------------------------------------------- |  | -------- | ------ | ------------------ | - | --------------------- | - | --------------------------- | ------ | ----------- | - | ----- | - | - | ------ | - | - | ------ | -
|                                                              |  | Parent * |        | SubsidiaryIssuer * |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries** |        | Adjustments |   | Total |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |  
|Revenues                                                      |  | $        |       |                    | $ |                      |   | $                           | 51,504 |             | $ |      |   | $ |       |   | $ | 51,504 |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|Operating expenses                                            |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|Vessel operating expenses                                     |  |          |       |                    |   |                      |   |                             | 17,021 |             |   |      |   |   |       |   |   | 17,021 |  
|Voyage expenses                                               |  |          |       |                    |   |                      |   |                             | 13,679 |             |   |      |   |   |       |   |   | 13,679 |  
|General and administrative expenses                           |  |          | 37     |                    |   |                      |   |                             | 3,519  |             |   | 438   |   |   |       |   |   | 3,994  |  
|Depreciation and amortization                                 |  |          |       |                    |   |                      |   |                             | 10,504 |             |   |      |   |   |       |   |   | 10,504 |  
|Other expense                                                 |  |          |       |                    |   |                      |   |                             | 5,787  |             |   |      |   |   |       |   |   | 5,787  |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|Total operating expenses, net                                 |  |          | 37     |                    |   |                      |   |                             | 50,510 |             |   | 438   |   |   |       |   |   | 50,985 |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|Operating (loss) income                                       |  |          | (37    | )                  |   |                      |   |                             | 994    |             |   | (438  | ) |   |       |   |   | 519    |  
|Interest expense                                              |  |          | 7,891  |                    |   | 3,407                 |   |                             |       |             |   |      |   |   | (3,407 | ) |   | 7,891  |  
|Interest income                                               |  |          |       |                    |   |                      |   |                             | (1,040 | )           |   |      |   |   |       |   |   | (1,040 | )
|Net (gains) losses on derivative financial instruments        |  |          | (706   | )                  |   |                      |   |                             |       |             |   | 264   |   |   |       |   |   | (442   | )
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|(Loss) income before income taxes and noncontrolling interest |  |          | (7,222 | )                  |   | (3,407                | ) |                             | 2,034  |             |   | (702  | ) |   | 3,407  |   |   | (5,890 | )
|Provision for income taxes                                    |  |          |       |                    |   |                      |   |                             | 292    |             |   |      |   |   |       |   |   | 292    |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|(Loss) income before noncontrolling interest                  |  |          | (7,222 | )                  |   | (3,407                | ) |                             | 1,742  |             |   | (702  | ) |   | 3,407  |   |   | (6,182 | )
|Equity in earnings of unconsolidated subsidiaries             |  |          | 1,444  |                    |   |                      |   |                             |       |             |   |      |   |   | (1,444 | ) |   |       |  
|Noncontrolling interest in Joint Venture losses               |  |          |       |                    |   |                      |   |                             |       |             |   | 404   |   |   |       |   |   | 404    |  
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  
|Net (loss) income                                             |  | $        | (5,778 | )                  | $ | (3,407                | ) | $                           | 1,742  |             | $ | (298  | ) | $ | 1,963  |   | $ | (5,778 | )
|                                                              |  |          |        |                    |   |                       |   |                             |        |             |   |       |   |   |        |   |   |        |  

* 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.

U.S. Shipping Partners L.P.
Unaudited Consolidating Statement of Operations 
Three Months Ended March 31, 2007 
(in thousands)

|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|------------------------------------------------------------- |  | -------- | ------ | --------------------- | - | ---------------------- | - | ------------------------------ | ------ | ----------- | - | ----- | - | - | ------- | - | - | ------ | -
|                                                              |  | Parent * |        | Subsidiary
  Issuer * |   | Guarantor Subsidiaries |   | Non-Guarantor
  Subsidiaries** |        | Adjustments |   | Total |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |  
|Revenues                                                      |  | $        |       |                       | $ |                       |   | $                              | 42,082 |             | $ |      |   | $ |        |   | $ | 42,082 |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|Operating expenses                                            |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|Vessel operating expenses                                     |  |          |       |                       |   |                       |   |                                | 14,918 |             |   |      |   |   |        |   |   | 14,918 |  
|Voyage expenses                                               |  |          |       |                       |   |                       |   |                                | 7,437  |             |   |      |   |   |        |   |   | 7,437  |  
|General and administrative expenses                           |  |          |       |                       |   |                       |   |                                | 3,707  |             |   | 58    |   |   |        |   |   | 3,765  |  
|Depreciation and amortization                                 |  |          |       |                       |   |                       |   |                                | 9,048  |             |   |      |   |   |        |   |   | 9,048  |  
|Other expense (income)                                        |  |          |       |                       |   |                       |   |                                | (3,486 | )           |   |      |   |   |        |   |   | (3,486 | )
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|Total operating expenses, net                                 |  |          |       |                       |   |                       |   |                                | 31,624 |             |   | 58    |   |   |        |   |   | 31,682 |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|Operating income (loss)                                       |  |          |       |                       |   |                       |   |                                | 10,458 |             |   | (58   | ) |   |        |   |   | 10,400 |  
|Interest expense                                              |  |          | 6,917  |                       |   | 3,416                  |   |                                |       |             |   |      |   |   | (3,416  | ) |   | 6,917  |  
|Interest income                                               |  |          |       |                       |   |                       |   |                                | (2,672 | )           |   | (3    | ) |   |        |   |   | (2,675 | )
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|(Loss) income before income taxes and noncontrolling interest |  |          | (6,917 | )                     |   | (3,416                 | ) |                                | 13,130 |             |   | (55   | ) |   | 3,416   |   |   | 6,158  |  
|Provision for income taxes                                    |  |          |       |                       |   |                       |   |                                | 420    |             |   |      |   |   |        |   |   | 420    |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|(Loss) income before noncontrolling interest                  |  |          | (6,917 | )                     |   | (3,416                 | ) |                                | 12,710 |             |   | (55   | ) |   | 3,416   |   |   | 5,738  |  
|Equity in earnings of unconsolidated subsidiaries             |  |          | 12,666 |                       |   |                       |   |                                |       |             |   |      |   |   | (12,666 | ) |   |       |  
|Noncontrolling interest in Joint Venture losses               |  |          |       |                       |   |                       |   |                                |       |             |   | 11    |   |   |        |   |   | 11     |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  
|Net income (loss)                                             |  | $        | 5,749  |                       | $ | (3,416                 | ) | $                              | 12,710 |             | $ | (44   | ) | $ | (9,250  | ) | $ | 5,749  |  
|                                                              |  |          |        |                       |   |                        |   |                                |        |             |   |       |   |   |         |   |   |        |  

* 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.

19

---



U.S. Shipping Partners L.P. 
Unaudited Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2008
(in thousands)

|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------- | ------ | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                                        |  | Parent * |        | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total   |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |  
|Cash flows from operating activities                                                                    |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Net (loss) income                                                                                       |  | $        | (5,778 | )                     | $ | (3,407                   | ) | $                                 | 1,742   |             | $ | (298    | ) | $ | 1,963   |   | $ | (5,778  | )
|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 |  |          | 464    |                       |   | 157                      |   |                                   | 10,504  |             |   |        |   |   | (157    | ) |   | 10,968  |  
|Impairment of construction-in-progress                                                                  |  |          |       |                       |   |                         |   |                                   | 5,720   |             |   |        |   |   |        |   |   | 5,720   |  
|Loss on sale of surplus equipment                                                                       |  |          |       |                       |   |                         |   |                                   | 67      |             |   |        |   |   |        |   |   | 67      |  
|Equity compensation                                                                                     |  |          | 37     |                       |   |                         |   |                                   |        |             |   |        |   |   |        |   |   | 37      |  
|(Benefit) for accounts receivable                                                                       |  |          |       |                       |   |                         |   |                                   | (90     | )           |   |        |   |   |        |   |   | (90     | )
|Noncontrolling interest in Joint Venture
loss                                                           |  |          |       |                       |   |                         |   |                                   |        |             |   | (404    | ) |   |        |   |   | (404    | )
|Gain (loss) on derivative financial
instruments                                                         |  |          | (706   | )                     |   |                         |   |                                   |        |             |   | 264     |   |   |        |   |   | (442    | )
|Deferred income taxes                                                                                   |  |          |       |                       |   |                         |   |                                   | 192     |             |   |        |   |   |        |   |   | 192     |  
|Capitalized drydock costs                                                                               |  |          |       |                       |   |                         |   |                                   | (1,965  | )           |   |        |   |   |        |   |   | (1,965  | )
|Equity in earnings of unconsolidated
subsidiaries                                                       |  |          | (1,444 | )                     |   |                         |   |                                   |        |             |   |        |   |   | 1,444   |   |   |        |  
|Changes in assets and liabilities:                                                                      |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Accounts receivable                                                                                     |  |          |       |                       |   |                         |   |                                   | 1,162   |             |   |        |   |   |        |   |   | 1,162   |  
|Prepaid expenses and other current assets                                                               |  |          |       |                       |   |                         |   |                                   | 1178    |             |   |        |   |   |        |   |   | 1178    |  
|Other assets                                                                                            |  |          |       |                       |   |                         |   |                                   | (1      | )           |   |        |   |   |        |   |   | (1      | )
|Accounts payable                                                                                        |  |          |       |                       |   |                         |   |                                   | (1,182  | )           |   |        |   |   |        |   |   | (1,182  | )
|Deferred revenue                                                                                        |  |          |       |                       |   |                         |   |                                   | (1,193  | )           |   |        |   |   |        |   |   | (1,193  | )
|Accrued expenses and other liabilities                                                                  |  |          |       |                       |   |                         |   |                                   | (4,897  | )           |   | 135     |   |   |        |   |   | (4,762  | )
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Net cash (used in) provided by operating
activities                                                     |  |          | (7,427 | )                     |   | (3,250                   | ) |                                   | 11,237  |             |   | (303    | ) |   | 3,250   |   |   | 3,507   |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Cash flows from investing activities                                                                    |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Change in restricted cash and equivalents, net                                                          |  |          |       |                       |   |                         |   |                                   | 39,000  |             |   |        |   |   |        |   |   | 39,000  |  
|Sale of surplus equipment                                                                               |  |          |       |                       |   |                         |   |                                   | 138     |             |   |        |   |   |        |   |   | 138     |  
|Construction of vessels and equipment                                                                   |  |          |       |                       |   |                         |   |                                   | (22,693 | )           |   | (59,490 | ) |   |        |   |   | (82,183 | )
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Net cash provided by (used in) investing
activities                                                     |  |          |       |                       |   |                         |   |                                   | 16,445  |             |   | (59,490 | ) |   |        |   |   | (43,045 | )
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Cash flows from financing activities                                                                    |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Proceeds from Joint Venture revolver borrowings                                                         |  |          |       |                       |   |                         |   |                                   |        |             |   | 29,895  |   |   |        |   |   | 29,895  |  
|Contribution by noncontrolling interest equity investors in Joint
  Venture                             |  |          |       |                       |   |                         |   |                                   |        |             |   | 29,895  |   |   | (11,959 | ) |   | 17,936  |  
|Repayment of debt                                                                                       |  |          | (775   | )                     |   |                         |   |                                   |        |             |   |        |   |   |        |   |   | (775    | )
|Intercompany receivable / payable                                                                       |  |          | 13,302 |                       |   | 3,250                    |   |                                   | (25,261 | )           |   |        |   |   | 8,709   |   |   |        |  
|Distributions to partners                                                                               |  |          | (5,100 | )                     |   |                         |   |                                   |        |             |   |        |   |   |        |   |   | (5,100  | )
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Net cash provided by (used in) financing
activities                                                     |  | $        | 7,427  |                       | $ | 3,250                    |   | $                                 | (25,261 | )           | $ | 59,790  |   | $ | (3,250  | ) | $ | 41,956  |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                    |  |          |       |                       |   |                         |   |                                   | 2,421   |             |   | (3      | ) |   |        |   |   | 2,418   |  
|Cash and cash equivalents at beginning of period                                                        |  |          |       |                       |   |                         |   |                                   | 21,596  |             |   | 8       |   |   |        |   |   | 21,604  |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  
|Cash and cash equivalents at end of period                                                              |  | $        |       |                       | $ |                         |   | $                                 | 24,017  |             | $ | 5       |   | $ |        |   | $ | 24,022  |  
|                                                                                                        |  |          |        |                       |   |                          |   |                                   |         |             |   |         |   |   |         |   |   |         |  

* 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.

20

---



U.S. Shipping Partners L.P. 
Unaudited Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2007
(in thousands)

|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------- | ------- | --------------------- | - | ------------------------ | - | --------------------------------- | ------- | ----------- | - | ------ | - | - | ------ | - | - | ------- | -
|                                                                                                        |  | Parent * |         | Subsidiary
  Issuer * |   | Guarantor
  Subsidiaries |   | Non-
  Guarantor
  Subsidiaries** |         | Adjustments |   | Total  |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |  
|Cash flows
  from operating activities                                                                  |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Net income (loss)                                                                                       |  | $        | 5,749   |                       | $ | (3,416                   | ) | $                                 | 12,710  |             | $ | (44    | ) | $ | (9,250 | ) | $ | 5,749   |  
|Adjustments to reconcile net
  income (loss) to net cash (used in)provided by operating activities      |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Depreciation of vessels and equipment, and
amortization of drydock
  costs and deferred financing costs |  |          | 404     |                       |   | 166                      |   |                                   | 9,048   |             |   |       |   |   | (166   | ) |   | 9,452   |  
|Deferred income taxes                                                                                   |  |          |        |                       |   |                         |   |                                   | (314    | )           |   |       |   |   |       |   |   | (314    | )
|Capitalized drydock costs                                                                               |  |          |        |                       |   |                         |   |                                   | (4,664  | )           |   |       |   |   |       |   |   | (4,664  | )
|Equity in earnings of unconsolidated
subsidiaries                                                       |  |          | (12,666 | )                     |   |                         |   |                                   |        |             |   |       |   |   | 12,666 |   |   |        |  
|Noncontrolling interest in Joint Venture
loss                                                           |  |          |        |                       |   |                         |   |                                   |        |             |   | (11    | ) |   |       |   |   | (11     | )
|Provision for accounts receivable                                                                       |  |          |        |                       |   |                         |   |                                   | 89      |             |   |       |   |   |       |   |   | 89      |  
|Changes in assets and liabilities                                                                       |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Accounts receivable                                                                                     |  |          |        |                       |   |                         |   |                                   | (2,199  | )           |   |       |   |   |       |   |   | (2,199  | )
|Prepaid expenses and other current assets                                                               |  |          |        |                       |   |                         |   |                                   | (338    | )           |   |       |   |   |       |   |   | (338    | )
|Other assets                                                                                            |  |          |        |                       |   |                         |   |                                   | (136    | )           |   |       |   |   |       |   |   | (136    | )
|Accounts payable                                                                                        |  |          |        |                       |   |                         |   |                                   | 3,772   |             |   |       |   |   |       |   |   | 3,772   |  
|Deferred revenue                                                                                        |  |          |        |                       |   |                         |   |                                   | (38     | )           |   |       |   |   |       |   |   | (38     | )
|Accrued expenses and other liabilities                                                                  |  |          |        |                       |   |                         |   |                                   | (2,877  | )           |   | (47    | ) |   |       |   |   | (2,924  | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Net cash (used in) provided by operating
activities                                                     |  |          | (6,513  | )                     |   | (3,250                   | ) |                                   | 15,053  |             |   | (102   | ) |   | 3,250  |   |   | 8,438   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Cash flows
  from investing activities                                                                  |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Construction of vessels and
  equipment                                                                 |  |          |        |                       |   |                         |   |                                   | (21,401 | )           |   | (3,859 | ) |   |       |   |   | (25,260 | )
|Purchase of interest rate
  cap                                                                         |  |          |        |                       |   |                         |   |                                   |        |             |   | (1,924 | ) |   |       |   |   | (1,924  | )
|Change in restricted cash
  and equivalents, net                                                        |  |          |        |                       |   |                         |   |                                   | 5,715   |             |   |       |   |   |       |   |   | 5,715   |  
|Payments to Hess, net                                                                                   |  |          |        |                       |   |                         |   |                                   | (447    | )           |   |       |   |   |       |   |   | (447    | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Net cash used in investing activities                                                                   |  |          |        |                       |   |                         |   |                                   | (16,133 | )           |   | (5,783 | ) |   |       |   |   | (21,916 | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Cash flows
  from financing activities                                                                  |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Proceeds from borrowings                                                                                |  |          | 18,000  |                       |   |                         |   |                                   |        |             |   |       |   |   |       |   |   | 18,000  |  
|Contribution by
  noncontrolling interest equity investors in Joint Venture                             |  |          |        |                       |   |                         |   |                                   |        |             |   | 3,906  |   |   | (1,562 | ) |   | 2,344   |  
|Proceeds from Joint Venture
  revolver borrowings                                                       |  |          |        |                       |   |                         |   |                                   |        |             |   | 1,982  |   |   |       |   |   | 1,982   |  
|Repayment of debt                                                                                       |  |          | (685    | )                     |   |                         |   |                                   |        |             |   |       |   |   |       |   |   | (685    | )
|Intercompany
  receivable/payable                                                                       |  |          | (2,429  | )                     |   | 3,250                    |   |                                   | 867     |             |   |       |   |   | (1,688 | ) |   |        |  
|Distributions to partners                                                                               |  |          | (8,373  | )                     |   |                         |   |                                   |        |             |   |       |   |   |       |   |   | (8,373  | )
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Net cash provided by financing
activities                                                               |  |          | 6,513   |                       |   | 3,250                    |   |                                   | 867     |             |   | 5,888  |   |   | (3,250 | ) |   | 13,268  |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Net (decrease) increase in
  cash and cash equivalents                                                  |  |          |        |                       |   |                         |   |                                   | (213    | )           |   | 3      |   |   |       |   |   | (210    | )
|Cash and cash equivalents at
  beginning of period                                                      |  |          |        |                       |   |                         |   |                                   | 2,686   |             |   |       |   |   |       |   |   | 2,686   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  
|Cash and cash equivalents at
  end of period                                                            |  | $        |        |                       | $ |                         |   | $                                 | 2,473   |             | $ | 3      |   | $ |       |   | $ | 2,476   |  
|                                                                                                        |  |          |         |                       |   |                          |   |                                   |         |             |   |        |   |   |        |   |   |         |  

* 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.

16. Subsequent Events

Distributions

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 will be 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
will be $5,109

Director
units

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.

Change
in Ownership Status of Certain Subsidiaries

In
May 2008, the Partnership contributed the ownership interests of three of its
subsidiaries, ITB Jacksonville LLC, ITB Groton LLC and ITB New York LLC, from a
non-corporate parent company to a corporate parent company. The Partnership is
currently evaluating the impact this will have on its financial statements in
the second quarter of 2008.

21

---



|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|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. We do not assume ownership of any of the
products that we transport on our vessels. Our existing fleet consists of
eleven tank vessels: six integrated tug barge units (ITBs); one product
tanker (Houston); three chemical parcel tankers (Parcel Tankers) and one
articulated tug barge unit (ATB) that entered service in July 2007. We have
embarked upon a capital construction program to build additional ATBs and,
through a joint venture, additional tank vessels that upon completion will
result in our having one of the most modern fleets in service. Our primary
customers are major oil and chemical companies.

Significant Challenges of Our Changing
Business Model

Our
business model is changing in the near term. Upon our formation, the 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, 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 has resulted
in the  supply of Jones Act vessels able to transport petroleum products not decreasing as
we had expected, we anticipate that our ITBs will operate more in the spot
market, which has become more competitive, than the term charter market.
Accordingly, our revenues will be less predictable and due to the increasing
importance of our specialty chemical transportation business and our desire to
keep our vessels operating more of our revenues may be derived from the transportation of products
that are not petroleum based. Our earnings are generally not subject to tax, as
long as 90% or more of our revenues are derived from the transportation of
petroleum based products, among other conditions. Our increasing percentage of
revenue derived from the transportation of non petroleum based products has
caused us to operate more of our vessels from corporate entities, which are
subject to entity level taxation. This increases our tax burden, and requires
us to closely monitor the level of non petroleum based earnings in our non
corporate entities for compliance with the aforementioned 90% rule. We are
actively seeking measures to optimize our capital structure and our legal
entity structure to cope with this changing business model.

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 theChemical
Pioneer,  the Charleston,  theSea Venture  and the ATB Freeport.  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 predominately in the spot market prospectively,
occasionally carrying non petroleum products, until their OPA 90 phase-out
date, 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, has placed an additional
operating burden on us. Our ability to effectively manage our changing
operations is critical to our future success.

Liquidity

We
did not declare a distribution on our subordinated units and general partner
units with respect to the quarters ended March 31, 2008 or December 31, 2007.
It was previously anticipated that our ITBs would operate primarily in the spot
market in 2008, increasing the volatility of our revenues and working capital
requirements, and decreasing the predictability of our cash flows. However, in
late March and early April 2008, market conditions in the spot market
deteriorated significantly 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 are at record 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). Additionally, one of our customers
terminated a charter of an ITB earlier than had been expected, and this ITB
entered the spot market. Due to these market shifts, the ITBs have recently
incurred idle periods greater than, and charter rates below, our previous
expectations. Additionally, we have observed modest decreased demand for the
domestic coastwise transportation of chemical products served by our chemical
transporting vessels, which we believe is primarily due to our customers
working off inventory levels due to the decline in economic activity.

22

---



As a
result, our cash flows and liquidity have come under increasing pressure due to
the current difficult market conditions and, unless there is a significant
improvement in utilization of, and charter rates for, the ITBs and a resumption
of growth in our chemical business, and/or an amendment to our financial
covenants, it is possible that we will fall out of compliance with certain
financial covenants relating to leverage (debt to EBITDA) and fixed charge and
interest coverage under our Third Amended and Restated Credit Facility (Senior
Credit Facility) measured at the end of the second quarter of 2008 and likely
that we will fall out of compliance with these same covenants measured at the
end of the third quarter of 2008, although we expect to generate sufficient
cash to make interest payments and scheduled principal payments on its debt. We
are currently in compliance with all of our financial covenants as of the end
of the first quarter of 2008.

Upon
the occurrence of a covenant breach, we will be unable to make distributions on
our common units until we have cured such breach (although any unpaid
distributions will accrue). In addition, a breach of our loan covenants would
give the lenders under the Senior Credit Facility the right to demand immediate
payment of our loans under the Senior Credit Facility and 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.

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.

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. Assuming
that the debt is not accelerated, we believe that we will have sufficient
liquidity to meet ongoing operations for the remainder of 2008 and into the
first half of 2009. 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. To mitigate this risk, we are
pursuing strategic alternatives to avoid default, including obtaining
amendments to, or waivers of compliance with, certain of the financial ratio
covenants, obtaining new equity or selling the business. Although there can be
no assurance, we believe we will be successful in doing so. The successful
consummation of any one or more of these alternatives on terms acceptable to us
or a significant improvement in utilization of, and charter rates for, the ITBs
and a resumption of growth in our chemical business would make the likelihood
of defaulting under these covenants remote.

Competitive Advantage

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.

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. As a result, we believe the domestic
supply of tank vessels may increase in the near term. This trend could
negatively impact our utilization rate for petroleum transporting vessels in
the future and, as a result, our levels of qualifying income for tax purposes.

Any
additional newbuildings or retrofittings of existing tank vessels may result in
additional capacity that the market will not be able to absorb at the
anticipated demand levels. The availability of additional capacity could adversely
affect the charter rates that we can obtain. 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 our ITBs will continue to derive an increasing percentage of their revenue
from operating in the spot market over the next several years. The announced or
other newbuilding programs may make the repurposing of our ITBs uneconomical or
unattractive to charterers compared to a newly built vessel, and may impact our
levels of qualifying income for tax purposes.

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, we have the option to cancel the fourth barge
prior to June 30, 2008 (the Cancellation Option), which we expect to
exercise. We expect that the first two of these ATB units will be completed in
August 2008 and November 2008, respectively, and the third ATB unit will be
completed in August 2009. The funds to substantially  complete these three ATBs 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.

23

---



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 second quarter of 2009, the second tanker later in 2009, two
tankers in 2010, one tanker in 2011, 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. If the vessels remain in
the Joint Venture, we will not receive the bulk of the benefits associated with
ownership of these vessels.

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

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:

|                            |  |                     |  |                     |  |                    |  |                   
|--------------------------- |  | ------------------- |  | ------------------- |  | ------------------ |  | ------------------
|                            |  |                     |  |                     |  | Consecutive        |  |                   
|                            |  |                     |  | Contract of         |  | Voyage             |  |                   
|                            |  | Time Charter        |  | Affreightment       |  | 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  |  | Customer
  does not |  | Customer
  pays if |  | Customer
  pays if
|                            |  | long as
  vessel is |  | pay                 |  | cargo not
  ready  |  | cargo not
  ready 
|                            |  | available
  for     |  |                     |  |                    |  |                   
|                            |  | operations          |  |                     |  |                    |  |                   

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

For
the three months ended March 31, 2008 and 2007 we derived approximately 70% and
80%, respectively, of our revenue under time charters, consecutive voyage
charters and contracts of affreightment, and approximately 30% and 20%,
respectively, of our revenue from spot charters. We expect the trend of increasing
revenues from spot voyages to continue, as we expect our ITBs to be employed
more often in the spot market in the future.

24

---



Definitions

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

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

| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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: ITBs and the Sea Venture to
  their mandatory retirement from transportation of petroleum products as
  required by OPA 90, between 2012 and 2014; 10 years for the Chemical Pioneer, theCharlestonand the Houston; and 30 years for the ATB Freeportbased on their respective
  estimated useful lives.                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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. 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.
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | o | The ATBs are
  subject to the same drydock requirements as the ITBs and currently qualify
  for participation in the UWILD program. We will capitalize expenditures
  incurred for drydocking the ATBs and amortize these expenditures over 60
  months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | General
  and administrative expenses. General and administrative expenses
  consist of employment costs for shore side staff and cost of facilities, as
  well as legal, audit and other administrative costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | · | Total vessel days. Total vessel days are
  equal to the number of calendar days in the period multiplied by the total
  number of vessels operating or in drydock during that period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | · | Days worked. Days worked are equal to total
  vessel days less drydocking days and days off-hire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | · | Drydocking days. Drydocking days are days
  designated for the inspection and survey of vessels, and resulting
  maintenance work, as required by the U.S. Coast Guard and the American Bureau
  of Shipping to maintain the vessels qualification to work in the U.S.
  coastwise trade. Both domestic (U.S. Coast Guard) and international
  (International Maritime Organization) regulatory bodies require that our 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. 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.

25

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Net utilization. Net utilization is a
  primary measure of operating performance in our business. Net utilization is
  a percentage equal to the total number of days worked by a vessel or group of
  vessels during a defined period, divided by total vessel days for that vessel
  or group of vessels. Net utilization is adversely impacted by drydocking,
  scheduled and unscheduled maintenance and idle time not paid for by the
  customer.                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | · | Time charter equivalent. Time charter
  equivalent, another key measure of our operating performance, is equal to the
  net voyage revenue (voyage revenue less voyage expenses) earned by a vessel
  during a defined period, divided by the total number of actual days worked by
  that vessel during that period. Fluctuations in time charter equivalent
  result not only from changes in charter rates charged to our customers, but
  also from voyage expenses incurred as well as from external factors such as
  weather or other delays.

26

---



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 March 31, |       
|                                                                |  |                                      |       
|                                                                |  | 2008                                 |        | 2007 |  
|                                                                |  |                                      |        |      |  
|                                                                |  |                                      |        |      |   |        |  
|Voyage revenue                                                  |  | $                                    | 51,504 |      | $ | 42,082 |  
|                                                                |  |                                      |        |      |   |        |  
|Vessel operating expenses                                       |  |                                      | 17,021 |      |   | 14,918 |  
|% of voyage revenue                                             |  |                                      | 33.0   | %    |   | 35.4   | %
|Voyage expenses                                                 |  |                                      | 13,679 |      |   | 7,437  |  
|% of voyage revenue                                             |  |                                      | 26.6   | %    |   | 17.7   | %
|General and administrative expenses                             |  |                                      | 3,994  |      |   | 3,765  |  
|% of voyage revenue                                             |  |                                      | 7.8    | %    |   | 8.9    | %
|Depreciation and amortization                                   |  |                                      | 10,504 |      |   | 9,048  |  
|Other expenses (income)                                         |  |                                      | 5,787  |      |   | (3,486 | )
|                                                                |  |                                      |        |      |   |        |  
|Total operating expenses, net                                   |  |                                      | 50,985 |      |   | 31,682 |  
|                                                                |  |                                      |        |      |   |        |  
|Operating income                                                |  |                                      | 519    |      |   | 10,400 |  
|% of voyage revenue                                             |  |                                      | 1.0    | %    |   | 24.7   | %
|Interest expense                                                |  |                                      | 7,891  |      |   | 6,917  |  
|Interest income                                                 |  |                                      | (1,040 | )    |   | (2,675 | )
|Net gains on derivative financial
  instruments                 |  |                                      | (442   | )    |   |       |  
|                                                                |  |                                      |        |      |   |        |  
|Loss (income) before income taxes and
  noncontrolling interest |  |                                      | (5,890 | )    |   | 6,158  |  
|Provision for income taxes                                      |  |                                      | 292    |      |   | 420    |  
|                                                                |  |                                      |        |      |   |        |  
|(Loss) income before noncontrolling
  interest                  |  |                                      | (6,182 | )    |   | 5,738  |  
|Noncontrolling interest in Joint Venture
  losses               |  |                                      | 404    |      |   | 11     |  
|                                                                |  |                                      |        |      |   |        |  
|Net (loss) income                                               |  | $                                    | (5,778 | )    | $ | 5,749  |  
|                                                                |  |                                      |        |      |   |        |  
|                                                                |  |                                      |        |      |   |        |  
|Distributions declared per common unit in respect of the period |  | $                                    | 0.45   |      | $ | 0.45   |  
|                                                                |  |                                      |        |      |   |        |  
|Operating Data                                                  |  |                                      |        |      |   |        |  
|Number of vessels                                               |  |                                      | 11     |      |   | 10     |  
|Total vessel days                                               |  |                                      | 1,001  |      |   | 900    |  
|Days worked                                                     |  |                                      | 966    |      |   | 893    |  
|Drydocking days                                                 |  |                                      |       |      |   |       |  
|Net utilization                                                 |  |                                      | 97     | %    |   | 99     | %
|Average daily time charter equivalent rate                      |  | $                                    | 38,436 |      | $ | 38,796 |  

Three Months Ended
March 31, 2008 Compared to Three Months Ended March 31, 2007

The
three month period ended March 31, 2008 is one day greater than the three month
period ended March 31, 2007.

Voyage
Revenue. Voyage revenue was $51.5 million for the three months ended March 31,
2008, an increase of $9.4 million, or 22%, as compared to $42.1 million for the
three months ended March 31, 2007. Revenues are affected by several factors,
such as the mix of charter types (i.e., time charters, which traditionally have
lower charter rates as the customer is responsible for voyage expenses,
compared to consecutive voyage charters, contracts of affreightment and spot
market charters where, traditionally, charter rates are higher as we are
responsible for voyage expenses); the charter rates attainable in the market;
fleet utilization (i.e., days worked) and other items such as fuel surcharges.
Contracts of affreightment and consecutive voyage charters generally provide
for fuel escalation charges that are designed to protect us against increases
in fuel prices; however, these surcharges do not protect us fully when the
price of fuel increases. These charges generally increase revenue, but only
serve to offset the increase in fuel expenses.

27

---



For
the quarter ended March 31, 2008, the ATB Freeport, which was placed in service
in July 2007, contributed $4.2 million (including $1.0 million in fuel surcharges)
to revenues. Fuel surcharges on the remaining fleet increased revenues by $2.4
million. The change in the mix of charter types decreased revenues by
approximately $1.7 million (with a corresponding decrease to voyage expenses of
approximately $1.5 million) as one of the ITBs on a consecutive voyage charter
in 2007 was on a short-term time-charter during the first quarter of 2008. The
increase in days worked (due to 2008 being a leap year), increased charter
rates and the recording of 100% of the revenue related to our first grain
charter, which commenced in December 2007, increased revenues by approximately
$4.5 million. On December 14, 2007, the ITB Philadelphia commenced a single
voyage to transport grain from the U.S. to Africa for various humanitarian
organizations. In addition to transporting the grain to
Africa, we were required to bag all of the grain following discharge and
transport a portion of the grain, via truck, to points inland. In accordance
with our accounting policy related to such voyages, we did not recognize any
voyage revenue or voyage expense on this voyage until the grain was delivered
to its final destination in February 2008.

Vessel Operating Expenses. Vessel
operating expenses were $17.0 million for the three months ended March 31,
2008, an increase of $2.1 million, or 14%, as compared to $14.9 million for the
three months ended March 31, 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, which increased
vessel operating expenses by $1.3 million. Additionally, crew wages and
benefits increased by $0.9 million. The increase in crew wages and benefits
resulted from new collective bargaining agreements with the unions that cover
the crew members and officers of our vessels. These increases were offset by a
$0.1 million net decrease in all other vessel operating expenses.

Voyage Expenses. Voyage expenses were
$13.7 million for the three months ended March 31, 2008, an increase of $6.2
million, or 84%, as compared to $7.4 million for the three months ended March
31, 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 costs 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. If we pay voyage expenses, they
are included in our results of operations when they are incurred. Typically,
freight rates are higher when we pay voyage expenses. The increase in voyage
expenses for the quarter ended March 31, 2008 compared to the same period in
2007 was due to the addition of the ATB Freeport, which contributed $1.5
million in voyage expenses, offset by a reduction in voyage expenses of
approximately $1.5 million due to an ITB being on a short-term time charter,
and increases in fuel, port, commission and other costs on the remaining fleet
of approximately $6.2 million. Of this $6.2 million, increase, approximately
$1.8 million related to the reimbursed costs of the grain voyage completed by
the ITB Philadelphia during the first quarter of 2008, $3.5 million of this
increase related to increased fuel costs for our vessels other than the ATB
Freeport (partially offset by the $2.4 million of increased fuel surcharge
revenue from those vessels) and $0.9 million of the increase related to all other
voyage related expenses. As a percentage of revenue, voyage expenses were 26.6%
for the three months ended March 31, 2008 compared to 17.7% for the three
months ended March 31, 2007 primarily due to an increase in fuel costs.

General and Administrative Expenses.
General and administrative expenses were $4.0 million for the three months
ended March 31, 2008 compared to $3.8 million for the three months ended March
31, 2007. An increase in professional fees, consisting of legal, accounting and
consulting fees, of $0.5 million, offset by a decrease in personnel expenses of
$0.3 million, were the reasons for the increase of $0.2 million.

Depreciation and Amortization.
Depreciation and amortization was $10.5 million for the three months ended
March 31, 2008, an increase of $1.5 million, or 16%, compared to $9.0 million
for the three months ended March 31, 2007. The increase is primarily due to
additional amortization of drydock expenditures of $1.1 million, principally
resulting from drydocks completed in 2007, and $0.8 million attributable to the
addition of the ATB Freeport. These increases to depreciation and amortization
expense were offset by a decrease of $0.4 million resulting from an adjustment
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 under GAAP
were considered an adjustment to the original purchase price.

Other expense (income). Other expense in
the three months ended March 31, 2008 reflects an impairment loss of $5.7
million and a loss of $67,000 on the sale of surplus equipment. We previously
entered into contracts to construct four additional ATB units similar to the
ATB Freeport, each of which is specified to have a carrying capacity of
approximately 156,000 barrels at 98% of capacity. However, we have the option
to cancel the fourth ATB unit prior to June 30, 2008. During the quarter ended
March 31, 2008, we determined that the fourth ATB unit referenced above is impaired.
While we have obtained financing for construction of the first three ATB units,
we have not obtained financing for the fourth ATB unit. Based on current market
conditions, we expect to exercise the Cancellation Option for the fourth barge
in June 2008, and we do not expect to exercise our option to construct the
fourth tug, although we continue to pursue charters for the operation of, and
financing for the construction of, the vessel. Accordingly, we have assessed
the fair value of the construction in progress of the fourth ATB unit at zero,
resulting in a non-cash impairment charge of $5.7 million which includes $3.8
million previously paid for construction of the barge portion of this ATB unit,
$1.4 million for deposits on certain owner furnished equipment, and $0.5
million of capitalized interest costs. For the three months ended March 31,
2007, a $3.5 million contract settlement was paid to us, resulting in other
income for the period.

28

---



Interest Expense. Interest expense was
$7.9 million for the three months ended March 31, 2008, an increase of $1.0
million, compared to $6.9 million for the three months ended March 31, 2007.
The increase is primarily attributable to a higher average outstanding debt
balance during the 2008 quarter partially offset by a decrease in interest
rates. The average effective interest rate for the quarter ended March 31, 2008
was 9.7% compared to 10.0% for the quarter ended March 31, 2007.

Interest Income. Interest income,
consisting of interest earned on our invested balances, was $1.0 million for
the three months ended March 31, 2008, a decrease of $1.6 million, compared to
$2.6 million for the three months ended March 31, 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 Gains on Derivative Financial Instruments.
We recorded a gain of $0.7 million in connection with the foreign currency
forward contracts that we entered into for the purchase of owner-furnished
items relative to our newbuild ATB series. 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 was recognized in our Consolidated Statement of Operations. For
information on our foreign currency forward contracts, see Item 3.
Quantitative and Qualitative Disclosures about Market Risk. Additionally, the
Joint Venture recorded a loss of $0.3 million in the three months ended March
31, 2008 in connection with the interest rate cap it had entered into in April
2007. For information on this interest rate cap, see Item 3. Quantitative and
Qualitative Disclosures about Market Risk. No gains or losses on derivative
financial instruments were recorded in the first quarter of 2007.

Provision for Income Taxes. The provision
for income taxes was $0.3 million for the three months ended March 31, 2008,
compared to a provision for income taxes of $0.4 million for the three months
ended March 31, 2007. The provision recorded in the first quarter of 2008 is
primarily due a provision of $0.1 million recorded upon the election to treat
the owners of the Sea Venture and ITB Philadelphia as corporations for tax
purposes, a provision of $1.1 million recorded to reserve for deferred tax
assets created during the period as a result of net operating losses generated
and $0.1 million of unrecognized tax benefits recorded during the first quarter
of 2008. Offsetting these items were losses at the various corporate
subsidiaries generating a tax benefit of $1.0 million. For the comparable
period in 2007, only the Chemical Pioneer was owned by a corporate subsidiary
subject to federal, state and local income taxes. The provision for income taxes
for the three months ended March 31, 2007 was $0.4 million due to pre-tax
operating income generated by the corporate owner of the Chemical Pioneer due
to increased revenue rates coupled with a reduction in drydock amortization
expenses.

Noncontrolling Interest in Joint Venture.
For the three months ended March 31, 2008, we recorded noncontrolling interest
in Joint Venture losses of $0.4 million compared to $11,000 for the three
months ended March 31, 2007, relating to the 60% of the Joint Venture owned by
third parties.

Net Loss. The net loss for the three
months ended March 31, 2008 was $5.8 million, a decrease of $11.5 million,
compared to net income of $5.7 million for the three months ended March 31,
2007. The decrease in operating income of $9.9 million (which includes a $5.7
million non-cash impairment charge), increase in interest expense of $1.0
million and decrease in interest income of $1.6 million drove this decrease.

Liquidity and Capital Resources

Operating Cash Flows

Net
cash provided by operating activities was $3.5 million and $8.4 million for the
three months ended March 31, 2008 and 2007, respectively.

The
decrease in operating cash flows of $4.9 million in the first quarter of 2008
compared to the first quarter of 2007 is the result of the decrease in net
income by $11.5 million combined with an increase in net operating assets of
$2.9 million. These decreases were partially offset by a reduction in
capitalized drydock cost of $2.7 million and non-cash items of $6.8 million.

No
vessels underwent drydockings in the first quarter of 2008 or the first quarter
of 2007, however expenditures for drydockings were related to accrued expenses
for drydockings that took place in previous periods. Three vessels are
scheduled for drydocking in 2008, and three ITBs are scheduled for UWILD
surveys. As a result, we are forecasting 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 and UWILD surveys.

29

---



The
change in non-cash items of $6.8 million in the first quarter of 2008 compared
to the first quarter of 2007 was due primarily to the $5.7 million impairment
of the capitalized costs incurred as of March 31, 2008 for the construction of
the fourth ATB in our current ATB newbuild series, an increase in depreciation
and amortization of $1.5 million, a decrease in our deferred tax assets of $0.5
million and a loss on the sale of surplus equipment of $0.1 million. These
items were partially offset by an increase in net gains on derivative financial
instruments of $0.4 million and interest in Joint Venture losses of $0.4
million.

Increased
working capital cash requirements due to overall higher net operating assets
were primarily affected by the addition of the ATB Freeport, which drove
receivables and other current assets higher compared to March 31, 2007. As we
add two additional vessels in 2008 and our ITBs participate more in the spot
market, we expect our working capital requirements to increase. Participation
in the spot market requires us to carry higher amounts of working capital, as
under spot charters fuel costs are our responsibility, and not realized
economically until payment is made to us by the customer. Additionally, payment
dates are generally at the completion of a voyage, compared to time charters,
where payment is generally due at the beginning of a fixed period of time, such as a
month.

Investing Cash Flows

Net
cash used in investing activities totaled $43.0 million for the three months
ended March 31, 2008, an increase of $21.1 million compared to net cash used of
$21.9 million for the three months ended March 31, 2007. For the three months
ended March 31, 2008, we made $22.8 million of payments toward the construction
of the ATBs and the Joint Venture made $59.4 million of payments toward the
construction of the product tankers. Of the $82.2 million spent for the construction
of ATBs and tankers, $39.0 million was funded from our restricted cash
accounts. Additionally, in the three months ended March 31, 2008, we sold some
of our surplus equipment for proceeds of $0.1 million. For the three months
ended March 31, 2007, we made $21.4 million of payments toward the construction
of the ATBs and the Joint Venture made $3.9 million of payments toward the
construction of the product tankers. Of the $25.3 million spent for the
construction of ATBs and tankers, $5.7 million was funded from our restricted
cash accounts. Additionally, in the quarter ended March 31, 2007, the Joint
Venture purchased a nine year interest rate cap with a notional amount of
$100.0 million effective April 1, 2007 for $1.9 million, including transaction
fees.

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 $0.5 million for the three months ended March
31, 2007.

Financing Cash Flows

For the three months ended March 31, 2008, net cash provided by financing
activity was $42.0 million. Our Joint Venture received a total of $47.8 million
from the Joint Venture Investors, of which $17.9 million was equity
contributions, and $29.9 million was pursuant the Joint Ventures credit
facility. 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 possible 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. We also made scheduled debt payments of
$0.8 million in the first quarter of 2008 and we distributed $5.1 million to
our holders of common units in respect to the fourth quarter of 2007.
Distributions to partners will decrease in 2008 as we do not expect to make
distributions to our subordinated unitholders in 2008. Distributions to
subordinated unitholders totaled $13.1 million in 2007.

Net cash provided by financing activities was $13.3 million for the three
months ended March 31, 2007. We borrowed $18.0 million under our credit
facility. Our Joint Venture received a total of $4.3 million from the Joint
Venture Investors, of which $2.3 million was equity contributions, and $2.0
million was pursuant the Joint Ventures credit facility. We also made
scheduled debt payments of $0.7 million in the first quarter of 2007 and we
distributed $8.4 million to our partners (including holders of our subordinated
units) in respect to the fourth quarter of 2006.

30

---



Payments of
Distributions

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 will be 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 will be $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 for either of these periods.

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. 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. We expect our ITBs to continue
participation in the UWILD Program. Even if the U.S. Coast Guard allows us to
continue in the UWILD Program, we will need to conduct an enhanced survey,
which will result in the vessel being off-hire, and not earning revenue, for an
additional 12 days each time a survey is conducted at a cost of $0.5 million.
In addition, 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.

The
ITB Baltimorecompleted 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 Philadelphiacompleted its drydock in December 2007 at a cost of $5.6 million. For future
drydockings, we estimate that drydocking the ITBs will cost approximately $6.0
million per vessel, the parcel tanker and Houstondrydocks will cost
approximately $3.5 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 Houstonwill 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.

In
calculating cash available to pay distributions, our partnership agreement
requires our general partner to deduct from basic surplus each quarter
estimated maintenance capital expenditures as opposed to actual maintenance
capital expenditures in order to reduce disparities in basic surplus caused by
fluctuating maintenance capital expenditures, such as retrofitting or
drydocking. Our annual estimated maintenance capital expenditures for purposes of
calculating basic surplus are $20.9 million in 2008, which is unchanged from
2007. This amount is based on our current estimates of the amounts of
expenditures we will be required to make in the future, which we believe to be
reasonable. The amount of estimated maintenance capital expenditures deducted
from basic surplus is subject to review and change by the board of directors of
our general partner at least once a year, with any change approved by the
conflicts committee.

31

---



Liquidity Needs

We
did not declare a distribution on our subordinated units and general partner
units with respect to the quarters ended March 31, 2008 or December 31, 2007.
It was previously anticipated that our ITBs would operate primarily in the spot
market in 2008, increasing the volatility of our revenues and working
capital requirements, and decreasing the predictability of our cash flows.
However, in late March and early April 2008, market conditions in the spot
market deteriorated significantly 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 are at record 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. Additionally,
one of our customers terminated a charter of an ITB earlier than had been
expected, and this ITB entered the spot market. Due to these market shifts, the
ITBs have recently incurred idle periods greater than, and charter rates below,
our previous expectations. Additionally, we have observed modest decreased
demand for the domestic coastwise transportation of chemical products served by
its chemical transporting vessels, which we believe is 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 and, unless there is a
significant improvement in utilization of, and charter rates for, the ITBs and
a resumption of growth in our chemical business, and/or an amendment to our
financial covenants, it is possible that we will fall out of compliance with
certain financial covenants relating to leverage (debt to EBITDA) and fixed
charge and interest coverage under our Senior Credit Facility measured at the
end of the second quarter of 2008 and likely that we will fall out of
compliance with these same covenants measured at the end of the third quarter
of 2008, although we expect to generate sufficient cash to make interest
payments and scheduled principal payments on its debt. We are currently in
compliance with all of our financial covenants as of the end of the first
quarter of 2008.

Upon
the occurrence of a covenant breach, we will be unable to make distributions on
our common units until we have cured such breach (although any unpaid
distributions will accrue). In addition, a breach of our loan covenants would
give the lenders under the Senior Credit Facility the right to demand immediate
payment of our loans under the Senior Credit Facility and 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.

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.

Consistent
with generally accepted accounting principles, the 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. Assuming
that the debt is not accelerated, we believe that we will have sufficient
liquidity to meet ongoing operations for the remainder of 2008 and into the
first half of 2009. 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. To mitigate this risk, we are
pursuing strategic alternatives to avoid default, including obtaining
amendments to, or waivers of compliance with, certain of our financial ratio
covenants, obtaining new equity or selling the business. Although there can be
no assurance, we believe we will be successful in doing so. The successful
consummation of any one or more of these alternatives on terms acceptable to us
or a significant improvement in utilization of, and charter rates for, the ITBs
and a resumption of growth in our chemical business would make the likelihood
of defaulting under these covenants remote.

Our
partnership agreement requires that we distribute our available cash to
unitholders on a quarterly basis. Available cash generally means, for each
fiscal quarter, all cash on hand at the end of the quarter:

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

Currently,
our common units have the right to receive distributions of available cash in
an amount equal to the minimum quarterly distribution of $0.45 per quarter,
plus any arrearages in the payment of the minimum quarterly distribution on the
common units from prior quarters, before any distributions of available cash
may be made on any subordinated units. Distribution arrearages do not accrue
on the subordinated units.

32

---



The purpose of the subordinated units is to increase
the likelihood that during the subordination periods there will be available
cash to pay the minimum quarterly distribution on the common units. Our common
unitholders historically received $5.1 million per quarter and our subordinated
unitholders and general partner historically received $3.3 million per quarter.
In February 2008 we did not, and in May 2008 we will not, pay a distribution on
the subordinated or general partner units. Shipping Master, the holder of our
subordinated units and general partner units, requested that we not pay the
distribution on the subordinated units and general partner units and instead
retain the cash for working capital purposes; to increase reserves available
for payment of future quarterly distributions on our common units; for the
completion of our capital construction program; and to strengthen coverage with
respect to the financial covenants under our credit facility in future periods.
There can be no assurance that our available cash will be adequate to pay the
minimum quarterly distribution on the common and subordinated units in the
future.

The
agreements governing our indebtedness prohibit us from paying distributions
following a default. In addition, the indenture under which our senior notes
were issued provides that whenever our fixed charge coverage ratio (as defined
in the indenture) is less than 1.75 to 1 for the last year, we cannot pay
distributions that in aggregate during any period when our fixed charge
coverage ratio is less than 1.75 to 1 an amount in excess of $50.0 million plus
the proceeds of certain equity issuances. The current minimum quarterly
distribution on our common units is $5.1 million and on our subordinated and
general partner units is $3.3 million. Accordingly, we will be prohibited by
the indenture from paying distributions except out of proceeds of certain
equity issuances if our fixed charge coverage ratio is less that 1.75 to 1 for
more than five quarters (nine quarters if we only make cash distributions in
respect of our common units).

Please
see Risk FactorsRisks Inherent in Our Business in our Annual Report on Form
10-K dated December 31, 2007 for a detailed discussion of our liquidity
requirements and the events that could impact our liquidity.

Please
see the section titled Cash Distribution Policy in Part II, Item 5., Market
for Registrants Common Equity, Related Unitholder Matters and Issuer Purchases
of Equity Securities, in our Annual Report on Form 10-K dated December 31,
2007 for a detailed discussion of our policies and conditions regarding cash
distributions and the conversion of subordinated units into common units.

Contractual
Commitments and Contingencies

We
have entered into contracts to construct four additional ATB units. In 2006, we
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. However, we have
an option, exercisable through June 30, 2008, to cancel the last barge and,
based on current market conditions, we expect to exercise this Cancellation
Option. In 2006, we 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 includes
an option to construct and deliver an additional tug, which must be exercised
by June 30, 2008. This tug, if constructed, will be combined with the fourth
barge referenced above. The total construction cost anticipated for the first
three new ATB units is approximately $66.0 million to $69.0 million per unit
(subject to modifications and changes in the cost of steel), in each case
inclusive of owner furnished equipment, but exclusive of capitalized interest.
The capitalized interest as of March 31, 2008 relating to the first three ATB
units is $10.0 million. We expect that the first two of these ATB units will be
completed in August 2008 and November 2008, respectively, and the third ATB
unit to be completed in August 2009. As of March 31, 2008, we made payments
totaling $120.7 million related to the first three newbuilds and had in escrow
approximately $58.4 million, plus $21.1 million of funds drawn from the escrow
account in anticipation of payments due in the second quarter of 2008. These
escrowed amounts and funds drawn represent our estimated cost to substantially
complete construction of the first three ATBs under construction at Manitowoc
and Eastern.

During
the quarter ended March 31, 2008, we have determined that the fourth ATB unit
referenced above is impaired. While we have obtained financing for construction
of the first three ATB units, we have not obtained financing for the fourth ATB
unit. Based on current market conditions, we expect to exercise the
Cancellation Option for the fourth barge in June 2008, and we do not expect to
exercise our option to construct the fourth tug, although we continue to pursue
charters for the operation of, and financing for the construction of, the
vessel. Accordingly, we have assessed the fair value of the construction in
progress of the fourth ATB unit at zero. In addition, we may be required to
make additional payments for certain owner furnished equipment if we exercise
the Cancellation Option, but would have 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 second quarter of 2009, the second tanker later
in 2009, two tankers in 2010, one tanker in 2011, 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.

33

---



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 $42.1 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.

On
October 25, 2007, Products Investor and NASSCO contractually accelerated the
delivery dates for the first five tankers that NASSCO is constructing for our
Joint Venture. 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, we believe any such use of additional capacity should not
materially affect the delivery dates of vessels six through nine.

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.

Upon
formation of the Joint Venture, Product Carriers assigned its rights and
obligations with respect to the construction of the first five tankers to the
Joint Venture and we received an arrangement fee of $4.5 million. The Joint
Venture has the right to elect to have rights and obligations under the NASSCO
contract to construct up to four additional tankers assigned to the Joint
Venture at specified times. NASSCO released Product Carriers from any
obligation under the construction contract relating to the first five tankers
and will release Product Carriers from any obligation under the construction
contract relating to tankers six through nine to the extent the rights with
respect to such tankers are also assigned to the Joint Venture. 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.

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. We have not elected fair value treatment for
any financial instruments as of March 31, 2008. We are
currently evaluating the impact of FAS 157 related to nonfinancial assets and
nonfinancial liabilities on our financial statements.

34

---



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.                                                         

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.

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:

| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| | · | forecasts of
  our ability to make cash distributions on our units and to pay interest on,
  and principal of, our indebtedness;
| |   |                                                                                                                                 
| | · | our ability
  to maximize the use of our vessels;                                                                               
| |   |                                                                                                                                 

35

---



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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;                                                                                                                                 
| |   |                                                                                                                                                                                                
| | · | the
  likelihood of a repeal of, or a delay in the phase-out requirements for,
  single-hull vessels mandated by OPA 90;                                                                       
| |   |                                                                                                                                                                                                
| | · | 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 qualified income as defined by the IRS;                                                                                                                                  
| |   |                                                                                                                                                                                                
| | · | our ability
  to maintain our qualified 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:

| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | insufficient
  cash from operations;                                                                                                                                                                                
| |   |                                                                                                                                                                                                                     
| | · | a decline in
  demand for refined petroleum, petrochemical and commodity chemical products;                                                                                                                         
| |   |                                                                                                                                                                                                                     
| | · | 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;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                     
| | · | the
  availability of, and our ability to consummate, vessel acquisitions;                                                                                                                                          
| |   |                                                                                                                                                                                                                     
| | · | 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;                                                                                                                                
| |   |                                                                                                                                                                                                                     
| | · | increases in
  interest rates;                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                     
| | · | our
  liquidity;                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                     
| | · | 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 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.

36

---



|        |                                                           
|------- | ----------------------------------------------------------
|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 three months ended March 31, 2008, a 1% change
in our variable interest rates would have increased our interest expense by
$1.0 million for the three months ended March 31, 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; however, counterparties to these agreements are major
financial institutions, and the risk of loss due to nonperformance is
considered by management to be minimal. We do not hold or issue interest rate
swaps for trading purposes.

We
had two interest rate swap agreements as of March 31, 2008. The intent of these
agreements is to reduce interest rate risk by swapping an unknown variable
interest rate, three month LIBOR, reset quarterly, for a fixed rate. As of
March 31, 2008 the fair market values of our two interest rate swaps were a
loss of $11.4 million and a loss $7.2 million.

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

|                         |   |   |            |  
|------------------------ | - | - | ---------- | -
|Notional
  amount        |   | $ | 122,813    |  
|Fixed rate
  paid        |   |   | 5.355      | %
|Variable
  rate received |   |   | 2.696      | %
|Effective
  date         |   |   | 8/15/2006  |  
|Expiration
  date        |   |   | 8/6/2012   |  
|Fair Value               | ( | $ | 11,360     | )
|                         |   |   |            |  
|Notional
  amount        |   | $ | 98,250     |  
|Fixed rate
  paid        |   |   | 4.899      | %
|Variable
  rate received |   |   | 2.696      | %
|Effective
  date         |   |   | 12/12/2006 |  
|Expiration
  date        |   |   | 8/6/2012   |  
|Fair Value               | ( | $ | 7,230      | )

We
have entered into contracts for the purchase of owner-furnished items relative
to our newbuild ATB series, denominated in Euros, costing approximately $14.4
million. To hedge the exposure to foreign currency, we have entered into a
series of foreign currency forward contracts with an average exchange rate of
$1.25 per Euro. As of March 31, 2008 the fair value of the foreign currency
hedge was approximately $1.5 million. At March 31, 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
currently.

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.

37

---



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 March 31, 2008 was $1.7 million. Changes in the fair
value of those instruments are reported in earnings.

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

|                    |  |   |          |  
|------------------- |  | - | -------- | -
|Notional
  amount   |  | $ | 100,000  |  
|Interest
  rate cap |  |   | 6.00     | %
|Effective
  date    |  |   | 4/1/2007 |  
|Expiration
  date   |  |   | 4/1/2016 |  
|Fair Value          |  | $ | 1,686    |  

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

38

---



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 thereunder.

|         |             
|-------- | ------------
|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:

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

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

|                                                                                                                                      |                                                                                                                                                                                                                         
|------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                      | · the level
  of consumption of refined petroleum, petrochemical and chemical products in
  the markets in which we operate;                                                                                            
|                                                                                                                                      |                                                                                                                                                                                                                         
|                                                                                                                                      | · 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; and                                                                              
|                                                                                                                                      |                                                                                                                                                                                                                         
|                                                                                                                                      | · prevailing
  economic and competitive conditions.                                                                                                                                                                     
|                                                                                                                                      |                                                                                                                                                                                                                         
|In addition,
  the actual amount of cash we will have available for distribution each
  quarter will depend on other factors such as:
|                                                                                                                                     
|                                                                                                                                      | · the level
  of capital expenditures we make, including for acquisitions, drydockings for
  repairs, repurposing or retrofitting of vessels to comply with OPA 90,
  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 or other borrowings, including borrowings to
  pay distributions to unitholders; and                                                                                            
|                                                                                                                                      |                                                                                                                                                                                                                         
|                                                                                                                                      | · the amount
  of reserves, including reserves for future capital expenditures and other
  matters, established by our general partner.                                                                                 

The
agreements governing our indebtedness prohibit us from paying distributions
following a default, including without limitation any failure to satisfy the
financial covenants in our credit agreement. In addition, the indenture under
which our senior notes were issued provides that whenever our fixed charge
coverage ratio (as defined in the indenture) is less than 1.75 to 1 for the
last year, we cannot pay distributions that in aggregate during any period when
our fixed charge coverage ratio is less than 1.75 to 1 an amount in excess of
$50.0 million plus the proceeds of certain equity issuances. The minimum
quarterly distributions we have historically paid on our common units
(excluding our subordinated and general partner units) are $5.1 million.
Accordingly, we will be prohibited by the indenture from paying distributions
except out of proceeds of certain equity issuances if our fixed charge coverage
ratio is less that 1.75 to 1 for more than nine quarters (five quarters if the
minimum quarterly distributions on our subordinated and general partner units
are also paid).

We
are facing difficult current market conditions.  Demand in the spot market has recently deteriorated significantly
due to overall declining economic activity and decreased demand for the
domestic coastwise transportation of petroleum products.

39

---



Refinery utilization has declined
significantly, fuel prices for operating our vessels are at record levels and
increased industry capacity from newbuilds has created significant competitive
pressures.  Due to these market shifts,
our ITBs have recently incurred idle periods greater than, and chartering rates
below, our previous expectations.
Additionally, we have observed modest decreased demand for the domestic
coastwise transportation of chemical products served by our chemical
transporting vessels, which we believe is due to our customers working off
inventory levels.

As
a result, our earnings before interest, taxes and depreciation and amortization
(EBITDA) and liquidity have come under increasing pressure, and unless there
is a significant improvement in utilization of, and charter rates for, our ITBs
and a resumption of growth in our chemical business, and/or an amendment to our
financial covenants, it is possible that we will fall out of compliance with
certain financial ratio covenants under our senior credit facility measured at
the end of the second quarter and likely that we will fall out of compliance
with these same covenants measured at the end of the third quarter, although we
expect to have sufficient cash resources to service our debt.  If we are not in compliance with our
financial covenants, our lenders have a number of remedies, including declaring
all outstanding borrowings to be immediately due and payable and not permitting
us to make distributions on our common units until we are again in compliance,
although any unpaid distributions will continue to accrue on the common
units.  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.

If
the Joint Venture elects not to construct the remaining four tankers, Product
Carriers will be obligated to arrange financing for the construction of the
tankers or assign the contract to a third party. If we provide capital to
Product Carriers for such purpose, this will limit the cash we have available
to make quarterly distributions on the units. Our ability to provide capital to
Product Carriers and, therefore, the Joint Venture will be limited to an extent
by our debt agreements.

The amount of cash
we have available for distribution to unitholders depends primarily on our
liquidity and cash flow and not solely on profitability.

The
amount of cash we have available for distribution depends primarily on our
liquidity and cash flow, including cash reserves and working capital or other
borrowings, and not solely on profitability, which will be affected by non-cash
items. As a result, we may make cash distributions during periods when we
record losses and may not make cash distributions during periods when we record
net income. Our net income per unit for each of 2007, 2006 and 2005 was less
than the annual distribution of $1.80 per unit; our net income for the quarter
ended March 31, 2007 was less than the quarterly distribution of $0.45 and we
suffered a net loss per unit in the quarter ended March 31, 2008.  We did not pay the minimum quarterly
distribution on our subordinated and general partner units for the fourth
quarter of 2007 and the first quarter of 2008 in order to increase cash
available for our operations.

The
amount of available cash we need to pay the minimum quarterly distribution for
four quarters in 2008 on the currently outstanding common units is
approximately $20.4 million, and is $33.5 million when the minimum
quarterly distribution is paid on the currently outstanding subordinated and
general partner units.

Our
liquidity has been, and may continue to be, affected by several factors, some
of which are outside our control, including:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · Cost
  overruns on the construction of the ATB
  Freeport of approximately $24.4 million from the amount
  estimated at the time of the August 2006 refinancing resulted in additional
  borrowings under our credit facility, thereby reducing availability under the
  credit facility to meet our ongoing liquidity requirements, and increased
  interest expense.                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · Reduced
  cash flows and operating margins from our ITB fleet due to the expiration of
  the Hess support agreement in September 2007, which provided us minimum rates
  on our vessels, reduced demand and lower rates for our ITBs due to an
  increasing supply of vessels and overall declining economic activity and
  refinery utilization, and higher operating expenses of our ITBs due to their
  age and record fuel prices.                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · Increased
  vessel operating expenses due to new collective bargaining agreements with
  the two maritime unions that cover all of our seagoing personnel. The two
  agreements, which follow agreements reached by other vessel operators in our
  industry, increased vessel personnel expenses by $0.9 million in the first
  quarter of 2008 compared to the first quarter of 2007 and are expected to
  increase vessel personnel expenses by in excess of $3.0 million in 2008
  when compared to the 2007 levels under the expired contracts.

To the extent
the foregoing or other factors negatively impact our future operating results,
our available cash will be adversely affected. Our inability to adequately
address any liquidity issues that may arise in the future could impact our
ability to pay the minimum quarterly distribution in full.

40

---



A decline in demand
for refined petroleum, petrochemical and commodity chemical products, or
decreases in U.S. refining activity, particularly in the coastal regions of the
United States, or a decrease in the cost of importing refined petroleum
products, could cause demand for U.S. flag tank vessel capacity and charter
rates and vessel values to decline, which would decrease our revenues, our
ability to pay the minimum quarterly distribution on our units and to pay
interest on, and principal of, our indebtedness and our estimated return from
our investment in the Joint Venture.

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

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

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

Any
of these factors could adversely affect the demand for U.S. flag tank vessel
capacity and charter rates. Any decrease in demand for tank vessel capacity or
decrease in charter rates could have a material adverse effect on our business,
results of operations and financial condition, our ability to make
distributions on our units and to pay interest on, and principal of, our
indebtedness and our estimated return from our investment in the Joint Venture.

Additionally,
the demand for our services is heavily influenced by the level of refinery
utilization and capacity in the United States, particularly in the Gulf Coast
region. Any decline in refining utilization or capacity on the Gulf Coast, even
on a temporary basis, may significantly reduce the demand for waterborne
movements of refined petroleum products. For example, demand and charter rates
for our vessels have been significantly unfavorably impacted by the declining
refinery utilization over the past several months.  Additionally, following Hurricanes Katrina and Rita in 2005, movements
of refined petroleum products from the Gulf Coast were significantly curtailed
in 2005 and 2006, with repairs to hurricanedamaged Gulf Coast refineries being
completed in late 2006. While the Energy Information Administration of the U.S.
Department of Energy (EIA) has estimated that incremental capacity expansions
will increase the capacity of Gulf Coast refineries by 1.6 million barrels
per day (bpd) by 2016, it is possible that some or all of the proposed refinery
expansions may be delayed or not completed. While we expect that these refinery
expansions will increase demand for waterborne transportation of refined
petroleum products if refining capacity is not expanded or decreases from
current levels demand for our vessels could decrease, which could affect our
ability to grow our fleet, revenues and cash available to make distributions on
our units and to pay interest on, and principal of, our indebtedness.

The
demand for U.S. flag tank vessel capacity is influenced by the cost of importing
refined petroleum products. Historically, charter rates for vessels qualified
to participate in the coastwise trade under the Jones Act have been higher than
charter rates for foreign flag vessels because of the higher construction and
operating costs of U.S. flag vessels due to the Jones Act requirements that
such vessels must be built in the United States and manned by U.S. crews.
Therefore, it has historically been cheaper for certain areas of the United
States, such as the northeastern United States, to import refined petroleum
products than to obtain them from U.S. refineries. International shipping rates
can influence the amount of refined petroleum products imported into the United
States. If the cost of foreign shipping of imported refined petroleum products
decreases, charter rates for foreign flag vessels may decline, making it
cheaper to import refined petroleum products to other regions of the East Coast
and the West Coast to meet demand. If this were to occur, demand for our oil
product vessels and charter rates could decrease, which could have a material
adverse effect on our business, results of operations and financial condition,
our ability to make cash distributions on our units and to pay interest on, and
principal of, our indebtedness and our estimated return from our investment in
the Joint Venture.

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

The
cost of fuel for our vessels is a significant component of our voyage expenses
under our voyage charters and we have recently experienced significant
increases in the cost of fuel used in our operations.

41

---



While we have been able
to pass a portion of these increases on to our customers pursuant to the terms
of our charters, there can be no assurances that we will be able to pass on any
future increases in fuel prices. The overall decrease in demand for waterborne
transportation of petroleum, petro-chemical and chemical products has made it
more difficult for us to pass on to our customers the significant increase in
fuel prices we have recently experienced while remaining competitive on charter
rates with our competitors.  If fuel
prices continue to increase and we are not able to pass such increases on to
our customers, our business, results of operations, financial condition and
ability to make cash distributions and to pay interest on, and principal of,
our indebtedness may be adversely affected.

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

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

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

Some
of our competitors may have greater financial resources and larger operating
staffs than we do. As a result, they may be able to make vessels available more
quickly and efficiently, transition to double-hulled vessels more rapidly and
withstand the effects of declines in charter rates for a longer period of time.
They may be better able to address a downturn in the domestic demand for
refined petroleum, petrochemical or commodity chemical products. As a result,
we could lose customers and market share to these competitors.

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

We
originally expected the supply of domestic tank vessels competing with us to
decrease over the next several years due to OPA 90, which mandates the
phase-out of certain non-double-hulled tank vessels at varying times by
January 1, 2015; and the Jones Act, which restricts the supply of new
vessels by requiring that all vessels participating in the coastwise trade be
constructed in the United States. However, with the announced newbuilding
programs, we expect that these new vessels will become fully utilized on
delivery and replace substantially all the capacity taken out of the market due
to OPA 90. It is possible that some of these vessels may 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. As a result, we believe the
domestic supply of tank vessels will not decrease at the rate we originally
expected and may in fact increase, which will likely result in a decrease in
charter rates for and utilization of, our vessels, particularly in the spot
market. In addition, any additional newbuildings or retrofittings of existing
tank vessels may result in additional capacity that the market will not be able
to absorb at the anticipated demand levels. The availability of additional
capacity could adversely affect the charter rates that we can obtain for, and
utilization of, our vessels, and limit our ability to obtain charters for our
ITBs at reasonable rates. In addition, as a result of these newbuilding
programs and customer reluctance to employ older vessels, it is very unlikely
that retrofitting our ITBs will be economical. If supply increases at a faster
rate than demand, the charter rates and demand for our vessels could decline
significantly.

Our
ITB fleet is currently our largest source of revenue and EBITDA. However, the
expiration of the Hess Support Agreement in September 2007, under which we were
assured minimum charter rates for our ITB fleet, the fact that most of our ITBs
are expected to operate in the spot market rather than under long-term
charters, increased volatility in rates, and the likelihood of lower rates in
the spot market due to an increasing supply of vessels, and higher operating
expenses of our ITBs due to their age, increasing fuel prices and the new union
contracts will negatively impact the operating income and EBITDA provided by
our ITBs over the next several years, and could adversely affect our ability to
remain in compliance with the financial covenants in our debt agreements.

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

42

---



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

Our general partner
and its affiliates have conflicts of interest and limited fiduciary duties,
which may permit them to favor their own interests to the detriment of our
unitholders.

United
States Shipping Master LLC (Shipping Master) currently indirectly owns
the 2% general partner interest and directly owns an approximately 37% limited
partner interest in us and owns and controls our general partner. Conflicts of
interest may arise between our general partner and its affiliates, on the one
hand, and us and our unitholders, on the other hand. As a result of these
conflicts, our general partner may favor its own interests and the interests of
its affiliates over the interests of our unitholders, including in connection
with any strategic alternative undertaken by us. These conflicts include, among
others, the following situations:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · our
  general partner is allowed to take into account the interests of parties
  other than us, such as our affiliates, in resolving conflicts of interest,
  which has the effect of limiting its fiduciary duty to our unitholders;                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  general partner has limited its liability and reduced its fiduciary duties
  under Delaware law and has also restricted the remedies available to our
  unitholders for actions that, without such limitations, might constitute
  breaches of fiduciary duty and, by purchasing common units, unitholders will
  be deemed to have consented to some actions and conflicts of interest that
  might otherwise constitute a breach of fiduciary or other duties under
  applicable law;                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  general partner determines the amount and timing of asset purchases and
  sales, capital expenditures (including, based on the applicable facts and
  circumstances, whether a capital expenditure is classified as a maintenance
  capital expenditure, which reduces basic surplus, or an expansion capital
  expenditure, which does not reduce basic surplus), borrowings, issuances of
  additional partnership securities and reserves, each of which can affect the
  amount of cash that is available for distribution to our unitholders and to
  pay interest on, and principal of, our indebtedness;
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · in some
  instances, our general partner may cause us to borrow funds in order to
  permit the payment of cash distributions, even if the purpose or effect of
  the borrowing is to make a distribution on the subordinated units  or to make incentive distributions;                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  general partner determines which costs incurred by it and its affiliates are
  reimbursable by us;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  partnership agreement does not restrict our general partner from causing us
  to pay it or its affiliates for any services rendered on terms that are fair
  and reasonable to us or entering into additional contractual arrangements
  with any of these entities on our behalf;                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  general partner controls the enforcement of obligations owed to us by it and
  its affiliates; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · our
  general partner decides whether to retain separate counsel, accountants or
  others to perform services for us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · permits
  our general partner to make a number of decisions in its individual capacity,
  as opposed to in its capacity as our general partner. This entitles our
  general partner to consider only the interests and factors that it desires,
  and it has no duty or obligation to give any consideration to any interest
  of, or factors affecting, us, our affiliates or any limited partner or
  unitholder. Decisions made by our general partner in its individual capacity
  will be made by its sole owner, Shipping Master, and not by the board of
  directors of our general partner. Examples include the exercise of its
  limited call right, its rights to transfer or vote the units it owns and its
  determination whether or not to consent to any merger or consolidation of the
  Partnership or amendment of the partnership agreement;
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · provides
  that our general partner will not have any liability to us or our unitholders
  for decisions made in its capacity as general partner so long as it acted in
  good faith, meaning that it reasonably believed that the decision is in our
  best interests;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · generally
  provides that affiliated transactions and resolutions of conflicts of
  interest not approved by the conflicts committee of the board of directors of
  our general partner and not involving a vote of unitholders must be on terms
  no less favorable to us than those generally being provided to or available
  from unrelated third parties or be fair and reasonable to us and that, in
  determining whether a transaction or resolution is fair and reasonable, our
  general partner may consider the totality of the relationships between the
  parties involved, including other transactions that may not be particularly
  advantageous or beneficial to us;                                                                                                                                                                     

43

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · provides
  that in resolving conflicts of interest, it will be presumed that in making
  its decision the general partner or its conflicts committee acted in good
  faith, and in any proceeding brought by or on behalf of any limited partner
  or us, the person bringing or prosecuting such proceeding will have the
  burden of overcoming such presumption; and                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | · provides
  that our general partner and its officers and directors will not be liable
  for monetary damages to us, our limited partners or assignees for any acts or
  omissions unless there has been a final and non-appealable judgment entered
  by a court of competent jurisdiction determining that the general partner or
  those other persons acted in bad faith or engaged in fraud, willful
  misconduct or gross negligence.

Our leverage may
limit our ability to borrow additional funds, comply with the terms of our
indebtedness or capitalize on business opportunities.

Our
leverage is significant in relation to our partners capital. As of
March 31, 2008, our total outstanding long-term debt, including current
maturities, was $418.0 million (exclusive of the debt held by the Joint
Venture of $71.1 million, which is intended to be non-recourse to us). We
can borrow up to an additional $27.0 million under the revolving credit
portion of under our amended and restated credit facility, and have the option,
with the consent of the lenders, to increase the amount we can borrow by an
additional $50.0 million, subject to limitations under the indenture
governing our senior notes.

We
are facing difficult current market conditions.  Demand in the spot market has recently deteriorated significantly
due to overall declining economic activity and decreased demand for the
domestic coastwise transportation of petroleum products.  Refinery utilization has declined
significantly, fuel prices for operating our vessels are at record levels and
increased industry capacity from newbuilds has created significant competitive
pressures.  Due to these market shifts,
our ITBs have recently incurred idle periods greater than, and chartering rates
below, our previous expectations.
Additionally, we have observed modest decreased demand for the domestic
coastwise transportation of chemical products served by its chemical
transporting vessels, which we believe is due to our customers working off
inventory levels.  As a result, our
EBITDA and liquidity have come under increasing pressure, and unless there is a
significant improvement in utilization of, and charter rates for, our ITBs and
a resumption of growth in our chemical business, and/or an amendment to our
financial covenants, it is possible that we will fall out of compliance with
certain financial ratio covenants (relating to debt to EBITDA and interest and
fixed charge coverage) under our senior credit facility measured at the end of
the second quarter and likely that we will fall out of compliance with these
same covenants measured at the end of the third quarter, although we expect to
have sufficient cash resources to service our debt.

We
are prohibited by our amended and restated credit facility from making cash
distributions during an event of default under any of our indebtedness. The
indenture under which our senior notes were issued limits the amounts of
distributions we may make when our fixed charge coverage ratio (as defined in
the indenture) is less than 1.75 to 1. Various limitations in our debt
instruments may reduce our ability to incur additional debt, to engage in some
transactions and to capitalize on business opportunities. Any subsequent
refinancing of our current indebtedness or any new indebtedness could have
similar or greater restrictions. Our ability to comply with the covenants and
restrictions contained in our debt instruments may be affected by events beyond
our control, including prevailing economic, financial and industry conditions.
If market or other economic conditions deteriorate, our ability to comply with
these covenants may be impaired. If we breach any of the restrictions,
covenants, ratios or tests in our debt agreements, a significant portion of our
indebtedness may become immediately due and payable, and our lenders
commitment to make further loans to us may terminate. We might not have, or be
able to obtain, sufficient funds to make these accelerated payments. In
addition, our obligations under our amended and restated credit facility are
secured by substantially all of our assets (other than the assets of our
unrestricted subsidiaries including the Joint Venture), and if we are unable to
repay our indebtedness under our amended and restated credit facility, the
lenders could seek to foreclose on such assets and such lenders would have the
right to be paid in full in cash from the proceeds of such assets prior to
holders of our senior notes receiving payment from the proceeds of such assets.
The assets of the Joint Venture are pledged to the lenders under the Joint
Venture's credit facility and Product Carriers pledged its 40% interest in the
Joint Venture to the other parties financing the Joint Venture and to NASSCO to
secure Product Carriers obligation to pay damages under the construction
contract if the Joint Venture elects not to build vessels six to nine and
Product Carriers is unable to finance such construction.

Our
ability to make scheduled payments, to refinance our obligations with respect
to our indebtedness or our ability to obtain additional financing in the future
will depend on our financial and operating performance, which, in turn, is
subject to prevailing economic conditions and to financial, business and other
factors that are beyond our control. We believe that we will have sufficient
cash flow from operations and available borrowings under our amended and
restated credit facility to service our indebtedness, although the principal
amount of our indebtedness will likely need to be refinanced in whole or in
part at maturity. However, a continuation of the significant downturn in the
domestic marine transportation industry or other development adversely
affecting our cash flow would materially impair our ability to service our
indebtedness and to remain in compliance with our financial covenants. If our
cash flow and capital resources are insufficient to fund our debt service obligations,
we may be forced to refinance all or a portion of our debt or sell assets. We
cannot assure you that we would be able to refinance our existing indebtedness
or sell assets on terms that are commercially reasonable.

44

---



Our
leverage may adversely affect our ability to fund future working capital,
capital expenditures and other general partnership requirements, pay
distributions on our common units, future acquisition, construction or
development activities, or to otherwise fully realize the value of our assets
and opportunities because of the need to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness or to comply with any
restrictive terms of our indebtedness. Our leverage may make our results of
operations more susceptible to adverse economic and industry conditions by
limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate and may place us at a competitive
disadvantage as compared to our competitors that have less debt.

Our
leverage and the other financial covenants in our amended and restated credit
facility and the indenture governing our senior notes could restrict our
ability to purchase vessels from the Joint Venture or pay distributions on our
common units or limit our ability to obtain the funds necessary to finance the
purchase of such vessels through the incurrence of additional debt. Our failure
to acquire the vessels constructed by the Joint Venture could materially
adversely affect our business, results of operations and financial condition
and our ability to pay cash distributions and to pay interest on, and principal
of, our indebtedness.

Restrictions in our
debt agreements will limit our ability to pay distributions upon the occurrence
of certain events.

Our
payment of principal and interest on our debt will reduce cash available for
distribution on our units. Our credit facility prohibits our payment of
distributions upon the occurrence of the following events, among others:

| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | · failure to
  pay any principal, interest, fees, expenses or other amounts when due;                                                    
| |                                                                                                                                          
| | · any loan
  document or lien securing the credit facility ceases to be effective;                                                       
| |                                                                                                                                          
| | · breach of
  certain financial covenants;                                                                                               
| |                                                                                                                                          
| | · failure to
  observe any other agreement, security instrument, obligation or covenant
  beyond specified cure periods in certain cases;
| |                                                                                                                                          
| | · default
  under other indebtedness of our operating company or any of our subsidiaries
  above specified amounts;                      
| |                                                                                                                                          
| | · bankruptcy
  or insolvency events involving us, our general partner or any of our
  subsidiaries;                                      
| |                                                                                                                                          
| | · failure of
  any representation or warranty to be materially correct;                                                                  
| |                                                                                                                                          
| | · a change
  of control, as defined in our credit agreement;                                                                             
| |                                                                                                                                          
| | · a material
  adverse effect, as defined in our credit agreement, occurs relating to us or
  our business; and                          
| |                                                                                                                                          
| | · judgments
  against us or any of our subsidiaries in excess of certain allowances.                                                     

In
addition, the indenture under which our senior notes were issued prohibits us
from paying distributions following an event of default and provides that
whenever our fixed charge coverage ratio (as defined in the indenture) is less
than 1.75 to 1 for the last year, we cannot pay distributions that in aggregate
during any period when our fixed charge coverage ratio is less than 1.75 to 1
an amount in excess of $50.0 million plus the proceeds of certain equity
issuances. The minimum quarterly distribution per quarter that we have
historically paid on our common units (excluding our subordinated and general
partners units) is $5.1 million. Accordingly, we will be prohibited by the
indenture from paying distributions except out of proceeds of certain equity
issuances if our fixed charge coverage ratio is less that 1.75 to 1 for more
than nine quarters (five quarters if the minimum quarterly distribution on our
subordinated and general partner units is also paid).

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

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

The
anticipated after-tax benefit of an investment in our common units depends
largely on our being treated as a partnership for federal income tax purposes.
For federal income tax purposes, we take the position that we are a partnership
that is not subject to federal income tax. We can take this position only if
90% or more of our gross income in each year consists of certain identified
types of qualifying income (which includes dividends from subsidiary
corporations and income from the transportation of minerals and natural
resources, including gas, oil or products thereof). Consequently, we are
required to make certain decisions regarding whether our revenue is qualifying
income and to perform certain activities through subsidiaries that are taxable
as regular domestic corporations. We have not requested, and do not plan to
request, a ruling from the IRS or any state on our status as a partnership or
any other matter affecting us. It may be necessary to resort to administrative
or court proceedings to sustain some or all of the positions we take. A court
may not agree with some or all of the positions we take.

45

---



Any contest with the
IRS or a state tax authority may materially and adversely impact the market for
our common units, our notes and the prices at which they trade. In addition,
the costs of any contest with the IRS or a state tax authority will result in a
reduction in cash available for distribution to unitholders and to pay interest
on, and principal of, our indebtedness.

If
we were treated as a corporation for federal income tax purposes, we would pay
federal income tax on our income (other than dividend income from any subsidiary
that is itself subject to corporate income tax) at the corporate tax rate,
which is currently a maximum of 35%. Because a tax would be imposed upon us as
a corporation, our cash available for distribution to unitholders and to pay
interest on, and principal of, our indebtedness would be substantially reduced.

Current
law may change, causing us to be treated as a corporation for federal income
tax purposes or otherwise subjecting us to entity-level taxation. The present
U.S. federal income tax treatment of publicly traded partnerships, including
us, or an investment in our common units may be modified by administrative,
legislative or judicial interpretation at any time. For example, in response to
certain recent developments, members of Congress are considering substantive
changes to the definition of qualifying income under Section 7704(d) of
the Internal Revenue Code. It is possible that these efforts could result in
changes to the existing U.S. tax laws that affect publicly traded partnerships,
including us. Any modification to the U.S. federal income tax laws and
interpretations thereof may or may not be applied retroactively. Because of
widespread state budget deficits, several states are evaluating ways to subject
partnerships to entity-level taxation through the imposition of state income,
franchise or other forms of taxation. If any state were to impose a tax upon us
as an entity, the cash available for distribution to unitholders and to pay
interest on, and principal of, our indebtedness would be reduced. The
partnership agreement provides that if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal,
state or local income tax purposes, then the minimum quarterly distribution
amount and the target distribution amounts will be adjusted to reflect the
impact of that law on us. We are unable to predict whether any of these
changes, or other proposals, will ultimately be enacted. Any such changes could
negatively affect the value of an investment in our common units.

The
decrease in demand for our services transporting petroleum products, combined
with our use of the ITBs for grain voyages in order to keep the vessels
employed, as well as the addition of the ATB Freeport, which transports principally
chemical products, to our fleet in July 2007, has increased the percentage of
non-qualifying income that we generate.
Although we monitor our level of non-qualifying income closely, given
the current uncertainty in the market there can be no assurance that we will be
able to continue to meet the qualifying income level necessary to maintain our
status as a publicly-traded partnership.

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

We
attempt to maintain the required level of qualifying income by conducting the
operations of our vessels the Chemical
Pioneer, the ATB Freeport,
the ITB Philadelphia and the Sea Venture through subsidiaries that are
taxed as corporations.   Additionally,
we began operating the ITB Groton, the ITB
Jacksonville and theITB New York through
subsidiaries taxed as corporations commencing in May 2008. The
operation of these vessels in subsidiaries taxed as corporations generally
reduces the amount of cash available for payment of distributions on our units
and the payment of principal of, and interest on, our outstanding debt.  As we seek to maintain utilization of our
ITBs, it is likely that one or more of our ITBs will begin to transport
products that do not generate qualifying income. We may elect to, or be
required to, conduct additional operations through these or other corporate
subsidiaries in the future. We may be required to place other of our vessels,
including one or more of our ATB units under construction, in subsidiaries
taxed as corporations. In addition, we have three other subsidiaries organized
as corporations: U.S. Shipping Finance Corp., which is co-issuer of our senior
notes, USS PC Holding Corp. and USS JV Manager, Inc. USS JV
Manager, Inc. receives management and other fees from the Joint Venture.
These corporate subsidiaries are subject to corporate-level tax, which may reduce
the cash available for distribution to unitholders. If the IRS were to
successfully assert that these corporations have more tax liability than we
anticipate or legislation was enacted that increased the corporate tax rate,
our cash available for distribution to unitholders would be further reduced.

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 will result in a significant reduction in the amount
of cash available for distribution to unitholders.

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

None.

46

---



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

Not
applicable.

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

None.

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

None.

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

|                  |  |                                                                                                            
|----------------- |  | -----------------------------------------------------------------------------------------------------------
|Exhibit 
  Number |  | Description                                                                                                
|                  |  |                                                                                                            
|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.

47

---



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:  May 12, 2008

| |                               |                                          
| | ----------------------------- | -----------------------------------------
| | U.S.
  SHIPPING PARTNERS L.P.
| |                              
| | By:                           | US Shipping
  General Partner LLC,       
| |                               | its general
  partner                    
| |                               |                                          
| | by:                           | /s/ Paul B.
  Gridley                    
| |                               |                                          
| |                               | Paul B.
  Gridley                        
| |                               | Chairman,
  Chief Executive Officer      
| |                               | (principal
  executive officer)          
| |                               |                                          
| | by:                           | /s/ Albert
  E. Bergeron                 
| |                               |                                          
| |                               | Albert E.
  Bergeron                     
| |                               | Vice
  PresidentChief Financial Officer 
| |                               | (principal
  financial officer)          
| |                               |                                          
| | by:                           | /s/ Anthony
  J. Guzzo                   
| |                               |                                          
| |                               | Anthony J.
  Guzzo                       
| |                               | Vice
  PresidentChief Accounting Officer
| |                               | (principal
  accounting officer)         

48

---