International Shipholding (ISH+) 10-K/A 2009 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

 X           Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2008

               Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:  001-10852

      INTERNATIONAL SHIPHOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)   11 North Water Street, Mobile, Alabama (Address of principal executive offices)   36-2989662 (I.R.S. Employer Identification No.)       36602 (Zip Code)

(251)-243-9100

(Registrant’s telephone number, including area code)

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

           Title of each class                                                                             Name of each exchange on which registered

 Common Stock, $1 Par Value                                                                                       New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes   o No þ

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 þ No o

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

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o 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 þ

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008, based upon the closing price of the common stock as reported by the New York Stock Exchange on such date, was approximately $135,576,960.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class Common Stock, $1 par value, Outstanding at May 31, 2009 7,406,070 shares

EXPLANATORY NOTE

International Shipholding Corporation (the “Company”) owns a 50% equity interest in Dry Bulk Cape Holding Inc., a Panamanian company (“Dry Bulk”).  Dry Bulk is a holding company engaged in international bulk carrier operations through its six wholly-owned subsidiaries.  During each of the last three filing years, we derived more than 20% of our pretax income from an ownership interest in Dry Bulk.  As a result, the Company is required by Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934 (the “Exchange Act”) to provide audited consolidated balance sheets for Dry Bulk as of December 31, 2008 and 2007 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the three years ended December 31, 2008, 2007 and 2006.

In addition, this Amendment No.1 to our Annual Report on Form 10-K for the year ended December 31, 2008  includes a reclassification for grossing up of our revenues and voyage expenses. This reclassification does not change what we previously reported for gross voyage profit, net income or earnings per share.

The reclassification applies only to the reporting of revenues and voyage expenses for carriage of our supplemental cargo on our U.S. flag Pure Car Truck Carriers, which is part of our Time Charter Segment. Under these time charter agreements, we are permitted, at the charterer’s discretion, to charter back and employ the vessel for carriage of supplemental cargoes. Prior to 2009, we only recorded our net profits and did not gross up the revenues and expenses for these types of supplemental voyages.

During the first quarter of 2009, as carriage of supplemental cargoes increased significantly compared to the same period of the previous year, our evaluation concluded that recording only our net profits is not consistent with current GAAP interpretations. Our reclassification will conform our accounting of supplemental cargoes with that of our other voyages and, we believe, provide investors with more comprehensive and meaningful information on the performance of our Time Charter Segment.

As a result, starting with the filing of our Form 10-Q for the quarterly period ended March 31, 2009, we began to report our revenues and voyage expenses for our supplemental cargoes on our U.S. flag Pure Car Truck Carriers on a gross basis. Below is the impact of the reclassification by year for total revenues and total voyage expenses:

International Shipholding Corporation
Revenues/Voyage Expenses Reclassification
(All Amounts in Thousands)	2008
		Q1		Q2		Q3		Q4	Total
Revenues (as previously reported)	$	55,804	$	58,123	$	66,151	$	58,402	$	238,480
Adjustment		7,901		3,026		18,198		14,296		43,421
Revenues (as adjusted)		63,705		61,149		84,349		72,698		281,901
Voyage Expenses (as previously reported)		44,207		45,876		44,949		41,787		176,819
Adjustment		7,901		3,026		18,198		14,296		43,421
Voyage Expenses (as adjusted)		52,108		48,902		63,147		56,083		220,240
	2007
		Q1	��	Q2		Q3		Q4	Total
Revenues (as previously reported)	$	46,573	$	47,311	$	51,306	$	51,920	$	197,110
Adjustment		3,704		9,791		3,001		4,507		21,003
Revenues (as adjusted)		50,277		57,102		54,307		56,427		218,113
Voyage Expenses (as previously reported)		34,740		34,922		38,572		38,778		147,012
Adjustment		3,704		9,791		3,001		4,507		21,003
Voyage Expenses (as adjusted)		38,444		44,713		41,573		43,285		168,015
	December 31,
	2006		2005		2004
Revenues (as previously reported)	$	185,464	$	168,791	$	163,451
Adjustment		18,034		18,824		10,667
Revenues (as adjusted)		203,498		187,615		174,118
Voyage Expenses (as previously reported)		137,478		125,107		117,147
Adjustment		18,034		18,824		10,667
Voyage Expenses (as adjusted)		155,512		143,931		127,814

This Amendment No. 1 includes the following items of our Annual Report on Form 10-K, which have been amended and restated in their entirety to reflect the inclusion of Dry Bulk’s financial statements and the above-described reclassification:

·   Part II – Item 6. Selected Financial Data

·   Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

·   Part IV- Item 15. Exhibits, Financial Statement Schedules

Other than as noted above, this Amendment No. 1 does not change any information set forth in the original filing of our Annual Report Form 10-K for the year ended December 31, 2008.  However, in accordance with Rule 12b-15, this Amendment No. 1 includes new financial certifications filed as Exhibits 31.1, 31.2, Exhibits 32.1 and 32.2. Other than as noted above, this Amendment No. 1 does not reflect events occurring after the filing of our original Annual Report or modify or update disclosures affected by subsequent events.

ITEM 6.  SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

The following summary of selected consolidated financial data is not covered by the report of our auditors appearing elsewhere herein. However, in the opinion of management, the summary of selected consolidated financial data includes all adjustments necessary for a fair representation of each of the years presented.

This summary should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this annual report.

(All Amounts in Thousands Except Share and Per Share Data)	Year Ended December 31,
	2008 (1)			2007			2006 (2)			2005			2004 (3)
Income Statement Data (4):
Revenues	$	281,901		$	218,113		$	203,498		$	187,615		$	174,118
Impairment Loss		-			-			8,866			-			-
Gross Voyage Profit		41,693			28,776			19,054			24,789			27,071
Operating Income		20,280			10,630			1,445			10,104			10,305
Income from Continuing Operations		34,223			11,792			18,194			6,393			10,996
Net Income Available to Common Stockholders		38,962			15,016			14,648			4,629			12,785
Basic and Diluted Earnings Per Common Share – Continuing Operations
Net Income Available to Common Stockholders - Basic		4.67			1.48			2.58			0.66			1.81
Net Income Available to Common Stockholders - Diluted		4.56			1.41			2.24			0.66			1.80
Balance Sheet Data:
Working Capital		50,506			23,189			3,024			16,120			17,650
Total Assets		434,111			440,655			428,042			449,507			385,048
Long-Term Debt, Less Current Maturities		126,841			130,523			98,984			161,720			168,622
(including Capital Lease Obligations)
Convertible Exchangeable Preferred Stock		-			37,554			37,554			37,554			-
Stockholders' Investment		205,192			173,702			153,736			140,714			135,454
Other Data:
Net Cash Provided by Operating Activities		42,185			20,231			22,981			23,778			28,989
Net Cash (Used) Provided by Investing Activities		41,434			(2,180	)		27,532			(61,208	)		(25,589	)
Net Cash (Used) Provided by Financing Activities		(45,887	)		(48,221	)		(22,418	)		43,095			(1,768	)
Cash Dividends Per Share of Common Stock		0.50			-			-			-			-
Weighted Average Shares of Common Stock Outstanding:
Basic		7,314,216			6,360,208			6,116,036			6,083,005			6,082,887
Diluted		7,501,555			8,369,473			8,122,578			6,114,510			6,092,302

(1) Includes income of  $15.9 million from the sale of a Dry Bulk vessel, of which we owned a 50% share.

(2) Results for 2006 reflect an Impairment Loss of approximately $8.9 million.  This non-cash charge was made to write       down our investment in the terminal located in New Orleans, Louisiana utilized in our Rail-Ferry Service.  That service relocated its U.S. operations during 2007 to Mobile, Alabama, where a new terminal has been constructed.

(3) Results for 2004 were significantly favorably impacted by certain income tax adjustment relating to the Jobs Creation Act    of 2004.

(4) During 2007, the decision was made to discontinue our LASH Liner service.  As a result, the LASH Liner service results were removed from continuing operations and reclassified into Discontinued Operations for all years presented above.  

1

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

NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10K and other documents filed or furnished by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and as such may involve known and unknown risks, uncertainties, and other factors that may cause our actual results to be materially different from the anticipated future results expressed or implied by such forward-looking statements.

Such statements include, without limitation, statements regarding (i) estimated fair values of capital assets, the recoverability of the cost of those assets, the estimated future cash flows attributable to those assets, and the appropriate discounts to be applied in determining the net present values of those estimated cash flows; (ii) estimated scrap values of assets; (iii) estimated proceeds from sales of assets and the anticipated cost of constructing or purchasing new or existing vessels ; (iv) estimated fair values of financial instruments, such as interest rate, commodity and currency swap agreements; (v) estimated losses (including independent actuarial estimates) under self-insurance arrangements, as well as estimated gains or losses on certain contracts, trade routes, lines of business or asset dispositions; (vi) estimated losses attributable to asbestos claims; (vii) estimated obligations, and the timing thereof, to the U.S. Customs Service relating to foreign repair work; (viii) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (ix) our ability to remain in compliance with our debt covenants; (x) anticipated trends in government sponsored cargoes; (xi) our ability to effectively service our debt; (xii) financing opportunities and sources (including the impact of financings on our financial position, financial performance or credit ratings); (xiii) anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, investment and expenditure plans, investment results, pricing plans, strategic alternatives, business strategies, and other similar statements of expectations or objectives, and (xiv) assumptions underlying any of the foregoing.  Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words.

Our forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are outside of our control.  These forward looking statements, and the assumptions upon which such statements are based, are inherently speculative and are subject to uncertainties that could cause our actual results to differ materially from such statements.  Important factors that could cause our actual results to differ materially from our expectations may include, without limitation, our ability to (i) identify customers with marine transportation needs requiring specialized vessels or operating techniques; (ii) secure financing on satisfactory terms to acquire, modify, or construct vessels if such financing is necessary to service the potential needs of current or future customers;  (iii) obtain new contracts or renew existing contracts which would employ certain of our vessels or other assets upon the expiration of contracts currently in place, on favorable economic terms; (iv) manage the amount and rate of growth of our general and administrative expenses and costs associated with operating certain of our vessels; (v) and manage our growth in terms of implementing internal controls and information systems and hiring or retaining key personnel, among other things, and (vi)  effectively handle our substantial leverage by servicing and meeting the covenant requirements in each of our debt instruments, thereby avoiding any defaults under those instruments and avoiding cross defaults under others;

Other factors include (i) changes in cargo, charterhire, fuel, and vessel utilization rates; (ii) the rate at which competitors add or scrap vessels in the markets as well as demolition scrap prices and the availability of scrap facilities in which we operate; (iii) changes in interest rates which could increase or decrease the amount of interest we incur on borrowings with variable rates of interest, and the availability and cost of capital to us; (iv) the impact on our financial statements of nonrecurring accounting charges that may result from our ongoing evaluation of business strategies, asset valuations, and organizational structures; (v) changes in accounting policies and practices adopted voluntarily or as required by accounting principles generally accepted in the United States; (vi) changes in laws and regulations such as those related to government assistance programs and tax rates; (vii) the frequency and severity of claims against us, and unanticipated outcomes of current or possible future legal proceedings; (viii) unplanned maintenance and out-of-service days on our vessels; (ix) the ability of customers to fulfill obligations with us; (x) the performance of unconsolidated subsidiaries; and (xi) other economic, competitive, governmental, and technological factors which may affect our operations.

For additional information, see the description of our business included above, as well as Item 7 of this report.  Due to these uncertainties, there can be no assurance that our anticipated results will occur, that our judgments or assumptions will prove correct, or that unforeseen developments will not occur.  Accordingly, you are cautioned not to place undue reliance upon any of our forward-looking statements, which speak only as of the date made.  Additional risks that we currently deem immaterial or that are not presently known to us could also cause our actual results to differ materially from those expected in our forward-looking statements.  We undertake no obligation to update or revise for any reason any forward-looking statements made by us or on our behalf, whether as a result of new information, future events or developments, changed circumstances or otherwise.

CRITICAL ACCOUNTING POLICIES

Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and which require complex management judgments or estimates and entail material uncertainties.  Information regarding our other accounting policies is included in the Notes to Consolidated Financial Statements appearing elsewhere herein.

Voyage Revenue and Expense Recognition

Revenues and expenses relating to our Rail-Ferry Service segment voyages are recorded over the duration of the voyage.  Our voyage expenses are estimated at the beginning of the voyages based on historical actual costs or from industry sources familiar with those types of charges.  As the voyage progresses, these estimated costs are revised with actual charges and timely adjustments are made.  The expenses are ratably expensed over the voyage based on the number of days in progress at the end of the period.  We believe there is no material difference between recording estimated expenses ratably over the voyage versus recording expenses as incurred.  Revenues and expenses relating to our other segments' voyages, which require no estimates or assumptions, are recorded when earned or incurred during the reporting period.

Depreciation

Provisions for depreciation are computed on the straight-line method based on estimated useful lives of our depreciable assets.  Various methods are used to estimate the useful lives and salvage values of our depreciable assets and due to the capital intensive nature of our business and our large base of depreciable assets, changes in such estimates could have a material effect on our results of operations.

Drydocking Costs

We defer certain costs related to the drydocking of our vessels.  Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings (generally two to five years).  Because drydocking charges can be material in any one period, we believe that the acceptable deferred method provides a better matching for the amortization of those costs over future revenue periods benefiting from the drydocking of our vessel.  We capitalize only those costs that are incurred to meet regulatory requirements or upgrades, or that add economic life to the vessel.  Normal repairs, whether incurred as part of the drydocking or not, are expensed as incurred.

Income Taxes

Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”  Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial income in another.  Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation.  However, pursuant to existing U.S. Tax Laws, earnings from certain of our foreign operations are subject to U.S. income taxes when those earnings are repatriated to the U.S.  We have indefinitely re-invested earnings of $24,135,275 and $7,130,000 of 2008 and 2007 foreign earnings, respectively, and accordingly, have not provided deferred taxes in the amount of $8,447,346 and $2,495,000 against those earnings.  The Jobs Creation Act, which first applied to us on January 1, 2005, changed the United States tax treatment of the foreign operations of our U.S. flag vessels and our international flag shipping operations.  We made an election under the Jobs Creation Act to have our qualifying U.S. flag operations taxed under a “tonnage tax” rather than under the usual U.S. corporate income tax regime.

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”)”, to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  We adopted FIN 48 on January 1, 2007.

Self-Retention Insurance

As explained further in Note E to the Notes to our Consolidated Financial Statements contained elsewhere in this report, we maintain provisions for estimated losses under our self-retention insurance based on estimates of the eventual claims settlement costs.  Our policy is to establish self-insurance provisions for Hull and Machinery and Loss of Hire for each policy year based on our estimates of eventual claims’ settlement cost.  Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions.  It is reasonably possible that changes in our estimated exposure may occur from time to time.  The measurement of our exposure for self-insurance liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the reporting period.  Actual results could differ materially from those estimates.

Asbestos Claims

We maintain provisions for estimated losses for asbestos claims based on estimates of eventual claims settlement costs.  Our policy is to establish provisions based on a range of estimated exposure.  We estimate this potential range of exposure using input from legal counsel and internal estimates based on the individual deductible levels for each policy year. We believe that insurance and the indemnification of a previous owner of one of our wholly-owned subsidiaries may mitigate our exposure.  The measurement of our exposure for asbestos liability requires management to make estimates and assumptions that affect the amount of the loss provisions recorded during the period.  Our estimates and assumptions are formed from variables such as the maximum deductible levels in a claim year, the amount of the indemnification recovery and the claimant's employment history with the company.  Actual results could differ materially from those estimates.

Pension and Postretirement Benefits

Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.”  These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates, and other factors.  We believe that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary and information as to historical experience and performance.  Differences in actual experience or changes in assumptions may affect our pension and postretirement obligations and future expense.

In September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).”  This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans.  Under SFAS No. 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Other Comprehensive Income, net of tax effects, until they are amortized as a component of net periodic benefit cost.  In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end.

EXECUTIVE SUMMARY

Overview of 2008

Overall Strategy

The company operates a diversified fleet of U.S. and International flag vessels that provide international and domestic maritime transportation services to customers primarily under medium to long-term contracts. Our business strategy consists of identifying growth opportunities as market needs change, utilizing our extensive experience to meet those needs, and continuing to maintain a diverse portfolio of medium to long-term contracts, under which we can serve our long-standing customer base by providing quality transportation services.

2008 Consolidated Financial Performance

Overall results in 2008 improved significantly compared to 2007. This was supported by improvements in our Rail-Ferry and Time Charter segments.  The increased carriage of supplemental cargoes on our U.S. flag PCTC’s was the primary factor strengthening the results of our  Time Charter segment.

§   Consolidated gross voyage profit grew from $28.8 million for the full year 2007 to $41.7 million for the full year 2008.

§   Income from unconsolidated entities includes a after-tax gain of $15.9 million on the sale of a Panamax Bulk Carrier in 2008

§   Consolidated net income increased to $39.1 million compared with $17.4 million for 2007.

§   Administrative expenses increased by 18% from 2007 to 2008, over half of which was due to non-ordinary charges, primarily associated with an unaffiliated shipping company’s unsolicited conditional offer to purchase the Company’s outstanding shares.

Financial Discipline & Strong Balance Sheet

We continued to improve our financial position in 2008.

§   Improved operating cash flow from $20.2 million in 2007 to $42.2 million in 2008.

§   Consolidated cash and cash equivalents increased to $51.8 million at December 31, 2008 from $14.1 million at December 31, 2007, largely as a result of the vessel sale noted above and increased gross voyage revenues.

§   Working capital ratios increased from 2007 to 2008.

§   Repurchased 471,572 shares of common stock.

§   Redemption of $17.3 million of preferred stock.

Segment Performance

Rail-Ferry

§Improvement in gross profits from a loss of $1.6 million for 2007 to $1.9 million profit in 2008

§Carriage of 16,300 Rail Cars in 2008, up from 9,600 Rail Cars carried in 2007.

                    §Average capacity utilization of 75% in 2008.

Time Charter Contracts

§Improvement in gross profit from $25.2 million in 2007 to $35.7 million in 2008.

§   Significant increases in our supplemental cargo volume.

     §Fixed time-charter rate which provides consistent operating cash flow.

Contract of Affreightment (“COA”)

§   Partly as a result of our 2007 sale transaction of our molten sulphur vessel described further herein,  the segment experienced a decrease of $2.5 million in gross profits, partially  offset by lower taxes.

§   Higher fuel cost in 2008 versus 2007.

Other

§   Net income from unconsolidated entities increased to $20.9 million in 2008 from $6.6 million for the 2007 full year, driven principally by the after-tax gain on the sale of a Panamax Bulk Carrier of $15.9 million in 2008.

§   Foreign exchange loss in 2008 on the devaluation of the Mexican peso of approximately $400,000.

2

YEAR ENDED DECEMBER 31, 2008

COMPARED TO YEAR ENDED DECEMBER 31, 2007

	Time Charter				Rail-Ferry
(All Amounts in Thousands)	Contracts		COA		Service			Other		Total
2008
Revenues from External Customers	$	218,805	$	19,195	$	39,410		$	4,491	$	281,901
Voyage Expenses		168,479		17,553		32,136			2,072		220,240
Gross Voyage Profit		35,735		1,642		1,909			2,407		41,693
2007
Revenues from External Customers	$	178,336	$	16,652	$	21,235		$	1,890	$	218,113
Voyage Expenses		137,828		10,940		18,406			841		168,015
Gross Voyage Profit (Loss)		25,198		4,100		(1,566	)		1,044		28,776

The changes of revenue and expenses associated with each of our segments are discussed within the gross voyage analysis below.

Time Charter Contracts: The increase in this segment’s gross voyage profit from $25.2 million in 2007 to $35.7 million in 2008 was due to an increase in the carriage of supplemental cargoes on our U.S. flag Pure Car Truck Carriers. Revenues for the segment increased from $178.3 million in 2007 to $218.8 million in 2008.  This improvement in revenues is the result of the aforementioned increase in supplemental cargoes and operating one additional International flag Pure Car Truck Carrier for the full year 2008 as compared to approximately half of 2007.

Contract of Affreightment: The decrease in this segment’s gross voyage profit from $4.1 million in 2007 to $1.6 million in 2008 was primarily due to an increase in costs associated with operating the segment’s vessel under an operating lease in 2008.  The vessel, which was fully depreciated for tax purposes, was sold in 2007.  The benefits derived under an operating lease are reflected in a lower net effective tax rate.  The increase in revenue from $16.7 million in 2007 to $19.2 million in 2008 was due to increased voyages and freight rate escalation for increasing fuel costs in 2008.

Rail-Ferry Service:  Gross voyage results for this segment improved from a loss of $1.6 million in 2007 to a profit of $1.9 million in 2008.  This increase was due to additional sailings in 2008 as well as increased cargo volumes which were carried as a result of the addition of second decks on each rail-ferry vessel.  Operation of the vessels with the second decks began in the third quarter of 2007.  Revenues for this segment increased from $21.2 million in 2007 to $39.4 million in 2008 due to the additional sailings and increased cargo volumes utilizing second deck capacity.

Other: Gross voyage profit for this segment increased from $1.0 million in 2007 to $2.4 million in 2008. This increase was primarily due to 2007 adjusted earnings recorded in 2008 for Dry Bulk’s subsidiary companies (which is discussed further below).

Other Income and Expenses

Administrative and general expenses (A&G) increased 18% from $18.2 million in 2007 to $21.4 million in 2008.  A substantial portion of this increase was due to fees related to non-ordinary charges associated with advisory and legal costs resulting from an unaffiliated shipping company’s unsolicited conditional offer to purchase the Company’s outstanding shares, employee relocation expenses associated with the move of the Company’s headquarters to Mobile, Alabama, and amortization of stock grants awarded to Executive Officers.  Excluding these expenses A&G increased 7.6%.

The following table shows the significant A&G components for the twelve months ending December 31, 2008 and 2007 respectively:

(All amounts in thousands)	Year Ended December 31,
A&G Account	2008		2007		Variance
Wages and Benefits	$	10,668	$	10,312	$	356
Executive Stock Compensation		873		-		873
Accounting / Legal Fees		1,528		1,472		56
Office Building Expense		1,159		1,114		45
Other		5,316		4,450		865
		19,544		17,348		2,195
Non-Ordinary Expenses		1,870		810		1,060
TOTAL:	$	21,414	$	18,158	$	3,255

Interest expense decreased 29.6% from $9.8 million in 2007 to $6.9 million in 2008.  The decrease was primarily due to the retirement of all the remaining outstanding obligations of our 7¾% Senior Unsecured Notes (“Notes”) in October of 2007.  We recognized an impairment loss of $369,000 on the Company’s investment in marketable securities in the fourth quarter of 2008.  The charge reflects investments in certain equity securities whose market values have been materially impacted by current economic conditions.

Investment income decreased from $2.6 million in 2007 to $894,000 in 2008. The decrease was primarily due to a lower rate of return on our short-term investments.

Income Taxes

We recorded a benefit for federal income taxes of $877,000 on $12.4 million of income from continuing operations before income from unconsolidated entities in 2008, reflecting tax losses on operations taxed at the U.S. corporate statutory rate.  For 2007, our benefit was $1.4 million on our $3.8 million of income from continuing operations before income from unconsolidated entities.  Our tax benefit decreased from the comparable prior year primarily as a result of improved earnings from our Rail Ferry segment which are taxed at the 35% statutory rate.

Equity in Net Income of Unconsolidated Entities

Equity in net income of unconsolidated entities, net of taxes, increased from $6.6 million in 2007 to $20.9 million in 2008.

The improved results came from our 50% investment in Dry Bulk Cape Holding Ltd (“Dry Bulk”), which owns 100% of subsidiary companies currently owning two Capesize Bulk Carriers and one Panamax Bulk Carrier, which contributed $21.2 million in 2008 compared to $6.7 million in 2007.  This increase was primarily due to a gain on the sale of one of Dry Bulk’s subsidiaries’ vessels, a Panamax Bulk Carrier, of approximately $15.9 million in June 2008.

During the second quarter of 2007, Dry Bulk’s subsidiary companies entered into a ship purchase agreement with Mitsui & Co. of Japan for two newbuildings Handymax Bulk Carriers to be delivered in the first half of 2012.  Total investment in the newbuildings is anticipated to be approximately $74.0 million, of which the Company’s share would be 50% or approximately $37.0 million.  We expect to make our interim construction payments with cash generated from Dry Bulk’s subsidiary companies’ operations.  A decision on any long-term financing is expected to be determined at delivery.  Our 50% share of the initial contract payment of $750,000 was made in May of 2007.  For more information, see below “Liquidity and Capital Resources – Bulk Carriers.”

Discontinued Operations

In the third quarter of 2007, we elected to discontinue our International LASH service by the end of 2007.  During the first two months of 2008, we sold the one remaining LASH vessel and the majority of LASH barges, with the remaining LASH barges under contract to be sold by the end of the first quarter of 2008.  The after-tax gain of $9.9 million recorded in 2007 reflects a gain of $7.3 million on the sale of two LASH Vessels and $2.6 million on the sale of LASH barges. The gain of $4.6 million recorded in 2008 reflects the gain from the sale of one LASH Vessel and remaining LASH barges.  During 2008 there were no revenues associated with the discontinued LASH services, as compared to $42.0 million for 2007.  Profit from operations before taxes were $220,000 in 2008, compared to a $4.2 million loss in 2007.

Our U.S. flag LASH service and International LASH service were reported in “Continuing Operations” as a part of our Liner segment in periods prior to June 30, 2007.  The financial results for all periods presented have been restated to remove the effects of both of those operations from “Continuing Operations”.

YEAR ENDED DECEMBER 31, 2007

COMPARED TO YEAR ENDED DECEMBER 31, 2006

	Time Charter				Rail-Ferry
(All Amounts in Thousands)	Contracts		COA		Service			Other		Total
2007
Revenues from External Customers	$	178,336	$	16,652	$	21,235		$	1,890	$	218,113
Voyage Expenses		137,828		10,940		18,406			841		168,015
Gross Voyage Profit (Loss)		25,198		4,100		(1,566	)		1,044		28,776
2006
Revenues from External Customers	$	166,615	$	16,081	$	18,427		$	2,375	$	203,498
Voyage Expenses		124,289		9,522		19,734			1,967		155,512
Impairment Loss		-		-		(8,866	)		-		(8,866	)
Gross Voyage Profit (Loss)		28,517		4,142		(14,002	)		397		19,054

Gross voyage profit increased from $19.1 million in 2006 to $28.8 million in 2007.  The gross profit in 2006 included a pre-tax impairment loss of $8.9 million on our investment in the Rail-Ferry Service’s terminal in New Orleans.  Excluding this loss, gross voyage profit increased from $27.9 million in 2006 to the above mentioned $28.8 million in 2007.  Revenues increased from $203.5 million in 2006 to $218.1 million in 2007.  Voyage expenses increased from $155.5 million in 2006 to $ 168.0 million in 2007.  The changes of revenues and expenses associated with each of our segments are discussed within the gross voyage analysis below.

Time Charter Contracts: The decrease in this segment’s gross voyage profit from $28.5 million in 2006 to $25.2 million in 2007 was primarily due to an increase in operating expenses.  These increases were primarily wages and maintenance, including drydock amortization charges on our U.S. flag Pure Car Truck Carriers.  Revenues for the segment increased from $166.6 million in 2006 to $178.3 million in  2007.  This improvement is a result of higher volumes of supplemental cargoes in 2007 on our U.S. flag Pure Car Truck Carriers, higher charter rates in 2007 on our International flag Pure Car Truck Carriers and increased charterhire days for our U.S. flag Jones Act Coal Carrier, which was in drydock during the first and second quarters of 2006.

Contract of Affreightment: Gross voyage profit of $4.1 million for this segment in 2007 was consistent with 2006. While this segment operated more voyages in 2007, higher port and fuel costs eroded some of these positive results as compared to 2006.

Rail-Ferry Service:  Gross voyage results before impairment loss for this segment improved from a loss of $5.1 million in 2006 to a loss of $1.6 million in 2007.  This improvement is primarily from higher cargo volumes due to the installation of the second decks, which began operating in the third quarter of 2007.  Revenues for this segment increased from $18.4 million in 2006 to $21.2 million in 2007 due to the completion and operation of the second deck cargo volume in second half of  2007.  The added volume caused operating margins to improve, primarily in the fourth quarter of 2007

The pre-tax impairment loss of $8.9 million recorded in the second quarter of 2006 was related to our investment in the Rail-Ferry Service’s terminal in New Orleans located on the Mississippi River Gulf Outlet (“MR-GO”).  After Hurricane Katrina struck the Gulf Coast in 2005, dredging of the MR-GO was indefinitely suspended by the Army Corps of Engineers, effectively closing it to deep draft shipping.

Other: Gross voyage profit for this segment increased from $397,000 in 2006 to $1.0 million in 2007 primarily due to nonrecurring expenses in 2006 of $1.9 million related to terminating the lease of an intermodal terminal facility in Memphis, Tennessee.  The decrease in revenue for this segment was mainly due to prior year income adjustments.

Other Income and Expenses

Administrative and general expenses increased 3.1% from $17.6 million in 2006 to $18.2 million in 2007.  The increase was primarily associated with one-time costs related to the termination of our lease agreement on our former New Orleans office and an increase in audit fees related to the initial audit of our internal control over financial reporting as required under Section 404 of The Sarbanes-Oxley Act.

The following table shows the significant A&G components for the twelve months ending December 31, 2007 and 2006 respectively:

(All amounts in thousands)	Year Ended December 31,
A&G Account	2007		2006		Variance
							��
Salaries and Wages	$	6,087	$	5,917	$	170
Group Insurance		1,419		1,382		37
Special Services		1,371		1,275		96
Accounting & Audit Fees		790		591		199
Relocation Expenses		4,993		838		4,155
Other		3,498		7,606		(4,108	)
TOTAL:	$	18,158	$	17,609	$	549

Interest expense decreased 11.7% from $11.1 million in 2006 to $9.8 million in 2007.  The decrease was primarily due to the retirement of all the remaining outstanding obligations of our 7¾% Senior Unsecured Notes (“Notes”) in October of 2007.

The gain on sale of investments decreased, as the 2006 results reflect the sale of our 26.1% investment in Belden Shipholding Pte Ltd (“BSH”), a company that owned and operated cement carrier vessels. This sale generated a gain of $22.6 million in November of 2006.  In 2007, the gain on sale of investments of $352,000 was related to the sale of stock from the portfolio of investments, at the time held by our captive insurance company.

Investment income increased from $1.4 million in 2006 to $2.6 million in 2007 primarily as a result of higher interest rates, and an increase in the overall average balance of funds invested during the full year in 2007 compared to 2006.

           Loss on early extinguishment of debt of $248,000 reported in 2006 was due to the early retirement of $12.5 million of our 7¾% Senior Notes at a slight premium.

Income Taxes

We recorded a benefit for federal income taxes of $1.4 million on $3.8 million of income from continuing operations before income from unconsolidated entities in 2007, reflecting tax losses on operations taxed at the U.S. corporate statutory rate.  For 2006, our provision was $1.0 million on our $14.5 million income from continuing operations before income from unconsolidated entities.  Our tax benefit increased from the comparable prior year primarily as a result of incurring taxes on the gain on sale of BSH in November of 2006.  In 2006, we were able to release $3.2 million of our valuation allowance as a result of the generation of certain foreign earnings.  We have indefinitely re-invested $7,130,000 of 2007 foreign earnings, and accordingly, have not provided deferred taxes of $2,495,000 against those earnings.  Our qualifying U.S. flag operations continue to be taxed under a “tonnage tax” regime rather than under the normal U.S. corporate income tax regime.

Equity in Net Income of Unconsolidated Entities

Equity in net income of unconsolidated entities, net of taxes, increased from $4.7 million in 2006 to $6.6 million in 2007.

The improved results came from our 50% investment in Dry Bulk Cape Holding Ltd (“Dry Bulk”), a company which owns 100% of subsidiary companies owning two Capesize Bulk Carriers and two Panamax Bulk Carriers during 2006 and 2007.  These subsidiary companies contributed $6.7 million in 2007 compared to $4.2 million in 2006, primarily due to a stronger charter market for Dry Bulk’s subsidiary companies’ vessels.

During the second quarter of 2007, Dry Bulk’s subsidiary companies entered into a ship purchase agreement with Mitsui & Co. of Japan for two newbuildings Handymax Bulk Carriers to be delivered in the first half of 2012.  Total investment in the newbuildings is anticipated to be approximately $74.0 million, of which the Company’s share would be 50% or approximately $37.0 million.  We expect to make our interim construction payments with cash generated from operations.  A decision on any long-term financing is expected to be determined at delivery.  Our 50% share of the initial contract payment of $750,000 was made in May of 2007For more information, see below “Liquidity and Capital Resources – Bulk Carriers.”

Discontinued Operations

In the third quarter of 2007, we elected to discontinue our International LASH service by the end of 2007.  During the first two months of 2008, we sold the one remaining LASH vessel and the majority of LASH barges,with the remaining LASH barges under contract to be sold by the end of the first quarter of 2008.  The pre-tax gain of $9.9 million recorded in 2007 reflects a gain of $7.3 million on the sale of two LASH Vessels and $2.6 million on the sale of LASH barges.  During 2007, total revenues associated with the discontinued LASH services were $42.0 million, compared to $89.4 million for 2006.  Losses from operations before taxes were $4.2 million in 2007, compared to $8.4 million in 2006.

Our U.S. flag LASH service and International LASH service were reported in “Continuing Operations” as a part of our Liner segment in periods prior to June 30, 2007.  The financial results for all periods presented have been restated to remove the effects of both of those operations from “Continuing Operations”.

3

LIQUIDITY AND CAPITAL RESOURCES

The following discussion should be read in conjunction with the more detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows included elsewhere herein as part of our Consolidated Financial Statements.

Our working capital (which we define as the difference between our total current assets and total current liabilities) increased from $23.2 million at December 31, 2007, to $50.5 million at December 31, 2008.  Cash and cash equivalents increased during 2008 by $37.1 million to a total of $51.8 million.  This increase was due to cash provided by operating activities of $42.2 million, and cash provided by investing activities of $41.4 million, offset by cash used by financing activities of $45.9 million.  Of the $39.2 million in current liabilities at December 31, 2008, $13.3 million related to current maturities of long-term debt.

Operating activities generated positive cash flow after adjusting net income of $39.1 million for non-cash provisions such as depreciation, amortization and gains on sales of assets and investments.  Cash provided by operating activities of $42.2 million for 2008 also included, among other things, the add back of the non-cash loss of $1.4 million on the early redemption of Preferred Stock, the deduction of the non-cash $4.6 million pre-tax gain on the sale of LASH assets, and the deduction of the non-cash recognition of $20.9 million in earnings from our equity in net income of unconsolidated entities, which included a gain on the sale of a Panamax Bulk Carrier.  We received cash dividends of $6.0 million from the normal operations of our unconsolidated entities, with the proceeds from the aforementioned sale presented in investing activities.

Cash provided by investing activities of $41.4 million for 2008 included proceeds from the sale of our discontinued LASH liner service assets of $10.8 million, proceeds from Dry Bulk’s subsidiary company’s sale of the Panamax Bulk Carrier of $25.5 million, proceeds from the sale of short term investments of $1.6 million and principal payments received under direct financing leases of $7.5 million, partially offset by capital improvements of $4.0 million, including improvements to our information technology systems and additional tank work on our Rail-Ferry vessels.

           Cash used for financing activities of $45.9 million for 2008 included regularly scheduled debt payments of $10.9 million, payment of $17.3 million on the early redemption of our Preferred Stock, $11.5 million of repurchases of our common stock, and $3.7 million on cash dividends paid on our common stock.

In March of 2008, we signed an agreement with Regions Bank to provide us with an unsecured revolving line of credit for $35 million.  This facility replaced the prior secured revolving line of credit for the like amount.  As of December 31, 2008, $6.4 million of the $35 million revolving credit facility, which expires in April of 2010, was pledged as collateral for letters of credit, and the remaining $28.6 million was available. Currently we are evaluating our options to increase our line of credit and expect tighter bank restrictions due to the overall condition of the credit markets.

We frequently evaluate the possibility of acquiring additional vessels or businesses.  At any given time, we may be engaged in discussions or negotiations regarding additional acquisitions.  We generally do not announce our acquisitions or dispositions until we have entered into a preliminary or definitive agreement.  We may require additional financing in connection with any such acquisitions, the consummation of which could have a material impact on our financial condition or operations.

Preferred Stock Redemption

On February 4, 2008, we redeemed our 800,000 outstanding shares of 6% Convertible Exchangeable Preferred Stock.  In lieu of the cash redemption, holders of 462,382 shares of the Preferred Stock elected to convert their shares into approximately 1,155,955 shares of the Company’s common stock. The remaining 337,618 outstanding shares of Preferred Stock were retired for cash (including accrued and unpaid dividends to, but excluding, the redemption date), pursuant to the terms of the Preferred Stock. Upon completion of the redemption, we no longer have any shares of our 6% Convertible Exchangeable Preferred Stock outstanding. The total cash payment for the redemption of the Preferred Stock including the accrued and unpaid dividends was $17,306,299.  We had a charge to earnings of approximately $1.4 million in the first quarter of 2008 from the redemption of the Preferred Stock.

Stock Repurchase Program

On January 25, 2008, the Company’s Board of Directors approved a share repurchase program for up to a total of 1,000,000 shares of the Company’s common stock. We expect that any share repurchases under this plan will generally be made from time to time for cash in open market transactions at prevailing market prices. The timing and amount of any purchases under the program will be determined by management based upon market conditions and other factors.  Through December 31, 2008, we have repurchased 491,572 shares of our common stock for $11.5 million.  Unless and until the Board otherwise provides, this new authorization will remain open indefinitely or until we reach the 1,000,000 share limit.   

Debt and Lease Obligations

As of December 31, 2008, we held three vessels under operating contracts, six vessels under bareboat charter or lease agreements and four vessels under time charter agreements.  The types of vessels held under these agreements include four Pure Car/Truck Carriers, five Breakbulk/Multi Purpose vessels, two Container vessels, and a Tanker vessel operating in our Time Charter segment and a Molten Sulphur Carrier operating in our Contracts of Affreightment segment.  We also conduct certain of our operations from leased office facilities. 

We entered into a new lease agreement on our New York City office which became effective October 1, 2008.  The length of the lease is nine years and nine months, with graduated payments starting after an initial nine month period of free rent.  The agreement calls for total annual payments of $451,000 for years one through five and total annual payments of $488,000 for years six through nine.  The rent expense, along with the associated leasehold improvements are being amortized using the straight-line method over the lease-term.

Debt Covenants

 In the unanticipated event that our cash flow and capital resources are not sufficient to fund our debt service obligations, we could be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, enter into financings of our unencumbered vessels or restructure debt.We believe we have sufficient liquidity despite the current disruption of the capital and credit markets and can continue to fund working capital and capital investment liquidity needs through cash flow from operations.  While not significant to date, the disruption in capital and credit markets may result in increased borrowing costs associated with any additional short-term and long-term debt.  We presently have variable to fixed interest rate swaps on 100% of our long-term debt.

Contractual Obligations and Other Commitments

The following is a summary of the scheduled maturities by period of our debt and lease obligations that were outstanding as of December 31, 2008:

Debt and lease obligations (000’s)	Total		2009		2010		2011		2012		2013		Thereafter
Long-term debt (including current maturities)	$	140,126	$	13,285	$	58,683	$	10,590	$	22,980	$	24,588	$	10,000
Interest payments		30,410		5,544		5,951		4,618		4,007		2,689		7,601
Operating leases		116,127		15,968		15,462		15,474		15,474		13,464		40,285
Vessel Commitments		54,800		13,700		41,100		-		-		-		-
Total by period	$	341,463	$	48,497	$	121,196	$	30,682	$	42,461	$	40,741	$	57,886

The above contractual obligations table does not include our approximate $16 million obligation to the Alabama State Port Authority related to the terminal upgrades in Mobile, AL, to be paid by us over the ten-year terminal lease.  This long-term obligation, reported in other long-term liabilities, will be met by the operation of our Rail Ferry vessels in the Mobile port.  The chart further excludes contingent equity contributions that may be payable to Dry Bulk under the circumstances described under “Liquidity and Capital Resources – Bulk Carriers.”  For additional information on our operating leases, see Note J.

Current Economic and Market Issues

The current economic crisis has affected us in a number of areas.  Due to the turmoil in the financial markets, banking institutions have tightened lending standards or eliminated access to credit for new projects.  Financial institutions with which we have no existing relationship have indicated an unwillingness to lend to us.  Those institutions with which we do have existing relationships ceased lending activities in late 2008, but have recently indicated a willingness to extend credit under appropriate circumstances.  Large increases in debt financing costs have hampered the ability of transportation companies, including us, to undertake new projects requiring borrowed funds.

We have maintained for a number of years banking relationships with financially solid institutions.  Based on information currently available to us, we believe these institutions remain stable.  While the exact effects of the crisis to our customers is not known, we have not suffered from the nonpayment of freights or charterhires being earned in the ordinary course of business.  We continue to review the status of our customers and are ready to take appropriate actions to reduce potential exposures should the occasion arise.    While we have been fortunate in our ability to avoid potential hardships from the nonpayment of freights, we cannot provide you with assurance that this will continue.  For more information, see Item 1A, Risk Factors.

Due to the dramatic fall in the financial markets, our pension plan suffered negative returns for the year ended 2008.  During 2008, we maintained an asset allocation within the plan of up to a maximum exposure of 60% equities and 40% fixed income instruments. Results derived from the marketplace negatively impacted the Plan’s funding status.  As of December 31, 2008 we show an underfunded status in other comprehensive income, however, we have met our required funding obligation under the current Pension Protection Act.  We expect to contribute $2.0 million for fiscal year 2009.  For more information, see Note F, Employee Benefit Plans.

Restructuring of Liner Services and Disposition of Certain LASH Assets

The Board of Directors decided in the fourth quarter of 2006 to dispose of certain LASH Liner Service assets.  The decision was based on the belief that we could generate substantial cash flow and profit on the disposition of the assets, while improving our future operating results.  Accordingly, we sold our LASH Feeder vessel and 114 barges in the first quarter of 2007.  In the second quarter of 2007 we sold our one remaining U.S. flag LASH vessel and 111 LASH barges.  In the third quarter of 2007, the company elected to discontinue its International LASH service by the end of 2007.  During the first quarter of 2008, we sold the one remaining LASH vessel and the remainder of our LASH barges. The pre-tax gain of $9.9 million recorded in 2007 reflects a gain of $7.3 million on the sale of the LASH Feeder Vessel and Liner Vessel, and $2.6 million on the sale of LASH barges. The gain of $4.6 million recorded in 2008 reflects the gain from the sale of one LASH Vessel and remaining LASH barges. During 2008, we generated no revenues from our LASH services, compared to $42.0 million for 2007.  Profit from operations before taxes were $220,000 in 2008, compared to a $4.2 million loss in 2007.

Our U.S. flag LASH service and International LASH service were reported in “Continuing Operations” as a part of our Liner segment in periods prior to June 30, 2007.  Financial information for all periods presented have been restated to remove the effects of those operations from “Continuing Operations”.

Rail-Ferry Service Expansion

This service provides a unique combination of rail and water ferry service between the U.S. Gulf Coast and Mexico.  The relatively low operating profit margin generated by this service makes higher cargo volumes necessary to achieve meaningful levels of cash flow and profitability.  The capacity of the vessels operating in our Rail-Ferry Service defines the maximum revenues and, in turn, the cash flow and gross profits that can be generated by the service.  Accordingly we have made investments that essentially double the capacity of the service including the construction of second decks on each of the ships as well as construction of new terminals in Mobile, Alabama and an upgraded terminal in Coatzacoalcos, Mexico. These capital investments have permitted us to expand our cargo volumes ,  reduce our cost per unit of cargo carried and increase our cash flow.

We completed construction of the second decks in mid-2007 at a total cost of approximately $25 million, which we paid in full through December 31, 2007.  The utilization of the second deck capacity is directly related to the terminal upgrades in Mobile, AL and Coatzacoalcos, Mexico.  Both terminal upgrades were substantially completed in July 2007 and became operational at that time.  The total cost of the Mobile terminal was approximately $26 million, of which $10 million was funded by a grant from the State of Alabama.  The remaining $16 million was financed by the Alabama State Docks and will be repaid over the ten-year terminal lease.  We estimate that our share of the cost of the improvements to the terminal in Mexico will be approximately $6.4 million.  We have a 49% interest in the company that owns the terminal in Mexico, and 30% of the advances to that company for our share of the cost of the terminal are accounted for as capital contributions with the remaining 70% accounted for as a loan to that company.

As of December 31, 2008, the cost of our total investment in a joint venture that owns a trans-loading and storage facility (RTI), which was used to support the Rail-Ferry service in New Orleans, included an equity investment in unconsolidated entities of $1.5 million and an outstanding loan of approximately $2.2 million due from our 50% partner in the venture.  As a result of our terminal operations moving from New Orleans to Mobile, an impairment test to determine our loss exposure on this facility was required.  As of December 31 2008, no impairment was recorded as we expect to recover our total investment.

Our terminal lease with the Port of New Orleans was terminated during the second quarter of 2007, when we transitioned to the Mobile terminal.  As of June 30, 2007, we wrote off both the cost of the New Orleans terminal of $17.0 million, funded by the State and City, which was recorded as a leasehold improvement, and the reimbursements to us from the State and the City of $17.0 million that were recorded as deferred credits, resulting in no effect on net income.

Our investment in the New Orleans terminal was funded with the proceeds from a New Market Tax Credit (NMTC) financing agreement.  Under the NMTC financing, the lender has the ability to utilize certain tax credits associated with profitable operations at that location.  With the relocation of the operations to Mobile, Alabama, the lender amended the original application to the Federal agency that oversees the NMTC issuance to include the Mobile terminal as eligible property for the usage of the tax credits.

Bulk Carriers

We have a 50% interest in Dry Bulk, which owns 100% of subsidiary companies which own two Capesize Bulk Carriers and one Panamax-Size Bulk Carrier.  This investment is accounted for under the equity method and our share of earnings or losses are reported in our consolidated statements of income net of taxes.  Dry Bulk’s subsidiary companies have entered into a ship purchase agreement with a Japanese company for newbuilding two Handymax Bulk Carriers, scheduled to be delivered in 2012.  Total investment in the newbuildings is anticipated to be approximately $74.0 million, of which our share would be 50% or approximately $37 million.  During the period of construction up to delivery, where 50% of the projected overall costs will be expended, Dry Bulk plans to finance the interim construction costs with equity contributions of up to 15% with the 85% balance of the cost being financed with a bank financed bridge loan. While it is anticipated that the required equity contributions will be covered by Dry Bulk’s subsidiary companies’ earnings, if they are not, our anticipated share of these interim equity contributions could be approximately $2.7 million.   Upon completion and delivery, Dry Bulk plans to establish permanent long-term financing.

Dividend Payments

Our preferred stock accrued cash dividends at a rate of 6.0% per annum from the date of issuance in early January 2005 through January 31, 2008.  All such shares were either redeemed or converted into shares of our common stock on February 1, 2008.

On October 29, 2008 our Board of Directors authorized the reinstitution of a quarterly cash dividend program beginning in the fourth quarter of 2008.  On January 29, 2009 our Board also approved a 2009 first quarter payment of $.50 cash dividend for each share of common stock held by them on the record date of February 15, 2009.  The payment of future quarterly cash dividends is at the discretion of our Board of Directors.

Environmental Issues

As of December 31, 2008, we have not been notified that we are a potentially responsible party in connection with any environmental matters, and we have determined that we have no known risks for which assertion of a claim is probable that are not covered by third party insurance, third party indemnification or our self-retention insurance reserves.  Our environmental risks primarily relate to oil pollution from the operation of our vessels.  We have pollution liability insurance coverage with a limit of $1 billion per occurrence, with deductible amounts not exceeding $500,000 for each incident.

In January 2008 we were notified that the United States Coast Guard (USCG) was conducting an investigation on the USNS MAJOR STEPHEN W. PLESS of an alleged discharge of untreated bilge water by one or more members of the crew.  The USCG has inspected the ship and interviewed various crew members.  The United States Attorney’s Office is completing its discovery process.  We believe at this time that we are not a target of this investigation.

New Accounting Pronouncements

In September of 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years.  As discussed further in Note 8, this statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements.  We adopted SFAS 157 on January 1, 2008 and the adoption has had no effect on our consolidated financial position and results of operation.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” – including an amendment of FASB Statement No. 115 (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities, and certain nonfinancial instruments that are similar to financial instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We adopted SFAS 159 on January 1, 2008 and the adoption has had no effect on our consolidated financial position and results of operation.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging activities” – an amendment of FASB Statement No. 133.  SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities.  SFAS No. 161 is effective for fiscal years beginning after November 15, 2008.  We have not yet determined the impact, if any, the adoption of SFAS No. 161 will have on our consolidated financial position or results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with an updated framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP.  SFAS No. 162 is effective for fiscal years beginning after November 15, 2008.  The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s financial position.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (SFAS No. 141 (R)).  SFAS No. 141 (R) is a revision of SFAS No. 141, but retains the fundamental requirements that the acquisition method of accounting (purchase method) be used for all business combinations.  SFAS No. 141 (R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  SFAS No. 141 (R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired to be measured at fair value at the acquisition date.  In addition, acquisition related costs must be expensed in the periods in which the costs are incurred and the services received.  SFAS No. 141 (R) is effective for fiscal years beginning on or after December 15, 2008 and is not expected to have an impact on the Company’s financial position.

LIQUIDITY - 2007

The following discussion should be read in conjunction with the more detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows included elsewhere herein as part of our Consolidated Financial Statements.

Our working capital (which we define as the difference between our total current assets and total current liabilities) increased from $3.0 million at December 31, 2006, to $23.2 million at December 31, 2007.  Cash and cash equivalents decreased during 2007 by $30.2 million to a total of $14.1 million.  This decrease was primarily due to the retirement of all the remaining outstanding obligations of our 7¾% Senior Unsecured Notes (“Notes”) in October of 2007 of $41.9 million, cash used by other financing activities of $6.3 million, and cash used for investing activities of $2.2 million, partially offset by cash provided by operating activities of $20.2 million.  Of the $40.2 million in current liabilities at December 31, 2007, $12.7 million related to current maturities of long-term debt.

Operating activities generated positive cash flow after adjusting net income of $17.4 million for non-cash provisions such as depreciation, amortization and gains on sales of assets and investments.  Cash provided by operating activities of $20.2 million for 2007 also included a decrease in accounts receivable of $1.3 million primarily due to the timing of collections of receivables from the MSC and U.S. Department of Transportation, offset by a\ decrease in accounts payable and accrued liabilities of $4.9 million.  Also included was $9.8 million of cash used to cover payments for vessel drydocking costs in 2007, offset by cash distributions of $4.4 million received from our investments in unconsolidated entities.

Cash used by investing activities of $2.2 million for 2007 included proceeds from the sales of assets of $48.8 million, including $32.0 million on the sale of the Molten Sulphur Carrier (discussed below) and $16.8 million on the sale of LASH assets and our investment in our unconsolidated entity in Mexico (TTG).  These were offset by the use of $56.1 million of cash for the purchase of capital assets, including $26.8 million for a U.S. flag PCTC, which was previously under lease; $13.7 million for the first payment on the 6400 CEU Newbuilding PCTC (discussed below); and $10.4 million for second deck modifications on the Rail-Ferry vessels.

Cash used for financing activities of $48.2 million for 2007 included regularly scheduled debt payments of $8.3 million, and $41.9 million for the retirement of our 7¾% Senior Notes, as well as $2.4 million for preferred stock dividend payments.  These uses of cash were partially offset by proceeds of $5.7 million from the issuance of common stock pursuant to the exercise of stock options by our Chairman and President.

In January 2008, our board authorized open market repurchases of up to 1,000,000 shares of our common stock, subject to a variety of factors, including our cash requirements, the market price of our stock, and general economic and market conditions.

Following the retirement of the company’s 7 ¾ % Senior Notes in October 2007, the company reduced the borrowing capacity under the revolving line of credit from $50 million to $35 million.  As of December 31, 2007, $6.3 million of the $35 million revolving credit facility, which expires in December of 2009, was pledged as collateral for a letter of credit, and the remaining $28.7 million was available.

  In 2007, we invested $43.5 million for the purchase of a Panamanian flagged PCTC.  The vessel was purchased with 100% financing and subsequently chartered to a third party under a financing lease arrangement.  This noncash transaction is not reflected in our Consolidated Statements of Cash Flows.

LIQUIDITY - 2006

The following discussion should be read in conjunction with the more detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows included elsewhere herein as part of our Consolidated Financial Statements.

Our working capital decreased from $16.1 million at December 31, 2005, to $3.0 million at December 31, 2006, primarily due to the $40 million balance of our 7¾% Senior Notes due in October of 2007 becoming a current liability in October of 2006, offset by cash proceeds received during the fourth quarter of 2006 from asset and investment sales.  Cash and cash equivalents increased during 2006 by $28.1 million to a total of $44.3 million.  This increase was due to cash provided by operating activities of $23 million and by investing activities of $27.5 million, partially offset by cash used for financing activities of $22.4 million. Of the $84.7 million in current liabilities at December 31, 2006, $50.3 million related to current maturities of long-term debt, including $40 million for the 7¾% Senior Notes.

Operating activities generated positive cash flow after adjusting net income of $17 million for non-cash provisions such as depreciation, amortization, impairment loss and gains on sales of assets and investments.  Cash provided by operating activities of $23 million also included a decrease in accounts receivable of $12.3 million primarily due to the timing of collections of receivables from the MSC and U.S. Department of Transportation, offset by a decrease in accounts payable and accrued liabilities of $12.1 million primarily due to the timing of payments for operating expenses and capital improvements accrued at December 31, 2005 that were paid in 2006.  Also included was $8.4 million of cash used to cover payments for vessel drydocking costs in 2006, offset by cash distributions of $1.5 million received from our investments in unconsolidated entities and lease incentive obligations related to the relocation of corporate headquarters of $2.8 million.

Cash provided by investing activities of $27.5 million included proceeds from the sales of assets, our investment in an unconsolidated entity and marketable securities, a return of capital from one of our unconsolidated investments, and the release of $6.5 million of restricted cash from escrow previously required under an operating lease agreement that now is being satisfied with a letter of credit.  These sources of cash were offset by the use of $21.8 million of cash for the purchase of a vessel and capital improvements to some of our vessels and our Rail-Ferry Service U.S. terminal.  During 2006, the State of Louisiana and City of New Orleans reimbursed $2.6 million of the cost of the terminal improvements, some of which were incurred in 2005.  As of December 31, 2006, the State of Louisiana and City of New Orleans had fulfilled their obligation to us of $17 million for their portion of the cost of the New Orleans terminal.

Cash used for financing activities of $22.4 million included regularly scheduled debt payments of $10.3 million, $10 million for repayment of draws on our line of credit, $12.5 million for the repurchase of some of our 7¾% Senior Notes at a small premium, and $2.4 million for preferred stock dividend payments.  These uses of cash were partially offset by $10 million from draws on our line of credit, the $2.6 million received from the State of Louisiana and City of New Orleans mentioned earlier, and proceeds of $465,000 from the issuance of common stock pursuant to the exercise of stock options.

4

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following financial statements, schedules and exhibits are filed as part of this report:

(a)  1.                   Financial Statement Schedules

(i)   The following financial statements of Dry Bulk Cape Holding Inc. are included on pages A-1 through A-8 of this Form 10-K/A pursuant to Rule 3-09 of Regulation S-X:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2008 and 2007

Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007, and 2006

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006

Notes to the Consolidated Financial Statements

(ii)   The following financial statements of International Shipholding Corporation are included on pages F-1 through F-13 of this Form 10-K/A:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2008 and 2007

Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007, and 2006

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006

Notes to the Consolidated Financial Statements

2.   Exhibits

(3.1) Restated Certificate of Incorporation of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)

(3.2) By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2008 and incorporated herein by reference)

(4.1) Specimen of Common Stock Certificate (filed as an exhibit to the Registrant's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980 and incorporated herein by reference)

(10.1)   Credit Agreement, dated as of September 30, 2003, by and among LCI Shipholdings, Inc. and Central Gulf Lines, Inc., as Joint and Several Borrowers, the banks and financial institutions listed therein, as Lenders, Deutsche Schiffsbank Aktiengesellschaft as Facility Agent and Security Trustee, DnB NOR Bank ASA, as Documentation Agent, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.2 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)

(10.2) Credit Agreement, dated as of December 6, 2004, by and among LCI Shipholdings, Inc., Central Gulf Lines, Inc. and Waterman Steamship Corporation, as Borrowers, the banks and financial institutions listed therein, as Lenders, Whitney National Bank, as Administrative Agent, Security Trustee and Arranger, and the Registrant, Enterprise Ship Company, Inc., Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG Railway, Inc., as Guarantors (filed with the Securities and Exchange Commission as Exhibit 10.3 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the Securities and Exchange Commission on December 10, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)

(10.3) Credit Agreement, dated September 26, 2005, by and among Central Gulf Lines, Inc., as Borrower, the banks and financial institutions listed therein, as Lenders, DnB NOR Bank ASA, as Facility Agent and Arranger, and Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee and Arranger, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 30, 2005 and incorporated herein by reference)

(10.4) Credit Agreement, dated December 13, 2005, by and among CG Railway, Inc., as Borrower, the investment company, Liberty Community Ventures III, L.L.C., as Lender, and the Registrant, as Guarantor (filed with the Securities and Exchange Commission as Exhibit 10.4 to the Registrant’s Form 10-K for the annual period ended December 31, 2005 and incorporated herein by reference)

(10.5) Consulting Agreement, dated February 18, 2008, between the Registrant and Niels W. Johnsen (filed with the Securities and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for the annual period ended December 31, 2008 and incorporated herein by reference)

(10.6) Consulting Agreement, dated April 30, 2007, between the Registrant and Erik F. Johnsen (filed with the Securities and Exchange Commission as Exhibit 10.6 to the Registrant’s Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)

(10.7) International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)

(10.8) Form of Restricted Stock Agreement under the International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.1 to the Registrant's Form 8-K dated May 6, 2008 and incorporated herein by reference)

(10.9) International Shipholding Corporation 2009 Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 99.2 to the Registrant's Form 8-K dated April 30, 2009 and incorporated herein by reference)

(10.10) Form of Restricted Stock Agreement under the 2009 International Shipholding Corporation Stock Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 99.2 to the Registrant's Form 8-K dated May 7, 2009 and incorporated herein by reference)

(10.11) Description of Life Insurance Benefits Provided by the Registrant to Niels W. Johnsen and Erik F. Johnsen Plan (filed with the Securities and Exchange Commission as Exhibit 10.8 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)

(10.12) Memorandum of Agreement of the Registrant, dated as of August 24, 2007, providing for the Registrant’s purchase of one 6400 CEU Panamanian flagged pure car and truck carrier (filed with the Securities and Exchange Commission as Exhibit 10.10 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference) (Confidential treatment requested on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.)

(10.13) Loan Agreement, dated as of September 10, 2007, by and among Waterman Steamship Corporation, as borrower, the Registrant, as guarantor, DnB NOR Bank ASA, as facility agent and security trustee. (filed with the Securities and Exchange Commission as Exhibit 10.11 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)

(10.14) SHIPSALES Agreement, dated as of September 21, 2007, by and between East Gulf Shipholding, Inc., as   buyer, and Clio Marine Inc., as seller (filed with the Securities and Exchange Commission as Exhibit 10.12 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference) (Confidential treatment requested on certain portions of this exhibit.  An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.)

(10.15) Facility Agreement, dated as of January 23, 2008, by and among East Gulf Shipholding, Inc., as borrower,     the Registrant, as guarantor, the banks and financial institutions party thereto, as lenders, DnB NOR Bank ASA, as facility agent, and Deutsche Schiffsbank Aktiengesellschaft, as security trustee (filed with the Securities and Exchange Commission as Exhibit 10.13 to the Registrant's Form 10-K for the annual period ended December 31, 2007 and incorporated herein by reference)

(10.16) Change of Control Agreement, by and between the registrant and Niels M. Johnsen, effective as of August 6, 2008. (filed with the Securities and Exchange Commission as Exhibit 10.14 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference)

(10.17) Change of Control Agreement, by and between the registrant and Erik L. Johnsen, effective as of August 6, 2008. (filed with the Securities and Exchange Commission as Exhibit 10.15 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference)

(10.18) Change of Control Agreement, by and between the registrant and Manuel G. Estrada, effective as of August 6, 2008. (filed with the Securities and Exchange Commission as Exhibit 10.16 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference)

(23.1) Consent of Ernst & Young LLP*

(23.2) Consent of Deloitte & Touche S.p.A., Independent Registered Public Accounting Firm*

(31.1) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

(31.2) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

(32.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

(32.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

* Submitted electronically herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL SHIPHOLDING CORPORATION

(Registrant)

June 29, 2009 By                 /s/ Manuel G. Estrada

 Manuel G. Estrada

Vice President and Chief Financial Officer

5 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Dry Bulk Cape Holding Inc.:

We have audited the accompanying consolidated balance sheets of Dry Bulk Cape Holding Inc. and subsidiaries (the “Group”) as of December 31, 2008 and 2007 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dry Bulk Cape Holding Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The consolidated financial statements for the year ended December 31, 2008 have been prepared assuming that the Group will continue as a going concern. As discussed in Note 13 to the financial statements, the Group’s inability to comply with certain financial covenants under its current loan agreement as of December 31, 2008 raises substantial doubt about its ability to continue as a going concern.  Management's plans concerning these matters are also discussed in Note 13 to the financial statements.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE S.p.A.

Genoa, Italy

June 24, 2009

 A-1

DRY BULK CAPE HOLDING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of USD)
	December 31, 2008		December 31, 2007
ASSETS
CURRENT ASSETS
Cash (Note 3)		1,299		2,351
Trade receivables (Note 4)		1,227		2,946
Receivables from management company  (Note 5)		737		1,517
Other receivables (Note 6)		-		195
Inventories   (Note 7)		272		215
Other current assets		160		4
Total current assets		3,695		7,228
Restricted cash (Note 3)		1,000		1,000
Vessels, net of accumulated depreciation  (Note 8)		79,344		104,921
Vessels under construction (Note 9)		14,178		13,636
Other assets  (Note 10)		1,864		987
TOTAL ASSETS		100,081		127,772
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade payables		54		-
Accrued expenses  (Note 11)		398		784
Advances from shareholders (Note 12)		260		260
Current portion of bank borrowings  (Note 13)		96,036		6,500
Total current liabilities		96,748		7,544
Long term bank borrowings, net of current portion  (Note 13)		-		96,036
Total liabilities		96,748		103,580
SHAREHOLDERS’ EQUITY  (Note 14)
Common shares		-		-
Additional paid-in capital		3,202		8,202
Retained earnings		131		15,990
Total shareholders’ equity		3,333		24,192
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		100,081		127,772
See notes to consolidated financial statements.

 A-2

DRY BULK CAPE HOLDING INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands of USD)
	For the year ended December 31, 2008			For the year ended December 31, 2007			For the year ended December 31, 2006
Shipping income  (Note 15)		24,203			28,063			22,761
Costs of shipping income
Vessel expenses  (Note 16)		(5,682	)		(4,440	)		(4,008	)
Vessel depreciation		(3,665	)		(3,938	)		(4,037	)
		(9,347	)		(8,378	)		(8,045	)
GROSS PROFIT		14,856			19,685			14,716
Management fees (Note 17)		(576	)		(576	)		(576	)
General and administrative expenses		(62	)		(221	)		(90	)
		(638	)		(797	)		(666	)
OPERATING INCOME		14,218			18,888			14,050
Financial expenses, net (Note 18)		(3,915	)		(6,243	)		(6,426	)
INCOME FROM CONTINUING OPERATIONS		10,303			12,645			7,624
Income / (loss) from discontinued operations (Note 19)		31,838			678			(8	)
NET INCOME		42,141			13,323			7,616

See notes to consolidated financial statements.

DRY BULK CAPE HOLDING INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 2008, 2007 and 2006

(In thousands of USD)

			Additional
	Common		Paid-In			Retained						Comprehensive
	Stock		Capital			Earnings			Total			Income
BALANCE— January 1, 2006		-		6,702			5,451			12,153
Net income		-		-			7,616			7,616			7,616
Dividends paid		-		-			(1,600	)		(1,600	)
BALANCE— December 31, 2006		-		6,702			11,467			18,169
Net income		-		-			13,323			13,323			13,323
Capital increase		-		1,500			-			1,500
Dividends paid		-		-			(8,800	)		(8,800	)
BALANCE— December 31, 2007		-		8,202			15,990			24,192
Net Income		-		-			42,141			42,141			42,141
Capital repayment		-		(5,000	)		-			(5,000	)
Dividends paid		-					(58,000	)		(58,000	)
BALANCE— December 31, 2008		-		3,202			131			3,333
See notes to consolidated financial statements.

 A-3

DRY BULK CAPE HOLDING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of USD)
	Year ended December 31, 2008			Year ended December 31, 2007			Year ended December 31, 2006
OPERATING ACTIVITIES:
Net income		42,141			13,323			7,616
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of vessels		4,240			5,137			5,356
Amortization of deferred dry-docking charges		339			121			5
Amortization of deferred financing costs		66			66			66
Gain on sale of a vessel		(31,792	)		-			-
Changes in operating assets and liabilities:
Other receivables		195			1,591			(1,475	)
Inventories		(57	)		144			(175	)
Payments for dry-docking charges		(1,453	)		(473	)		(250	)
Other assets, trade and management company receivables		2,343			(2,078	)		(1,869	)
Trade accounts payable		54			-			(285	)
Accrued expenses and payables to related companies		(386	)		(134	)		(355	)
Net cash provided by operating activities		15,690			17,697			8,634
INVESTING ACTIVITIES:
Payments on vessels under construction		(542	)		(13,636	)		-
Proceeds from sale of a vessel , net of  direct expenses		53,300			-			-
Increase in restricted cash		-			-			(1,000	)
Net variation in settlement account with DryLog Group		-			-			520
Net cash provided by (used in) investing activities		52,758			(13,636	)		(480	)
FINANCING ACTIVITIES:
Proceeds from bank borrowings		-			12,036			-
Repayments of bank borrowings		(6,500	)		(6,500	)		(6,500	)
Capital (repayment) / increase		(5,000	)		1,500			-
Dividends paid		(58,000	)		(8,800	)		(1,600	)
Net cash used in financing activities		(69,500	)		(1,764	)		(8,100	)
NET (DECREASE) / INCREASE IN CASH		(1,052	)		2,297			54
CASH AT BEGINNING OF YEAR		2,351			54			-
CASH AT END OF YEAR		1,299			2,351			54
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid		4,681			6,666			6,365
See notes to consolidated financial statements.

A-4

DRY BULK CAPE HOLDING INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2008

(Amounts expressed in thousands of USD unless otherwise stated)

1. ORGANIZATION AND BUSINESS

Dry Bulk Cape Holding Inc. (the “Company”) was founded on September 16, 2003 and is incorporated in the Republic of Panama.  DryLog Bulkcarriers Ltd. and Cape Shipholding Inc. (collectively, the “Shareholders”) each owned 50% of the Company’s outstanding common shares.  The Company’s common stock is not publicly traded.

As of December 31, 2006, the Company has the following four British Virgin Island-incorporated subsidiaries:

a.   Dry Bulk Africa Ltd. (“Bulk Africa”).  Bulk Africa owns  “M.V. Africa”, a bulk carrier cape size vessel;

b.   Dry Bulk Australia Ltd (“Bulk Australia”).  Bulk Australia owns “M.V. Australia”, a bulk carrier cape size vessel;

c.   Dry Bulk Fern Ltd (“Bulk Fern”).  Bulk Fern owns “M.V. Bulk Fern”, a bulk carrier panamax vessel built in 1998; and

d.   Dry Bulk Cedar Ltd (“Bulk Cedar”).  Bulk Cedar owns “M.V. Bulk Cedar”, a bulk carrier panamax vessel built in 1998.

During 2007, the Company incorporated in the British Virgin Islands two new subsidiaries, Dry Bulk Oceanis Ltd. (“Bulk Oceanis”) and Dry Bulk Americas Ltd. (“Bulk America”).  Through these new entities, the Company entered into a ship sale agreement with Mitsui & Co. Ltd. for the acquisition of two handysize vessels to be delivered in 2012.  The purchase price of each vessel is in two currency denominations and is the sum of USD 17.70 million and JPY 1.77 billion.

Collectively, the Company and its subsidiaries are referred to as the “Group” herein.

The Group is engaged in international bulk carrier shipping operations.

Starting from the end of November 2005, M.V. Bulk Fern and M.V. Bulk Cedar are employed in time charter contracts with a related company, Ceres Bulk Carriers Transportes Maritimos Lda. (formerly Coeclerici Ceres Bulk Carriers Transportes Maritimos Lda.), which is 35% owned by DryLog Ltd, the parent company of DryLog Bulkcarriers Ltd.

According to the time charter contracts, considered as operating lease contracts, the hire is a rata per day or pro-rata for the period starting from the vessels’ delivery, excluding the off-hire period.  The expiration date of the time charter contracts was October 2008 (+/- 2 months in charter option).

In June 2008 the Group sold M.V. Bulk Cedar realizing a net gain of USD 31,792 thousand which is included in “Income / (loss) from discontinued operations” in the Group’s consolidated statements of income. As described in detail at Note 19, this gain is net of USD 15,131 thousand paid by the Group to Ceres Bulk Carriers Transportes Maritimos Lda. as compensation for the early termination of the time charter contract.

After the expiration of the contract with Ceres Bulk Carriers Transportes Maritimos Lda. in December 2008, M.V. Bulk Fern has been employed on the market by way of a short term time charter expiring in the first quarter of 2009.

Until the end of 2007 M.V. Bulk Africa and the M.V. Bulk Australia participated in the C Transport Cape Size Ltd. shipping pool (the “Shipping Pool”); which is ultimately owned and managed by DryLog Group.  There were approximately eight other vessels in the Shipping Pool as of December 31, 2007; of which three vessels were also owned 75%, 75%, and 37.5%, respectively, by DryLog Group.

In accordance with the pool agreement, the entire result of operations of the Shipping Pool had been allocated to each member vessel on the basis of a key figure expressing the relative theoretical earnings capacity of such member vessel, based on the cargo carrying capacity, capability and efficiency of operations and on any deficiency whatsoever attributable to any member vessel, including the consequence of such member vessel’s age, flag or crewing.  No portion of the results of operations of the Shipping Pool was attributed to the DryLog Group, the ultimate owner or shareholder of the Shipping Pool.

During each year, the Shipping Pool determined the amount of the result of business to be corresponded by way of a provisional hire paid monthly to each pool vessel, taking into account cash availability and cash flow projections. The final distribution was calculated on the net pool result and was made each calendar year following the presentation of the audited accounts of the operations of the Shipping Pool.  Such final distribution was determined by the vessels owners and not by the owner or shareholder of the Shipping Pool.  All the pool results as of December 31, 2007 were computed and attributed to the vessel owners based on the above described Pool rules.

1.During 2007, an agreement was reached among the owners of the vessels participating in the Shipping Pool and the DryLog Group for the termination of the pool as of January 1, 2008.  The control of the Shipping Pool, C Transport Cape Size (CTC), has been assumed by the DryLog Group as of January 1, 2008, including that of CTC’s commercial portfolio and relevant risk.  Contemporaneous with the termination agreement, the Company also entered into three years time charter with CTC at a fixed hire per day for M.V. Bulk Africa and the M.V. Bulk Australia.  The fixed charter rates have been calculated by reference to the prevailing market charter rates and the fair value of CTC’s commercial portfolio at the calculation date designated in the termination agreement (June 30, 2007).  The agreed fixed hire rates are calculated on a mark to market basis of the existing commercial portfolio as of June 30, 2007, less 5% for 2008 and 2009 and less 15% for 2010.  The simultaneous termination of the Shipping Pool and the entering into fixed rate three year lease contracts is viewed as a lease modification.  Accordingly, the off-market terms of the CTC’s commercial portfolio that was included in the calculation of the fixed rate lease will be recognized over the three year lease term and the shipping income to be recognized for M.V. Bulk Australia and M.V. Bulk Africa starting from January 1, 2008 will be based on the daily rates agreed in the three years time charter with CTC.

The Group has no employees. The operating management is provided by the DryLog Group.  The technical manager of the vessels is a related company, Unisea Shipping Ltd.  A shareholder and a member of the Board of Directors of Unisea Shipping Ltd is also a member of the Board of Directors of the DryLog Ltd.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Consolidation—The consolidated financial statements include the financial statements of the Company and its 100% controlled subsidiaries.  Those subsidiaries included Bulk Africa, Bulk Australia, Bulk Fern and Bulk Cedar for the years ended December 31, 2008, 2007 and 2006, and, in addition, Bulk Oceanis and Bulk Americas for the years ended December 31, 2008 and 2007.

The financial statements used for the preparation of the consolidated financial statements are those as of December 31, 2008 and 2007, the dates coinciding with the year-end for each year presented by the group holding company. The consolidated financial statements are prepared from the primary financial statements, which are in accordance with International Financial Reporting Standards, and are approved by the shareholders of the individual companies or prepared by the Boards of Directors for their approval.

2.

Our consolidated financial statements were prepared in conformity with US GAAP and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control.

Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

Use of Estimates—The preparation of the Group’s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities reported therein and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The significant judgments that management have made in the process of applying the entity’s accounting policies and that have a significant effect on the amounts recognized in financial statements are those related to the useful lives of the vessels and those used in performing impairment test of the vessels. Actual results reported in future periods may differ from these estimates, also considering the actual turmoil of the dry bulk shipping markets.

Revenues— The Group’s revenue from the two vessels in the Shipping Pool until the end of 2007 was based on an allocation of the Shipping Pool’s annual distributable income (net income of the Shipping pool).  Shipping Pool annual distributable income was initially attributed to each member vessel on the basis of a key figure, expressing the relative theoretical earnings capacity of the member vessel, based on the cargo carrying capacity, capability and efficiency of operation in and between respective trades in which the member vessels are employed, and on any deficiency attributable to any member vessel including the consequence of such member vessel’s age, flag or crewing.  The Shipping Pool’s annual distributable income was then allocated giving weight to each vessel and the number of days the vessel was available for charter excluding off-hire periods  consisting of dry-docking, laid-up periods, extended periods of break-down and other mutually agreed periods.

The Shipping Pool’s annual distributed income was computed based on the terms of the underlying Shipping Pool Agreement, and as ultimately agreed on an annual basis by the Shipping Pool’s Committee.   The Shipping Pool periodically entered into freight forward and bunker hedging contracts in an attempt to hedge the availability of the pool fleet and stabilize the amount of the Shipping Pool’s income to be allocated to Shipping Pool participants.   These derivative contracts were accounted for by the Shipping Pool on a cash basis when determining the annual distributable income.  Each Shipping Pool participant’s proportionate share of Shipping Pool derivative contract settlements was treated as a component of the annual distributable income when ultimately realized.

The time charter revenues are recognized when the services are rendered and are allocated between reporting periods based on relative transit time in each reporting period with the related expenses recognized as incurred.

Interest income is accrued on a time basis, by reference to the principal outstanding and to the effective interest rate applicable.

Foreign Currencies—The functional currency of the Group is United States dollar (“USD”) because the majority of its revenues, costs, vessels purchases, and debt and trade liabilities are either priced, incurred, or payable in USD.   Transactions denominated in foreign currencies are translated into USD using the rate ruling at the date of the transaction.  Monetary assets and liabilities denominated into foreign currencies are translated into USD, at year-end rates.   All resulting exchange differences are recognized in the consolidated statement of income. No significant exchange differences arose in 2008, 2007 and 2006.

Cash and Cash Equivalents—  The Group considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  At December 31, 2008 and 2007, cash consists only of those balances in the Group’s bank accounts.

Vessel Expenses and Dry-docking Cost— Vessel expenses are direct costs incurred to operate the Group’s vessels. These costs are expensed as incurred.

The Groups defers certain costs related to the dry-docking of the vessels. Deferred dry-docking costs are capitalized as incurred and amortized on a straight-line basis over the period between dry-dockings (generally five years). The Group incurred dry-docking costs of USD 1,453 thousand in 2008, USD 473 thousand in 2007 and USD 250 thousand in 2006.

Financial Instruments— Financial instruments carried on the balance sheet include accounts and other receivables, trade and other payables as well as long-term debt.

Deferred Financing Costs—The Group defers loan arrangement costs incurred in connection with its bank borrowings and amortizes them over the loan repayment period as incremental interest expenses.

Inventories—Inventories are valued at the lower of cost or market. Cost is determined on a First-in, First-out (FIFO) basis.

Vessels, net— The Group’s vessels are stated at historical cost, less accumulated depreciation. The cost of the vessel, less an estimated residual value, is depreciated on a straight-line basis over its estimated remaining useful life. The vessel's life is estimated at 25 years from the date of the completion of construction and its residual value is based on its scrap value.

Maintenance and repairs that do not extend the useful life of the asset are charged to operations as incurred. Major renovation costs and modifications are capitalized and depreciated over the estimated remaining useful life.

Vessels under construction are stated at cost.  They are not depreciated until the vessels are completed and ready for use.

Interest and finance costs relating to vessels, barges, and other equipment under construction are capitalized to properly reflect the cost of assets acquired.  No interest was capitalized as part of the vessel cost in 2006 while USD 293 and 542 thousand of interest were capitalized as part of construction in progress in 2008 and 2007, respectively.

Impairment losses are recorded on vessels when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the vessels’ carrying amount.  In the evaluation of the fair value and future benefits of vessels, the Group performs an analysis of the anticipated undiscounted future net cash flows of the vessels.  If the carrying value of the related vessels exceeds the undiscounted cash flows, the carrying value of the vessel is reduced to its fair value. Various factors including future charter rates and vessel operating costs are included in this analysis. The fair value of the vessels is estimated from market-based evidence by appraisals that are normally undertaken by at least two professionally qualified brokers.

The Group determined that no impairment loss needed to be recognized in 2007 and 2008.

Income Taxes— Although the Company is incorporated in the Republic of Panama, it has no business activities in Panama.  Earnings from transactions that are completed, consummated or take effects outside Panama, are not considered to be taxable in Panama. Dividends received by Panamanian companies are only taxed when derived from earnings taxable in Panama.  Consequently, dividends received from the Company’s BVI subsidiaries are not subject to taxation.  Revenues arising from international shipping commerce of national merchant ships legally registered in Panama, even if the shipping contracts have been entered into Panama, are also specifically exempt from taxation.

All the subsidiaries are currently incorporated in the BVI.   Based on their activities, they are categorized as International Business Companies (“IBC”) and thus not subject to income taxation in the BVI.   There are no withholding taxes on the distribution of IBC profits as dividends to the Company.

The Group provides for income taxes in accordance with Financial Accounting Standards Board Statement No. 109, “Accounting for Income Taxes”.  Under Statement No. 109, the liability method is used in accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.   Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

Due to the nature of the Group’s operations, no income taxes have been reflected in the accompanying consolidated financial statements.

Income / (Loss) from Discontinued Operations—In June 2008, the Group sold M.V. Bulk Cedar vessel for USD 71.5 million. The Group determined that the sale met the requirements of Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (and related interpretations, including EITF Issue No. 03-13), and, accordingly, the results of operations attributable to M.V. Bulk Cedar is reflected as discontinued operations in the Group's consolidated statements of income for the periods presented. The amount presented as discontinued operations for the year ended December 31, 2008 included the gain on sale of the vessel of USD 32 million.

Comprehensive Income—Comprehensive income is defined as the change in equity of a company during a period from non-owner sources. Comprehensive income of the Group for the years ended December 31, 2008, 2007 and 2006 consisted only of the reported net income.

Recent Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements.  SFAS 157 was effective for our Group on January 1, 2008. However, in February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2—Effective Date of FASB Statement No. 157) which delayed the effective date of SFAS No. 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 (at least annually). The adoption of SFAS 157 for our financial assets and liabilities did not have a material effect on the Group’s consolidated financial statements. We do not believe the adoption of SFAS 157 for our nonfinancial assets and liabilities, effective January 1, 2009, will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which amends various preceding guidance covering the accounting and disclosure for pension and post requirement plans.  This Statement requires companies to recognize an asset or liability for the funded status of their benefit plans annually through Other Comprehensive Income. Additionally, the statement changes the date in which the funded status can be measured (eliminates the 90 day window) with limited exceptions. The effective date of the recognition of the funded status is for years ending after December 15, 2006, and adoption did not have a material effect on the Company’s financial statements. The effective date for the change in acceptable measurement date is for fiscal years ending after December 15, 2008. This guidance did not have a material effect on the Group’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an Amendment of SFAS No. 115” (“SFAS 159”), which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, which few exceptions.  SFAS 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities.  The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election.  SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007.  The adoption of this statement did not have a material effect on the Group’s consolidated financial statements.

In April 2007, the FASB issued FSP No. FIN 39-1, "Amendment of FASB Interpretation No. 39." This FSP replaces certain terms in FIN No. 39 with "derivative instruments" (as defined in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities") and permits the offsetting of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The FSP is effective for fiscal years beginning after November 15, 2007. Adoption of the Statement on January 1, 2008, did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". The Statement establishes revised principles and requirements for how the Company will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of the Statement on January 1, 2009, is not expected to have a material impact on the Company's consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". The Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Adoption of the Statement on January 1, 2009, is not expected to have a material effect on the Company’s consolidated financial statements.

A-5

3. CASH AND RESTRICTED CASH

As of December 31, 2008 and 2007, cash of USD 1,299 thousand and USD 2,351 thousand, respectively, reflects the balance at year-end of the Group’s bank accounts denominated in US Dollars.

Restricted cash of USD 1,000 thousand represents restricted cash as a result of the Group’s debt agreement with HSH Nordbank AG as discussed in Note 13.

4. TRADE RECEIVABLES

As of December 31, 2008 trade receivables of USD 1,227 thousand is comprised of USD 921 thousand for the amount due by C Transport Cape Size Ltd in connection with the time charter of M.V. Bulk Africa and M.V. Bulk Australia, started in 2008 as a consequence of the pool termination and of USD 306 thousand for the amount due by the charterer of M.V. Bulk Fern.

As of December 31, 2007 trade receivables of USD 2,946 thousand entirely relates to the amount due from the Shipping Pool, C Transport Cape Size Ltd., mainly as a result of the final distribution (revenue adjustment) to be paid by the Shipping Pool, determined on the basis of the net distributable income of the Shipping Pool attributable to M.V. Africa and M.V. Australia.

5. RECEIVABLES FROM MANAGEMENT COMPANY

As of December 31, 2008 and 2007, the balances of USD 737 thousand and USD 1,517 thousand, respectively, include the amounts advanced to a related company, Unisea Shipping Ltd, in connection with the technical management of the vessels.

6. OTHER RECEIVABLES

As of December 31, 2007, the other receivables balance entirely refers to the residual insurance receivable related to the damage at the rudder stock suffered in September of 2006 by the M.V. Bulk Cedar.  This balance of USD 195 thousand was collected in full at the beginning of 2008.

7. INVENTORIES

The balance of USD 272 thousand and USD 215 thousand as of December 31, 2008 and 2007, respectively, shown as inventories represents the cost of lubricants on board the vessels as of the end of the year.

8. VESSELS, NET OF ACCUMULATED DEPRECIATION

The 2008 and 2007 movements in this caption are the following (in thousands of USD):

	2008			2007
Cost
At January 1,		121,500			121,500
Sale of M.V. Bulk Cedar		(24,500	)		-
At December 31,		97,000			121,500
Accumulated depreciation
At January 1,		16,579			11,442
Charge for the year		4,240			5,137
Sale of M.V. Bulk Cedar		(3,163	)		-
At December 31,		17,656			16,579
Net Book Value
At January 1,		104,921			110,058
At December 31,		79,344			104,921

The depreciation charged for the years ended December 31, 2008 and 2007 includes the amounts of USD 575 thousand and 1,199 thousand, respectively, related to M.V. Bulk Cedar.

The present insured value of the vessels in respect of actual and/or constructive total loss is USD 310 million.

There are collateral registered on vessels M.V. Bulk Australia, M.V. Bulk Africa, and M.V. Bulk Fern as security for the unpaid balance of the bank borrowings.

9. VESSELS UNDER CONSTRUCTION

The amount of USD 14.2 million shown in the line item “Vessels under construction” relates to the first installment paid in 2007 to Mitsui & Co. plus additional costs (mainly interest expenses and bank commission incurred during 2008 and 2007 for USD 542 thousand and USD 367 thousand, respectively) in connection with the building of two handysize vessels at the Tsuneishi Yard.  Delivery is expected in 2012 and the purchase price of each vessel, denominated in two currencies, is the sum of USD 17.7 million and JPY 1.77 billion.

As a condition for the release of the pre-delivery loan, the Group assigned the rights arising from the construction contracts in favor of HSH Nordbank AG.

10. OTHER ASSETS

Other assets of USD 1,864 thousand and USD 987 thousand as of December 31, 2008 and 2007, respectively, include the following:

-   USD 324 thousand (USD 390 thousand as of December 31, 2007) related to unamortized deferred financing costs, including legal expenses in connection with bank borrowings from HSH Nordbank AG, and

-   USD 1,540 thousand (USD 597 thousand as of December 31, 2007) related to the unamortized deferred dry-docking charges.

The movements in this caption are the following (in thousands of USD):

	Deferred			Deferred			Total
	Financing			Dry-docking
	Costs			Charges
Balance as of January 1, 2007		456			245			701
Increase		-			473			473
Amortization		(66	)		(121	)		(187	)
Balance as of December 31, 2007		390			597			987
Increase		-			1,453			1,453
Amortization		(66	)		(339	)		(405	)
Decrease for the sale of M.V. Bulk Cedar		-			(171	)		(171	)
Balance as of December 31, 2008		324			1,540			1,864

In 2007, the dry-docking costs incurred of USD 473 thousand were for M.V. Bulk Africa.

In 2008, the dry-docking costs incurred of USD 1,453 thousand were for M.V. Bulk Australia and  for M.V. Bulk Fern.

11. ACCRUED EXPENSES

The balance of USD 398 thousand and USD 784 thousand as of December 31, 2008 and 2007, respectively, mainly relates to accrued interest expenses.

12.        ADVANCES FROM SHAREHOLDERS

In 2004, each Shareholder advanced cash to the Company in the amount of USD 150 thousand for a total of USD 300 thousand. The cash advance is pursuant to the Joint Venture Agreement, signed on November 5, 2003 by the Shareholders.  The advance was made to meet the working capital needs of the Group and is interest-free.  The advance will be repaid at the discretion of the Company’s Board of Directors. During 2005, part of the cash advance for USD 40 thousand was converted into capital, and as a consequence at the end of 2005 the advances from shareholders amount to USD 260 thousand.  No changes in this balance occurred during 2008, 2007 and 2006.

A-6

13.      BANK BORROWINGS

The bank borrowings are composed as following (in thousands of USD):

	Current		Long term		Total
	portion		portion
HSH Nordbank AG - USD 103,500 loan facility		84,000		-		84,000
HSH Nordbank AG - USD 30,090 loan facility		12,036		-		12,036
Balance as of December 31, 2008		96,036		-		96,036

Bank borrowings have been classified as short term debt since the Group failed to meet certain financial covenants as disclosed below.

The HSH Nordbank AG loan of original USD 103,500 thousand was originally repayable in 32 consecutive quarterly installments starting from January 28, 2006. The first 12 installments will amount to USD 1,625 thousand each, and the remaining 20 installments will amount to USD 2,125 thousand each. With the last installment, the Group should also make a final balloon payment of USD 41,500 thousand. The repayment of the loan portion relating to the M.V. Bulk Cedar sold in 2008, has been waived by the bank and therefore the loan reimbursement schedule remains unchanged and it is as follows: (in USD thousands):

2009...............................8,500

2010...............................8,500

2011...............................8,500

2012…………………….8,500

2013............................ 50,000

Total                             84,000

The interest rate on this loan is LIBOR plus a spread which approximates 3.43% at December 31, 2008 (6.31% at December 31, 2007).

The above facility is collateralized by first priority mortgage registered over all Group's vessels, as well as assignments of such vessel's earnings and insurance.

The facility loan agreement with HSH Nordbank AG signed at the end of November 2005 requires the Group to comply with some financial covenants. The most significant of the covenants include a requirement to maintain: (1) a minimum cash liquidity of USD 1 million and (2) a ratio of current assets to current liabilities not less than one (excluding the current portion of the loan), (3) a minimum net worth (defined as book net equity adjusted to market value of vessels) shall not be less than USD 65 million. In case the Group will not meet the financial covenants and such is not remedied immediately, the bank could request the immediate repayment of the loan’s outstanding amount.

During 2007, the Group entered into a pre-delivery loan facility for the amount of USD 30,090 thousand from HSH Nordbank AG in order to finance the construction of two Tsuneishi Handymaxes as described above. The facility covers 85% of the pre-delivery purchase price and was drawn down, as of year-end, for an amount of USD 12,036 thousand. The facility will be repaid at the expected date of vessels delivery in 2012.  The Group will also need to find the financial resources needed to fully pay the pre-delivery loan facility and to pay the last installments to the shipyard in order to finalize the purchase of the two vessels. The pre-delivery loan agreement has been guaranteed by DryLog Ltd. and requires the compliance with some financial covenants which should be computed on the DryLog Group consolidated financial statements.

The interest rate on this pre-delivery loan is LIBOR plus a spread which approximates 2.98% at December 31, 2008 (5.81% at December 31, 2007).

In order for the pre-delivery loan to be released, the Group assigned the rights arising from the construction contracts in favor of HSH Nordbank AG.

The carrying amount of the long-term debt approximates fair value at year end.

Due to the payment of dividends of USD 58 million, repayment of capital for USD 5 million (totaling USD 63 million) and the payment by Dry Log Ltd of dividends exceeding 50% of consolidated net result, the Group failed to meet certain financial debt covenants as of December 31, 2008. Accordingly, all the debt due to HSH/Nordbank AG is classified as short term debt without considering the loan reimbursement schedule above. The Group requested a bank waiver which has not yet been received. Furthermore, the Group believes that immediate repayment of the loan’s outstanding amount will not be called by the bank. Accordingly, no action has been put in place to find additional financial resources. If the bank did request the immediate repayment of the loan’s outstanding amount, the Group believes that the market value of its three owned vessels, based on independent third parties’ appraisal, would allow the Group to generate the necessary financial resources through the sale of the vessels. Although the Group considers any requirements to sell the vessels to be remote, such sale may result in the end of commercial operations.

As such, our ability to continue as a going concern is dependent upon the bank not calling for the immediate repayment of the loan’s outstanding amount, which is outside of our direct control. This uncertainty raises substantial doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

14.        SHAREHOLDERS’ EQUITY

The authorized share capital of the Company is 600 no par value shares divided into 300 “A” Class shares and 300 “B” Class shares, out of which 500 shares have been issued.  Cape Holding Ltd beneficially holds 250 “A” Class shares and Drylog Bulkcarriers Ltd beneficially holds 250 “B” Class shares.  All shares confer the same rights and are subject to the same obligations and restrictions.

On the basis of the Joint Venture Agreement signed on November 5, 2003, the two 50% shareholders have agreed to contribute by way of equity to the Group:

    - an amount not exceeding USD 6,347 thousand per shareholder, and

    - all amounts payable from time to time by the Group under the loan agreements to the extent to which such amounts cannot be funded by the net earnings of the Group.

Each shareholder shall contribute towards the equity contribution in accordance with their owner percentage in the Group. As of December 31, 2006, the additional paid in capital to the Group from the shareholders was USD 6,702 thousand, of which 50% of the amount was paid by each shareholder. In 2007, the shareholders decided to increase the additional paid in capital to USD 8,202 thousand providing cash for a total amount of USD 1.5 million. In 2008 the shareholders decided on a capital repayment of USD 5 million.

The Joint Venture Agreement provides that a shareholder cannot, without prior written consent of the other shareholder:

-     mortgage, pledge or otherwise encumber its legal or beneficial interest in the shares,

-     sell, transfer or otherwise dispose of all or any of its shares or any legal interest therein, and or

-     enter into any agreement with respect to the voting rights attached to all or any of its shares.

The shareholders can, however, transfer any of their shares to an entity within the same Group. The joint venture agreement continues to be effective until: (a) each shareholder transfers its shares in the Group to the other shareholder, or (b) an effective resolution is passed or a binding offer is made to wind up the Group, whichever is the earlier.

The changes in shareholders’ equity during 2008 are shown in the consolidated statements of shareholders equity.

15.        SHIPPING INCOME

The shipping income is composed of the following (in thousands of USD):

	2008		2007		2006
Revenues from Shipping Pool		-		24,527		19,060
Revenues from time charters contracts		24,203		3,536		3,701
Total shipping income		24,203		28,063		22,761

Considering that the Shipping Pool terminated its activity at the end of 2007 the shipping income for 2008 relates to the following:

·   USD 20.7 million, connected to M.V. Bulk Africa and Bulk Australia, employed during 2008 with the related company C Transport Cape Size Ltd.

·   USD 3.2 million, connected to the hire paid by the related company Ceres Bulk Carriers Transportes Maritimos Lda., for M.V. Bulk Fern;

·   USD 358 thousand, as income related to M.V. Bulk Fern, hired to third parties at the end of 2008.

See Note 1 and 2 for further discussion on the revenue recognition policy of the Group.

A-7

16.        VESSEL EXPENSES

  The detail of the vessel expenses is the following (in thousands of USD):

	2008		2007		2006
Wages		2,408		2,124		1,944
Maintenance		512		341		554
Lube oils		579		607		464
Insurance		581		421		365
Stores		301		243		217
Spare parts		450		226		207
Certificates & Class		198		81		89
Bunker		247		-		-
Amortization of deferred dry-docking charges		315		71		-
Sundry expenses		91		326		168
Total		5,682		4,440		4,008

17. MANAGEMENT FEES

The detail of the management fees is the following (in thousands of USD):

	2008		2007		2006
Unisea Shipping Ltd		432		432		432
DryLog Ltd		144		144		144
Total		576		576		576

Unisea Shipping Ltd was appointed in 2005 as technical manager of the vessels; on the basis of ship management agreement the remuneration is a yearly lump sum for each vessel.

In 2008, 2007 and 2006, DryLog Ltd (the shareholder of DryLog Bulkcarriers Ltd) provided the accounting, reporting, treasury and other corporate functions to the Group for a management fee of USD 4 thousand per month per vessel.

18. FINANCIAL EXPENSES, NET

This caption includes the following (in thousands of USD):

	2008			2007			2006
Interest income		136			149			62
Loan interest expenses		(3,985	)		(6,326	)		(6,422	)
Amortization of deferred financing costs		(66	)		(66	)		(66	)
Total financial expenses, net		(3,915	)		(6,243	)		(6,426	)

         The significant reduction in interest expenses is mainly due to the decrease in the interest rates.

19. INCOME / (LOSS) FROM DISCONTINUED OPERATIONS

This caption entirely relates to the M.V. Bulk Cedar sold in June 2008 as described in Note 1 and is comprised of the following (in thousands of USD):

	2008			2007			2006
Shipping income		1,781			3,709			3,044
Vessel expenses		(992	)		(1,640	)		(1,541	)
Vessel depreciation		(575	)		(1,199	)		(1,319	)
Management fees		(168	)		(192	)		(192	)
Net gain on the sale of the vessel		31,792			-			-
Total income / (loss) from discontinued operations		31,838			678			(8	)

The sale price of M.V. Bulk Cedar was equal to USD 71.5 million. The gain on the sale is net of the compensation for the early termination of the existing time charter contract with Ceres Bulk Carriers Transportes Maritimos Lda. (USD 15.1 million), brokerage commission (USD 2.2 million of which USD 715 thousand was paid to DryLog Group), and of USD 850 thousand paid to the buyer in connection with the settlement of a claim related to the time of vessel’s delivery.

20. RELATED PARTIES

In 2008 and 2007, transactions with related parties are those with C Transport Cape Size Ltd, Ceres Bulk Carriers Transportes Maritimos Lda, Unisea Shipping Ltd, DryLog Ltd, (as described in Notes 1, 4, 5, 15, 17 and 19) and with the shareholders, DryLog Bulkcarriers Ltd and Cape Shipholding Inc. (as described in Note 12 and 14).

21.        SUBSEQUENT EVENTS

The Shipping Pool, as more fully described in Note 1, was terminated as of January 1, 2008.  Contemporaneous with such termination, the Group entered into with C Transport Cape Size (the same legal entity under which the Shipping Pool was operated) three-year fixed rate time charter contracts involving M.V. Bulk Africa and M.V. Bulk Australia starting from January 1, 2008.

According to the time charter contracts described above for M.V. Bulk Africa and M.V. Bulk Australia (three years time charter with C Transport Cape Size Ltd), the minimum total contractual future rentals for the Group in the next years is expected to be in the following amounts (assuming no off-hire periods):

Year	USD/000
2009		20,965
2010		25,420
Total		46,385

In 2009 M.V. Bulk Fern is expected to be employed in the market through time charter contracts or spot voyages.

Although the global recession and the global economic downturn had a significant impact on the shipping market and forecast is therefore subject to significant uncertainty, actually there are no elements, unless otherwise described in the notes, which could affect the Group’s ability to find the financial resources in order to meet its obligations and commitments. However, the development of shipping and financial markets is monitored by Group management in order to promptly adopt the right actions.

 A-8

INDEX OF FINANCIAL STATEMENTS

OF INTERNATIONAL SHIPHOLDING CORPORATION

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006	F-3
Consolidated Balance Sheets at December 31, 2008 and 2007	F-4
Consolidated Statements of Changes in Stockholders' Investment for the years ended December 31, 2008, 2007 and 2006	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

International Shipholding Corporation

We have audited the accompanying consolidated balance sheets of International Shipholding Corporation as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ investment, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Shipholding Corporation at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), International Shipholding Corporation's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New Orleans, Louisiana

March 6, 2009, except for paragraph 3 of Note 1

   as to which the date is June 26, 2009

F-2

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
	Year Ended December 31,
	2008			2007			2006
Revenues	$	281,901		$	218,113		$	203,498
Operating Expenses:
Voyage Expenses		220,240			168,015			155,512
Vessel and Barge Depreciation		19,968			21,322			20,066
Impairment Loss		-			-			8,866
Gross Voyage Profit		41,693			28,776			19,054
Administrative and General Expenses		21,414			18,158			17,609
Gain on Sale of Other Assets		-			(12	)		-
Operating Income		20,279			10,630			1,445
Interest and Other:
Interest Expense		6,886			9,762			11,147
Loss on Redemption of Preferred Stock		1,371			-			-
Gain (Loss) on Sale of Investment		148			(352	)		(23,058	)
Investment Income		(525	)		(2,592	)		(1,397	)
Loss on Early Extinguishment of Debt		-			-			248
		7,880			6,818			(13,060	)
Income from Continuing Operations Before (Benefit) Provision for
Income Taxes and Equity in Net Income of Unconsolidated Entities		12,399			3,812			14,505
(Benefit) Provision for Income Taxes:
Current		-			120			113
Deferred		(910	)		(1,570	)		919
State		33			86			4
		(877	)		(1,364	)		1,036
Equity in Net Income of Unconsolidated
Entities (Net of Applicable Taxes)		20,946			6,616			4,725
Income from Continuing Operations		34,223			11,792			18,194
Income (Loss) from Discontinued Operations:
Income (Loss) before Provision (Benefit) for Income Taxes		220			(4,238	)		(8,440	)
Gain on Sale of Liner Assets		4,607			9,880			5,125
(Provision) Benefit for Income Taxes		-			(18	)		2,169
Net Income (Loss) from Discontinued Operations		4,827			5,624			(1,146	)
Net Income	$	39,050		$	17,416		$	17,048
Preferred Stock Dividends		88			2,400			2,400
Net Income Available to Common Stockholders	$	38,962		$	15,016		$	14,648
Basic and Diluted Earnings Per Common Share:
Net Income (Loss) Available to Common Stockholders - Basic
Continuing Operations	$	4.67		$	1.48		$	2.58
Discontinued Operations		0.66			0.88			(0.18	)
	$	5.33		$	2.36		$	2.40
Net Income (Loss) Available to Common Stockholders - Diluted
Continuing Operations	$	4.56		$	1.41		$	2.24
Discontinued Operations		0.64			0.67			(0.14	)
	$	5.20		$	2.08		$	2.10
Weighted Average Shares of Common Stock Outstanding:
Basic		7,314,216			6,360,208			6,116,036
Diluted		7,501,555			8,369,473			8,122,578

The accompanying notes are an integral part of these statements.

F-3

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share Data)
	December 31,			December 31,
ASSETS	2008			2007
Current Assets:
Cash and Cash Equivalents	$	51,835		$	14,103
Marketable Securities		2,707			5,578
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $132 and $216 in 2008 and 2007, respectively:
Traffic		14,581			9,637
Agents'		2,712			1,804
Other		5,567			9,233
Net Investment in Direct Financing Leases		7,874			7,391
Other Current Assets		2,187			2,327
Material and Supplies Inventory		2,842			2,665
Assets Held for Disposal		-			9,105
Total Current Assets		90,305			61,843
Investment in Unconsolidated Entities		5,803			16,326
Net Investment in Direct Financing Leases		108,973			107,208
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges		338,729			335,511
Leasehold Improvements		26,128			29,530
Furniture and Equipment		5,023			8,086
		369,880			373,127
Less -  Accumulated Depreciation		(166,931	)		(147,484	)
		202,949			225,643
Other Assets:
Deferred Charges, Net of Accumulated Amortization		12,639			15,337
of $17,018 and $9,781 in 2008 and 2007, respectively
Acquired Contract Costs, Net of Accumulated Amortization		1,819			3,274
of $28,706 and $27,251 in 2008 and 2007, respectively
Due from Related Parties		6,195			5,897
Other		5,428			5,127
		26,081			29,635
	$	434,111		$	440,655

The accompanying notes are an integral part of these statements.

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share Data)
	December 31,			December 31,
	2008			2007
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Maturities of Long-Term Debt	$	13,285		$	12,681
Accounts Payable and Accrued Liabilities		26,514			23,546
Current Liabilities related to Assets Held for Disposal		-			2,427
Total Current Liabilities		39,799			38,654
Long-Term Debt, Less Current Maturities		126,841			130,523
Other Long-Term Liabilities:
Deferred Income Taxes		4,893			9,072
Lease Incentive Obligation		7,314			13,789
Other		50,072			37,361
		62,279			60,222
Commitments and Contingent Liabilities
Convertible Exchangeable Preferred Stock		-			37,554
Stockholders' Investment:
Common Stock, $1.00 Par Value, 10,000,000 Shares Authorized,		8,390			7,193
7,183,570 And 7,192,630 Shares Issued at December 31, 2008 and
December 31, 2007, Respectively
Additional Paid-In Capital		81,443			60,177
Retained Earnings		152,379			117,008
Treasury Stock, 1,165,015 and 673,443 Shares, at Cost, at December 31,   2008 and 2007, Respectively		(20,172	)		(8,704	)
Accumulated Other Comprehensive Loss		(16,848	)		(1,972	)
		205,192			173,702
	$	434,111		$	440,655

The accompanying notes are an integral part of these statements.

F-4

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(All Amounts in Thousands)
											Accumulated
			Additional								Other
	Common		Paid-In		Retained			Treasury			Comprehensive
	Stock		Capital		Earnings			Stock			(Loss) Income			Total
Balance at December 31, 2005	$	6,760	$	54,495	$	87,344		$	(8,704	)	$	819		$	140,714
Comprehensive Income:
Net Income		-		-		17,048			-			-			17,048
Other Comprehensive Income (Loss):
Recognition of Unrealized Holding Gain on Marketable
Securities, Net of Deferred Taxes of ($140)		-		-		-			-			(206	)		(206	)
Unrealized Holding Gain on Marketable Securities,
Net of Deferred Taxes of $43		-		-		-			-			219			219
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of $176		-		-		-			-			656			656
Total Comprehensive Income															17,717
Adjustment to Initially Apply SFAS No. 158, Net of
Deferred Taxes of ($8)		-		-		-			-			(2,760	)		(2,760	)
Preferred Stock Dividends		-		-		(2,400	)		-			-			(2,400	)
Options Exercised		33		432		-			-			-			465
Balance at December 31, 2006	$	6,793	$	54,927	$	101,992		$	(8,704	)	$	(1,272	)	$	153,736
Comprehensive Income:
Net Income		-		-		17,416			-			-			17,416
Other Comprehensive Income (Loss):															-
Recognition of Unrealized Holding Gain on Marketable																��
Securities, Net of Deferred Taxes of ($48)		-		-		-			-			(89	)		(89	)
Unrealized Holding Gain on Marketable Securities,
Net of Deferred Taxes of ($86)		-		-		-			-			(160	)		(160	)
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of ($325)		-		-		-			-			(2,177	)		(2,177	)
Change in Funding Status of Benefit Plans, Net of
Deferred Taxes of $12		-		-		-			-			1,726			1,726
Total Comprehensive Income															16,716
Preferred Stock Dividends		-		-		(2,400	)		-			-			(2,400	)
Options Exercised		400		5,250		-			-			-			5,650
Balance at December 31, 2007	$	7,193	$	60,177	$	117,008		$	(8,704	)	$	(1,972	)	$	173,702
Comprehensive Income:
Net Income		-		-		39,050			-			-			39,050
Other Comprehensive Income (Loss):															-
Unrealized Holding Loss on Marketable Securities,
Net of Deferred Taxes of ($465)		-		-		-			-			(848	)		(848	)
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of ($1,275)		-		-		-			-			(9,809	)		(9,809	)
Change in Funding Status of Benefit Plans, Net of
Deferred Taxes of $970		-		-		-			-			(4,219	)		(4,219	)
Total Comprehensive Income															24,174
Compensation Expense - Restricted Stock		41		716		-			-			-			757
Repurchase of Common Stock		-		-		-			(11,468	)		-			(11,468	)
Preferred Stock Dividends		-		-		(88	)		-			-			(88	)
Common Stock Dividends		-		-		(3,591	)		-			-			(3,591	)
Preferred Stock Conversion		1,156		20,550		-			-			-			21,706
Balance at December 31, 2008	$	8,390	$	81,443	$	152,379		$	(20,172	)	$	(16,848	)	$	205,192

The accompanying notes are an integral part of these statements.

F-5

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
	Twelve Months Ended December 31,
	2008			2007			2006
Cash Flows from Operating Activities:
Net Income	$	39,050		$	17,416		$	17,048
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation		20,351			23,969			24,417
Amortization of Deferred Charges and Other Assets		8,566			9,779			7,954
Benefit for Federal Income Taxes		(910	)		(1,468	)		(1,137	)
Impairment Loss		-			-			8,866
Loss on Early Redemption of Preferred Stock		1,371			-			-
Equity in Net Income of Unconsolidated Entities		(20,946	)		(6,616	)		(4,725	)
Distributions from Unconsolidated Entities		6,000			4,400			1,450
Proceeds from Lease Incentive Obligations		-			-			2,779
Gain on Sale of Liner Assets		(4,607	)		(11,280	)		(5,125	)
Loss on Early Extinguishment of Debt		-			-			248
Loss (Gain)  on Sale of Investments		148			(352	)		(23,058	)
Deferred Drydocking Charges		(4,171	)		(9,810	)		(8,432	)
Changes in:
Accounts Receivable		(3,202	)		1,322			12,349
Inventories and Other Current Assets		(72	)		(856	)		1,416
Other Assets		(386	)		(187	)		2,767
Accounts Payable and Accrued Liabilities		1,798			(4,868	)		(12,079	)
Federal Income Taxes Payable		-			-			(544	)
Other Long-Term Liabilities		(805	)		(1,218	)		(1,213	)
Net Cash Provided by Operating Activities		42,185			20,231			22,981
Cash Flows from Investing Activities:
Principal payments received under Direct Financing Leases		7,497			5,129			3,668
Capital Improvements to Vessels, Leasehold Improvements, and Other Asset		(4,024	)		(56,072	)		(21,799	)
Proceeds from Sale of Liner Assets		10,818			48,750			12,026
Distributions from Unconsolidated Entities		25,500			-			-
Purchase of and Proceeds from Marketable Securities		1,618			1,072			552
Investment in Unconsolidated Entities		-			(1,004	)		(1,336	)
Return of Capital of Unconsolidated Entity		-			-			2,480
Proceeds from Sale of Unconsolidated Entity		-			-			27,490
Decrease in Restricted Cash Account		-			-			6,541
Decrease (Increase)  in Related Party Note Receivables		25			(55	)		(2,090	)
Net Cash Provided by (Used in) Investing Activities		41,434			(2,180	)		27,532
Cash Flows from Financing Activities:
Redemption of Preferred Stock		(17,306	)		-			-
Common Stock Repurchase		(11,468	)		-			-
Proceeds from Issuance of Common Stock		-			5,650			465
Proceeds from Issuance of Debt		-			-			10,000
Repayment of Debt		(12,950	)		(50,253	)		(32,761	)
Additions to Deferred Financing Charges		(484	)		(590	)		(175	)
Preferred Stock Dividends Paid		(88	)		(2,400	)		(2,400	)
Common Stock Dividends Paid		(3,591	)		-			-
Reimbursements for Leasehold Improvements		-			-			2,613
Other Financing Activities		-			(628	)		(160	)
Net Cash Used by Financing Activities		(45,887	)		(48,221	)		(22,418	)
Net (Decrease)/Increase in Cash and Cash Equivalents		37,732			(30,170	)		28,095
Cash and Cash Equivalents at Beginning of Year		14,103			44,273			16,178
Cash and Cash Equivalents at End of Year	$	51,835		$	14,103		$	44,273

The accompanying notes are an integral part of these statements.

F-6

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of International Shipholding Corporation (a Delaware corporation) and its majority-owned subsidiaries.  In this report, the terms “we,” “us,” “our,” and “the Company” refer to International Shipholding Corporation and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest or otherwise control its operating and financial activities.  We use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest and have the ability to exercise significant influence over their operating and financial activities, and the cost method to account for investments in entities in which we hold less than 20% voting interest and in which we cannot exercise significant influence over operating and financial activities.

Certain reclassifications have been made to the prior period financial information in order to conform to current year presentation.  The primary reclassification relates to how we report our revenues and voyage expenses for carriage of our supplemental cargo on our U.S. flag Pure Car Truck Carriers, which is part of our Time Charter Contracts Segment.  This reclassification increased revenues and voyage expenses, including the amounts reported for our Time Charter Contracts segment, by $43.4 million, $21.0 million, and $18.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.  The reclassification also resulted in changes to the revenues and expenses for each quarter in the years ended December 31, 2008 and 2007 reported in Note R – Quarterly Financial Information (unaudited).

Nature of Operations

Through our subsidiaries, we operate a diversified fleet of U.S. and international flag vessels that provide domestic and international maritime transportation services to commercial customers and agencies of the United States government primarily under medium- to long-term charters or contracts.  At December 31, 2008, our fleet consisted of 31 ocean-going vessels and related shoreside handling facilities.  Our strategy is to (i) identify customers with high credit quality and marine transportation needs requiring specialized vessels or operating techniques, (ii) seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire, or construct vessels to meet the requirements of those charters or contracts, (iii) secure financing for the vessels predicated primarily on those charter or contract arrangements, and (iv) provide our customers with reliable, high quality service at a reasonable cost.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Voyage Revenue and Expense Recognition

Revenues and expenses relating to our Rail-Ferry Service segment’s voyages are recorded over the duration of the voyage. Our voyage expenses are estimated at the beginning of the voyages based on historical actual costs or from industry sources familiar with those types of charges. As the voyage progresses, these estimated costs are revised with actual charges and timely adjustments are made. The expenses are ratably expensed over the voyage based on the number of days in progress at the end of the period. We believe there is no material difference between recording estimated expenses ratably over the voyage versus recording expenses as incurred. Revenues and expenses relating to our other segments’ voyages, which require no estimates or assumptions, are recorded when earned or incurred during the reporting period.

Maritime Security Program

 The Maritime Security Act, which established the Maritime Security Program (“MSP”), was signed into law in October of 1996 and has been extended to 2015.  As of December 31, 2008, six of our Pure Car/Truck Carriers (“PCTCs”), and two of our Container vessels were qualified and received contracts for MSP participation.  Annual payments for each vessel in the MSP program are $2,600,000 in years 2007 and 2008, $2,900,000 in years 2009 to 2011, and $3,100,000 in years 2012 to 2015, which are subject to annual appropriations and not guaranteed.  We recognize MSP revenue on a monthly basis over the duration of the qualifying contracts.

Cash and Cash Equivalents

We consider highly liquid debt instruments with a maturity of three months or less to be cash equivalents.  The carrying amount approximates fair value for these instruments.

Inventories

Inventories aboard our vessels, including fuel, are carried at the first-in, first-out method of accounting.  As of December 31, 2008 and 2007, inventory included approximately $2,842,000 and $2,665,000 for critical spare parts, respectively.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts for accounts receivable balances estimated to be non-collectible.  These provisions are maintained based on identified specific accounts, past experiences, and current trends, and require management’s estimates with respect to the amounts that are non-collectible.

Property

For financial reporting purposes, vessels are depreciated over their estimated useful lives using the straight-line method to the estimated salvage value.  Estimated useful lives of Vessels and Barges, Leasehold Improvements, and Furniture and Equipment are as follows:

	Years
6 Pure Car/Truck Carriers	20
1 Coal Carrier	15
5 Other Vessels *	25
Leasehold Improvements	10-20
Other Equipment	3-12
Furniture and Equipment	3-10

* Includes two Special Purpose vessels and three Container vessels.

At December 31, 2008, our fleet of 31 vessels also included (i) three Roll-On/Roll-Off (“RO/RO”) vessels, which we operate, (ii) a Molten Sulphur Carrier, a Breakbulk/Multi-Purpose vessel, a Tanker, one Pure Car/Truck Carrier Newbuilding and three Container vessels, which we charter in  one of our services, (iii) four PCTCs which we charter in for our Time Charter contracts, (iv) two Cape-Size Bulk Carriers, one Panamax-Size Bulk Carrier, and two Handymax-size Bulk Carriers Newbuildings  in which we own a 50% interest.

Costs of all major property additions and betterments are capitalized.  Ordinary maintenance and repair costs are expensed as incurred.  Interest and finance costs relating to vessels, barges, and other equipment under construction are capitalized to properly reflect the cost of assets acquired.  Capitalized interest totaled $698,000 for the year ended December 31, 2008 and $197,000 for the year ended December 31, 2007.  Capitalized interest was calculated based on our weighted average interest rate on our outstanding debt.  No interest was capitalized in 2006.

We monitor our fixed assets for impairment and perform an impairment analysis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” when triggering events or circumstances indicate a fixed asset may be impaired.  Events may include a decrease in the market price of the long-lived asset (asset group) or a significant change in the way the asset is being used. Once it is determined that an event may cause an impairment, a comparison is done which shows the net book value of the asset  against the estimated undiscounted future cash flows the asset will generate over the remaining useful life of the asset. It is possible that our asset impairment review would include a determination of the asset’s fair value based on a third-party evaluation or appraisal. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. In 2008, we did not record any losses with respect to recoverability of our long-lived assets.

During 2006, in accordance with SFAS No. 144, we recorded an impairment loss of $8,866,000 to write-down our net investment in our Rail-Ferry terminal located in New Orleans, Louisiana on the MR-GO.  That waterway was effectively closed for long-term deep draft shipping when Congress indefinitely suspended dredging.  This resulted in the need for us to relocate the U.S. operations of the Rail-Ferry Service during 2007 to Mobile, Alabama.

Drydocking Costs

We defer certain costs related to the drydocking of our vessels.  Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings (generally two to five years). Because drydocking charges can be material in any one period, we believe that the capitalization and amortization of these costs over the drydocking period provides a better matching with the future revenue generated by our vessel. We capitalize only those costs that are incurred to meet regulatory requirements. Normal repairs, whether incurred as part of the drydocking or not, are expensed as incurred (See Note K – Deferred Charges and Acquired Contract Costs on Page F-25).

Deferred Financing Charges and Acquired Contract Costs

We amortize our deferred financing charges and acquired contract costs over the terms of the related financing agreements and contracts (See Note K – Deferred Charges and Acquired Contract Costs on Page F-25).

Self-Retention Insurance

We maintain provisions for estimated losses under our self-retention insurance program based on estimates of the eventual claims settlement costs.  Our policy is to establish self-insurance provisions for each policy year based on our estimate of the eventual claims’ settlement cost.  The measurement of our exposure for self-insurance liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the reporting period.  Actual results could differ materially from those estimates (See Note E – Self-Retention Insurance on Page F-17).

Asbestos Claims

We maintain provisions for estimated losses for asbestos claims based on estimates of eventual claims settlement costs.  Our policy is to establish provisions based on a range of estimated exposure.  We estimate this potential range of exposure using input from legal counsel and internal estimates based on the individual deductible levels for each policy year.  We are also indemnified for certain of these claims by the previous owner of one of our wholly-owned subsidiaries.  The measurement of our exposure for asbestos liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the period.  Actual results could differ from those estimates.

Income Taxes

Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial statement income in another.

Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation.  However, pursuant to existing U.S. Tax Laws, earnings from certain of our foreign operations are subject to U.S. income taxes when those earnings are repatriated to the U.S.

The Jobs Creation Act, which first applied to us on January 1, 2005, changed the United States tax treatment of the foreign operations of our U.S. flag vessels and our international flag shipping operations.  We made an election under the Jobs Creation Act to have our qualifying U.S. flag operations taxed under the “tonnage tax” regime rather than under the usual U.S. corporate income tax regime (See Note G – Income Taxes on Page F-21).

Foreign Currency Transactions

Certain of our revenues and expenses are converted into or denominated in foreign currencies, primarily the Singapore Dollar, Indonesian Rupiah, Euro, British Pound, Mexican Peso, Indian Rupee, Australian Dollar, and Japanese Yen.  All exchange adjustments are charged or credited to income in the year incurred. We recognized an exchange gain of $35,000, $11,000 and $162,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Dividend Policy

The payment of stock dividends is at the discretion of our board of directors.  On October 29, 2008, our Board of Directors authorized the reinstitution of a quarterly cash dividend program beginning in the fourth quarter of 2008.  On December 1, 2008 the Company’s shareholders were paid a $.50 cash dividend for each share of common stock held on the record date of November 14, 2008.  The total amount paid was $3,591,000.

Earnings Per Share

Basic earnings per share was computed based on the weighted average number of common shares issued and outstanding during the relevant periods.  Diluted earnings per share also reflects dilutive potential common shares, including shares issuable under stock options and restricted stock grants using the treasury stock method and convertible preferred stock using the if-covered method for the periods with outstanding preferred stock. (See Note C - Converted Exchangeable Preferred Stock on Page F-16).

Derivative Instruments and Hedging Activities

Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, in order to consider a derivative instrument as a hedge, (i) we must designate the instrument as a hedge of future transactions, and (ii) the instrument must reduce our exposure to the applicable risk.  If the above criteria are not met, we must record the fair market value of the instrument at the end of each period and recognize the related gain or loss through earnings.  If the instrument qualifies as a hedge, net settlements under the agreement are recognized as an adjustment to earnings, while changes in the fair market value of the hedge are recorded through Stockholders’ Investment in Other Comprehensive Income (Loss).  We currently employ, or have employed in the recent past, interest rate swap agreements, foreign currency contracts, and commodity swap contracts (See Note O - Fair Value of Financial Instruments and Derivatives on Page F-30).

Stock-Based Compensation

Prior to January 1, 2006, we accounted for stock-based compensation using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation expense was recognized for employee stock options issued under the Stock Incentive Plan if the exercise price of the options equals the market price of our stock on the date of grant (See Note F – Employee Benefit Plans on Page F-17).

In December of 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R) supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement of Cash Flows.”  SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Statement No. 123(R) was effective for calendar year public companies at the beginning of 2006.  Effective January 1, 2006, we adopted Statement No. 123(R), which had no impact on our financial position and results of operation.

On April 30, 2008, our Compensation Committee granted 175,000 shares of restricted stock to certain executive officers. The shares vest ratably over the respective vesting period, which ranges from three to four years. The fair value of the Company’s restricted stock, which is determined using the average stock price as of the date of the grant, is applied to the total shares that are expected to fully vest and is amortized to compensation expense on a straight-line basis over the vesting period (See Note U – Stock-Based Compensation on Page F-35).

SFAS No. 123(R) permits public companies to adopt its requirements using either a modified prospective method or a modified retrospective method.  Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards.  No change to prior periods presented is permitted under the modified prospective method.  Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the pro forma amounts previously disclosed in the footnotes.  Also, in the period of adoption and after, companies record compensation cost based on the modified prospective method.  We have adopted this statement using the modified prospective method.

Pension and Postretirement Benefits

Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.”  These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates, and other factors.  We believe that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary and information as to historical experience and performance.  Differences in actual experience or changes in assumptions may affect our pension and postretirement obligations and future expense.

We account for our pension and postretirement benefit plans in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).”  This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans.  Under SFAS No. 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Other Comprehensive Income (Loss), net of tax effects, until they are amortized as a component of net periodic benefit cost.  In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end.  SFAS No. 158 does not change the determination of net periodic benefit cost included in net income or the measurement issues associated with benefit plan accounting.  For the period ended December 31, 2008, the effect of the adjustment to our underfunded status was an increase in the liability of $5.4 million, and an Other Comprehensive Loss of $4.4 million, net of taxes of $970,000.

New Accounting Pronouncements

In September of 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years.  As discussed further in Note O – Fair Value of Financial Instruments and Derivatives, this statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements.  We adopted SFAS 157 on January 1, 2008 and the adoption had no effect on our consolidated financial position or results of operation.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – including an amendment of FASB Statement No. 115.”  SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities, and certain nonfinancial instruments that are similar to financial instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We adopted SFAS 159 on January 1, 2008 and the adoption has had no effect on our consolidated financial position or results of operation.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging activities – an amendment of FASB Statement No. 133.”  SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities.  SFAS No. 161 is effective for fiscal years beginning after November 15, 2008.  We have not yet determined the impact of the adoption of SFAS No. 161 on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with an updated framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP.  SFAS No. 162 is effective for fiscal years beginning after November 15, 2008.  The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (SFAS No. 141 (R)).  SFAS No. 141 (R) is a revision of SFAS No. 141, but retains the fundamental requirements that the acquisition method of accounting (purchase method) be used for all business combinations.  SFAS No. 141 (R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  SFAS No. 141 (R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired to be measured at fair value at the acquisition date.  In addition, acquisition related costs must be expensed in the periods in which the costs are incurred and the services received.  SFAS No. 141 (R) is effective for fiscal years beginning on or after December 15, 2008 and is not expected to have an impact on the Company’s financial position or results of operations.

F-7

NOTE B – PROPERTY, PLANT & EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

	December 31,
(All Amounts in Thousands)	2008			2007
Pure Car/Truck Carriers	$	97,024		$	97,024
Special Purpose Vessels		107,672			106,880
Coal Carrier		92,646			92,201
Container Ships		19,911			19,911
Breakbulk Ship		5,632			5,632
Non-vessel related property, plant and equipment		31,151			37,616
Less:  Accumulated depreciation		(166,931	)		(147,484	)
		187,105			211,780
Construction-in-progress (vessel and non-vessel)		15,844			13,863
	$	202,949		$	225,643

NOTE C - CONVERTIBLE EXCHANGEABLE PREFERRED STOCK

In January of 2005, we issued 800,000 shares of 6% convertible exchangeable preferred stock, $1.00 par value, at a price of $50.00 per share.  The proceeds of the preferred stock offering, after deducting all associated costs, were $37,987,000. Each share of the preferred stock had a liquidation preference of $50 per share and was convertible into shares of our common stock based on the initial conversion price of $20.00 per share. On February 1, 2008 we completed the redemption of our 800,000 outstanding shares of 6% Convertible Exchangeable Preferred Stock.  In lieu of cash redemption, holders of 462,382 shares of the Preferred Stock elected to convert their shares into approximately 1,155,955 shares of our common stock. The remaining 337,618 outstanding shares of Preferred Stock were retired for cash (including accrued and unpaid dividends to, but excluding, the redemption date), pursuant to the terms of the Preferred Stock. As a result, we no longer have any shares of the 6% Convertible Exchangeable Preferred Stock outstanding. The total cash payment for the redemption of the Preferred Stock including the accrued and unpaid dividends was $17,306,000. We had a charge to earnings of approximately $1,371,000 in the first quarter of 2008 from the redemption of the Preferred Stock. (See Note T – Accumulated Other Comprehensive Income (Loss) on Page F-34)

NOTE D – LONG-TERM DEBT

Long-term debt consisted of the following:

( in thousands)		Interest Rate			Total Principal Due
		December 31,	December 31,	Maturity	December 31,	December 31,
Description		2008	2007	Date	2008	2007
Secured:
Notes Payable – Variable Rate	*	4.4763%	6.200%	2015	$          23,334	$          26,000
Notes Payable – Variable Rate	*	0.9300%	4.3219%	2012	13,580	13,720
Notes Payable – Variable Rate	**	5.0119%	6.18-6.45%	2013	51,793	59,261
Notes Payable – Variable Rate	*	1.7475%	1.8713%	2010	51,419	44,223
Line of Credit		N/A	N/A	2010	-	-
					140,126	143,204
		Less Current Maturities			(13,285)		(12,681)
					$       126,841	$       130,523

*  We have interest rate swap agreements in place to fix the interest rates on our variable rate notes payable expiring in 2015, 2012 and 2010 at 4.41%, 5.17% and 1.15%, respectively.  After applicable margin adjustments, the effective interest rates on these notes payable are fixed at 5.41%, 4.67% and 2.00%, respectively. The swap agreements are for the same terms as the associated notes payable.

** We have three interest rate swap agreements currently effective to fix the interest rate on this variable note payable through 2010 at 4.68%, 3.96% and 3.46% respectively.  After applicable margin adjustments, the effective interest rates on the swapped portion of these notes payable are 5.68%, 4.96% and 4.46%, respectively.  Two of these swap agreements end in 2010 and we have entered into additional swap agreements to effectively fix the interest rate on the remaining period of the loan at 2.69% and 2.45%.

Our variable rate notes payable and our line of credit are secured by assets with an aggregate net book value of $162,090,000 as of December 31, 2008, and by a security interest in certain operating contracts and receivables.

The aggregate principal payments required as of December 31, 2008, for each of the next five years are $13,285,000 in 2009, $58,683,000 in 2010, $10,590,000 in 2011, $22,980,000 in 2012, and $24,588,000 in 2013.

In August 2007, we reduced our $50 million credit facility to $35 million.  As of December 31, 2008, we had $6.4 million of our $35 million revolving credit facility, which expires in March of 2010, pledged as collateral for letters of credit.  The remaining $28.6 million of that credit facility was available as of December 31, 2008.  Associated with this credit facility is a commitment fee of .125% per year on the undrawn portion of this facility.

Most of our debt agreements, among other things, impose defined minimum working capital and net worth requirements, impose leverage requirements, impose restrictions on the payment of dividends, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, except as defined.  As of December 31, 2008, we met all of the financial covenants under our various debt agreements, the most restrictive of which include the working capital, leverage ratio, minimum net worth and interest coverage ratios, and believe we will continue to meet these requirements throughout 2009, although we can give no assurance to that effect.

Certain of our loan agreements restrict the ability of our subsidiaries to dispose of collateralized assets or any other asset which is substantial in relation to our assets taken as a whole without the approval from the lender.  We have consistently remained in compliance with this provision of the loan agreements.

NOTE E – SELF-RETENTION INSURANCE

We are self-insured for Hull and Machinery claims in excess of $150,000/Hull and $250,000/ Machinery for each incident.  Loss of Hire claims are self-insured in excess of 14 days/Hull, and 21 days/Machinery up to an aggregate stop loss amount of $1,000,000/Hull and an additional $1,000,000/Machinery per policy year.  Once the aggregate stop loss amount is exceeded, we have coverage up to limits provided. The estimate of our self-insurance exposure for the policy year beginning June 27, 2008 is approximately $1,700,000.

Protection and Indemnity claims, including cargo and personal injury claims, are not included in our self-retention insurance program.  We have third party insurance coverage for these claims with deductible levels ranging from $100,000 to $500,000 per incident depending on vessel type.  Our estimates of exposure for claims under these deductible levels is approximately $1,600,000 for the policy year beginning February 20, 2008.

The current and non-current liabilities for self-insurance exposure and for claims under the deductible levels were $641,000 and $2,779,000, respectively, for the year ended December 31, 2008.  The current and non-current liabilities were $1,754,000 and $4,328,000, respectively, for the year ended December 31, 2007.

F-8

NOTE F – EMPLOYEE BENEFIT PLANS

Pension and Postretirement Benefits

We maintain a defined benefit pension plan (the “Retirement Plan”) for employees hired prior to September 1, 2006, and all such employees of our domestic subsidiaries who are not covered by union sponsored plans may participate after one year of service. Employees hired on or after September 1, 2006 with at least one year of service as of June 30, 2008, were eligible to participate in the new Cash Balance Plan as of July 1, 2008.  Computation of benefits payable under the defined pension plan is based on years of service, up to thirty years, and the employee's highest sixty consecutive months of compensation, which is defined as the participant’s base salary plus overtime (excluding incentive pay), bonuses or other extra compensation, in whatever form.  Our funding policy is based on minimum contributions required under ERISA as determined through an actuarial computation.  Plan assets consist primarily of investments in equity and fixed income mutual funds and money market holdings.  The target asset allocation range is 40% in fixed income investments and 60% in equity investments.  The asset allocation on December 31, 2008 was 48.10% in fixed income investments and 51.90% in equity investments.  The asset allocation on December 31, 2007 was 38.96% in fixed income investments and 61.04% in equity investments.  The plan’s prohibited investments include selling short, commodities and futures, letter stock, unregistered securities, options, margin transactions, derivatives, leveraged securities, and International Shipholding Corporation securities.  The plan’s diversification strategy includes limiting equity securities in any single industry to 25% of the equity portfolio market value, limiting the equity holdings in any single corporation to 10% of the market value of the equity portfolio, and diversifying the fixed income portfolio so that no one issuer comprises more than 10% of the aggregate fixed income portfolio, except for issues of the U.S. Treasury or other Federal Agencies.  The plan’s assumed future returns are based primarily on the asset allocation and on the historic returns for the plan’s asset classes determined from both actual plan returns and, over longer time periods, market returns for those asset classes.  As of December 31, 2008, the plan has assets of $18,100,000 and a projected pension obligation of $22,601,000.

Our postretirement benefit plans currently provide medical, dental, and life insurance benefits to eligible retired employees and their eligible dependents.  The following table sets forth the plans’ changes in the benefit obligations and fair value of assets and a statement of the funded status:

(All Amounts in Thousands)	Pension Plan		Postretirement Benefits
	Year Ended December 31,		Year Ended December 31,
	2008	2007	2008	2007
Change in Benefit Obligation
Benefit Obligation at Beginning of Year	$          23,063	$         23,684	$          7,267	$          8,048
Service Cost	597	616	18	25
Interest Cost	1,415	1,347	428	439
Plan Amendments	(34)	-	-	-
Actuarial (Gain) Loss	(1,244)	(1,057)	(392)	(38)
Benefits Paid and Expected Expenses	(1,196)	(1,138)	(614)	(620)
Medicare Part D Reimbursements	-	-	57	-
Curtailments	-	(409)	-	(587)
Special Termination Benefits	-	20	-	-
Benefit Obligation at End of Year	$          22,601	$         23,063	$            6,764	$            7,267
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year	$          23,299	$          22,432	$                   -	$                    -
Actual Return on Plan Assets	(5,211)	1,399	-	-
Employer Contribution	1,200	600	557	620
Benefits Paid and Actual Expenses	(1,188)	(1,132)	(614)	(620)
Medicare Part D reimbursements	-	-	57	-
Fair Value of Plan Assets at End of Year	$           18,100	$         23,299	$                   -	$                    -
Funded Status	$         (4,501)	$         236	$         (6,764)	$         (7,267)
Key Assumptions
Discount Rate	6.75%	6.25%	6.75%	6.25%
Rate of Compensation Increase	4.50%	5.00%	N/A	N/A

The accumulated benefit obligation for the pension plan was $20,472,000 and $20,314,000 at December 31, 2008 and 2007, respectively.

The following table shows amounts recognized in accumulated other comprehensive income:

(All Amounts in Thousands)	Pension Plan						Postretirement Benefits
	Year Ended December 31,						Year Ended December 31,
	2008			2007			2008		2007
Prior Service Cost	$	32		$	-		$	79	$	91
Net Loss		(6,968	)		(1,217	)		488		96
Change in Other Comprehensive Income	$	(6,936	)	$	(1,217	)	$	567	$	187

 The following table provides the components of net periodic benefit cost for the plans:

(All Amounts in Thousands)	Pension Plan			Postretirement Benefits
	Year Ended December 31,			Year Ended December 31,
	2008	2007	2006	2008	2007	2006
Components of Net Periodic Benefit Cost
Service Cost	$        597	$        616	$        676	$           18	$         25	$         63
Interest Cost	1,415	1,347	1,311	428	439	453
Expected Return on Plan Assets	(1,792)	(1,719)	(1,534)	-	-	-
Amortization of Prior Service Cost	(2)	-	-	(12)	(14)	(22)
Amortization of Net Actuarial Loss	-	12	162	-	-	-
Net Periodic Benefit Cost	$        218	$        256	$        615	$         434	$       450	$       494
Special Termination Benefits	-	20	10	-	-	-
Curtailment Gain	-	-	-	-	(38)	(45)
Net Periodic Benefit Cost After Special   Termination Benefits and Curtailment Gain	$         218	$         276	$         625	$         434	$        412	$         449
Key Assumptions
Discount Rate	6.25%	5.75%	5.75%	6.75%	6.25%	5.75%
Expected Return on Plan Assets	7.75%	7.75%	7.75%	N/A	N/A	N/A
Rate of Compensation Increase	5.00%	5.00%	5.00%	N/A	N/A	N/A

For measurement purposes, the health cost trend was assumed to be 1.7% and the dental care cost trend rate was assumed to be 7.3% in 2008 and 5% for all years thereafter. The health cost trend will increase by 7.3% in 2009 and will decrease steadily by .50% per year over the next eight years thereafter to a long-term rate of 5%. For employees over 65, the health cost trend was assumed to be 1.7% and the dental care cost trend was assumed to be 7.3% in 2008 and 5% for all years thereafter. The health cost trend will increase by 7.3% in 2009 and will decrease steadily by .50% per year over the next eight years thereafter to a long-term rate of 5%.  A one percent change in the assumed health care cost trend rates would have the following effects:

(All Amounts in Thousands)	1% Increase	1% Decrease
Change in total service and interest cost components
for the year ended December 31, 2008	$                                                          41	$                                                       (35)
Change in postretirement benefit obligation as of December 31, 2008	657	(558)

The following table provides the expected future benefit payments as of December 31, 2008:

(All Amounts in Thousands)
Fiscal Year Beginning		Pension Plan		Postretirement Benefits
2009		$	1,250	$	535
2010			1,306		548
2011			1,395		554
2012			1,420		548
2013			1,483		551
	2014-2018		8,348		2,629

We continue to evaluate ways in which we can better manage these benefits and control the costs.  Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of reported obligation and annual expense.

Crew members on our U.S. flag vessels belong to union-sponsored pension plans.  We contributed approximately $2,588,000, $2,499,000, and $2,353,000 to these plans for the years ended December 31, 2008, 2007, and 2006, respectively.  These contributions are in accordance with provisions of negotiated labor contracts and generally are based on the amount of straight pay received by the union members.  Information from the plans’ administrators is not available to permit us to determine whether there may be unfunded vested benefits.

In December of 2003, the Medicare Prescription Drug, Improvements, and Modernization Act of 2003 (“Act”) was signed into law.  In addition to including numerous other provisions that have potential effects on an employer’s retiree health plan, the Act includes a special subsidy beginning in 2006 for employers that sponsor retiree health plans with prescription drug benefits that are at least as favorable as the new Medicare Part D benefit.  We have determined that our plan is actuarially equivalent and as such we qualify for this special subsidy.  The law resulted in a decrease in our annual net periodic benefit cost.

401(k) Savings Plan

We provide a 401(k) tax-deferred savings plan to all full-time employees. We match 50% of the employee’s first $2,000 contributed to the plan annually.  We contributed $109,000, $110,000 and $108,000 to the plan for the years ended December 31, 2008, 2007 and 2006, respectively.

Stock Incentive Plan

In April of 1998, we established a stock-based compensation plan, the Stock Incentive Plan (the “Plan”), which was fully depleted upon issuance of the restricted stock in April 2008 noted below.  Under the Plan, we granted incentives to our eligible Plan participants for up to 650,000 shares of common stock.  The exercise price of each option equals the market price of our stock on the date of grant.  In July of 1999, options to purchase 475,000 shares of common stock were granted to certain qualified participants at an exercise price of $14.125 per share. All options vested immediately upon the grant date and were immediately exercisable. No options were granted during 2008, 2007, or 2006.  A total of  400,000 and 32,900 options were exercised in 2007, and 2006 respectively.  There were no remaining options outstanding during 2008.

On April 30, 2008, our Compensation Committee granted 175,000 shares of restricted stock to certain executive officers. The shares vest ratably over the respective vesting period, which ranges from three to four years. The fair value of the Company’s restricted stock, which is determined using the average stock price as of the date of the grant, is applied to the total shares that are expected to fully vest and is amortized to compensation expense on a straight-line basis over the vesting period.

In early 2009, our Board of Directors approved a new stock incentive plan to replace the Plan.

Life Insurance

We have agreements with the two former Chairmen of the Company whereby their estates will be paid approximately $822,000 and $626,000, respectively, upon death.  We reserved amounts to fund a portion of these death benefits, which amount to $822,000, and hold an insurance policy to cover the remaining liability.  The cash surrender value of the insurance policy was approximately $64,000 and $74,000 as of December 31, 2008 and 2007, respectively.

F-9

NOTE G - INCOME TAXES

Under previous United States tax law, U.S. companies like us and their domestic subsidiaries generally have been taxed on all income, including in our case income from shipping operations, whether derived in the United States or abroad.  With respect to any foreign subsidiary in which we hold more than a 50 percent interest (referred to in the tax laws as a controlled foreign corporation, or “CFC”), we were treated as having received a current taxable distribution of our pro rata share of income derived from foreign shipping operations.

The American Jobs Creation Act, which became effective for us on January 1, 2005, changed the United States tax treatment of our U.S. flag vessels and our international  flag shipping operations operating in CFCs.

In December of 2004, we made an election under the Jobs Creation Act to have our U.S. flag operations (other than those of two ineligible vessels used exclusively in United States coastwise commerce) taxed under the “tonnage tax” regime rather than under the usual U.S. corporate income tax regime.  As a result of that election, our gross income and taxable income for United States income tax purposes with respect to our eligible U.S. flag vessels will not include (1) income from qualifying shipping activities in U.S. foreign trade (i.e., transportation between the U.S. and foreign ports or between foreign ports), (2) income from cash, bank deposits and other temporary investments that are reasonably necessary to meet the working capital requirements of our qualifying shipping activities, and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets.

Under the tonnage tax regime, our taxable income with respect to the operations of our eligible U.S. flag vessels will instead be based on a “daily notional taxable income,” which is taxed at the highest corporate income tax rate.  In 2008, we had taxable income of $282,000 on vessels qualifying under the tonnage tax regime as compared to taxable income of $19,519,000 that would have been subject to the U.S. corporate income tax regime prior to the election.

Under the Jobs Creation Act, the taxable income from shipping operations of the Company’s CFCs will generally no longer be subject to current United States income tax but will be deferred.  In December of 2004, we established a valuation allowance of $4,330,000 on the net deferred tax asset associated with the foreign deficit carry-forwards that were no longer supportable as a result of the Jobs Creation Act, the impact of which is included in our deferred tax provision.  We were able to release $417,000, $3,177,000, and $736,000 of the valuation allowance during 2007, 2006, and 2005, respectively.  This reduction of the valuation allowance is attributed to our CFCs’ generation of earnings not subject to U.S. taxation during 2007.  Since those earnings are not subject to U.S. taxation, the earnings can be used to offset foreign deficits.  None of the valuation allowance remains at December 31, 2008.

Our Federal income tax returns are filed on a consolidated basis and include the results of operations of our wholly-owned U.S. subsidiaries.  Pursuant to the Tax Reform Act of 1986, the recognition of earnings of foreign subsidiaries, which were $1,243,000 in 2008, $1,817,000 in 2007, and $13,933,000 in 2006, have been included in our federal tax provision calculations.  No foreign tax credits are expected to be utilized on the federal return as of December 31, 2008.

Components of the net deferred tax liability/(asset) are as follows:

	December 31,			December 31,
(All Amounts in Thousands)	2008			2007
Liabilities:
Fixed Assets	$	19,063		$	15,395
Deferred Charges		3,316			2,338
Unterminated Voyage Revenue/Expense		71			72
Insurance and Claims Reserve		68			471
Other Liabilities		1,723			6,570
Total Liabilities		24,241			24,846
Assets:
Post-Retirement Benefits		(77	)		(401	)
Alternative Minimum Tax Credit		(4,577	)		(4,577	)
Net Operating Loss Carryforward/Unutilized Deficit		(8,541	)		(7,369	)
Work Opportunity Credit		(60	)		(293	)
Other Assets		(6,093	)		(3,134	)
Total Assets		(19,348	)		(15,774	)
Total Deferred Tax Liability, Net	$	4,893		$	9,072

The following is a reconciliation of the U.S. statutory tax rate to our effective tax rate –expense (benefit):

             Year Ended December 31,

	2008			2007			2006
Statutory Rate		35.00	%		35.00	%		35.00	%
State Income Taxes		0.36	%		2.26	%		0.03	%
Effect of Tonnage Tax Rate		(42.76	)%		(50.00	)%		(20.99	)%
Foreign Earnings-Indefinitely Reinvested		(6.84	)%		(26.39	)%		-
Foreign Earnings		4.23	%		12.90	%		-
Change in Valuation Allowance		-			(10.92	)%		(11.92	)%
Permanent Differences and Other, Primarily Non-deductible Expenditures		2.94	%		1.36	%		5.02	%
		(7.07	)%		(35.79	)%		7.14	%

Foreign income taxes of $525,000, $492,000, and $544,000 are included in our consolidated statements of income in the Provision for Income Taxes for the years ended December 31, 2008, 2007, and 2006, respectively.  We pay foreign income taxes in Indonesia.

For U.S. federal income tax purposes, in 2008, we generated $3,349,000 in net operating loss carryforwards (“NOLs”).  The NOL balance at December 31, 2008 of approximately $24,402,000, if not used, will expire in 2025 through 2028.  We also have approximately $4,577,000 of alternative minimum tax credit carryforwards, which are not subject to expiration and are available to offset future regular income taxes subject to certain limitations. Additionally, for state income tax purposes, we have NOLs of approximately $31,315,000 available to reduce future state taxable income.  These NOLs expire in varying amounts beginning in year 2010 through 2028.

We had total income from continuing operations before (benefit) provision for income taxes and equity in net income of unconsolidated entities of $12,399,000, $3,812,000, and $14,505,000 for 2008, 2007, and 2006, respectively. Income (loss) from continuing U.S. operations was $11,282,000, $308,000 and $(1,429,000) and income (loss) from continuing foreign operations was $1,117,000, $3,504,000 and $15,934,000 for 2008, 2007 and 2006, respectively.

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.”  FIN 48 provides guidance on the measurement and recognition in accounting for income tax uncertainties.  We adopted the provisions of FIN 48 on January 1, 2007.  As a result of the adoption, we recognized no adjustment to the liability for income tax benefits that existed as of December 31, 2006.

It is our policy to recognize interest and penalties associated with underpayment of income taxes as interest expense and general and administrative expenses, respectively.  All of our unrecognized tax benefits may impact our effective tax rate if recognized.

We file income tax returns in the U.S. federal and various state and foreign jurisdictions.  The number of years that are open under the statute of limitations and subject to audit varies depending on the tax jurisdiction.  Our U.S. income tax returns for 2004 and subsequent years remain open to examination.

A reconciliation of the total amounts of unrecognized tax benefits follows:

               2008             2007

Total unrecognized tax benefits as of January 1, ………………………       ………$1,400          $1,051

    Increases (decreases) in unrecognized tax benefits as a result of:

                      Tax positions taken during a prior year…………………………………………       -                    -

        Tax positions taken during the current year…………………………………….     455              349

        Settlements with taxing authorities……………………………………………..       -                     -

        Lapse of applicable statute of limitations……………………………………….      -                     -

Total unrecognized tax benefits as of December 31, …………………………..        $1,855         $1,400

NOTE H – TRANSACTIONS WITH RELATED PARTIES

We own a 50% interest in RTI Logistics L.L.C. (“RTI”) (See Note M-Unconsolidated Entities on Page F-28).  At December 31, 2008, we had two long-term receivables of $1,940,000 and $310,000, respectively, due from RTI.  The long-term portion of both of these receivables is included in Due from Related Parties.  Interest income on the $1,940,000 receivable is earned at the rate of 5% per year for seven years.  A total of $25,000 was repaid in 2008 on this receivable.  Interest income on the $310,000 receivable is earned at the rate of 6% per year, and the receivable along with interest income is payable on demand.

We own a 49% interest in Terminales Transgolfo  (“TTG”) (See Note M- Unconsolidated Entities on Page F-28).  At December 31, 2008, we had a long-term receivable of $4,459,000 due from TTG.  The long-term portion of this receivable is included in Due from Related Parties.  Interest income on this receivable is earned at the rate of 7.65% per year for seven years.

               A son of one of our Directors serves as our Secretary and is a partner in, and member of the Board of Directors of, the law firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre, which has represented us since our inception.  Another son of one of our former Directors serves as our Assistant Secretary and is a partner in the same law firm and serves on their Board of Directors.  Fees paid to the firm for legal services rendered to us were approximately $1,099,000, $735,000, and $886,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  There were no amounts due to the legal firm at December 31, 2008 and $20,000 due at December 31, 2007, which was included in Accounts Payable and Accrued Liabilities.

NOTE I - COMMITMENTS AND CONTINGENCIES

Commitments

As of December 31, 2008, 23 vessels that we own or operate were committed under various contracts extending beyond 2008 and expiring at various dates through 2019.  Certain of these agreements also contain options to extend the contracts beyond their minimum terms.

Approximately $6,361,000 of our $35,000,000 line of credit is maintained to cover standby letters of credit required on certain of our contracts.

On September 21, 2007, our wholly-owned subsidiary, East Gulf Shipholding, Inc. (“EGS”), entered into a SHIPSALES contract to purchase one 6400 CEU Newbuilding PCTC. Upon signing of the agreement, East Gulf Shipholding paid an initial 20% installment of approximately $13.7 million. The next two installments of 10% each are due upon keel-laying of the Vessel and launching of the Vessel, both of which are projected to be due in 2009. The final payment of 60% is due upon delivery of the vessel, scheduled for 2010. The initial installment amount was recorded as Vessel, Property & Other Equipment on the balance sheet and will not begin depreciating until the vessel is placed in service.

Contingencies

In the normal course of our operations, we become involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries, and other matters.  While we believe that we have meritorious defenses against these claims, our management has used significant estimates in determining our potential exposure.  Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions.  It is reasonably possible that changes in our estimated exposure may occur from time to time.  As is true of all estimates based on historical experience, these estimates are subject to some volatility.  However, because our total exposure is limited by our aggregate stop loss levels (see Note E on Page F-17 for further discussion of our self-retention insurance program), we believe that our exposure is within our estimated levels.  Where appropriate, we have recorded provisions, included in Other Long-Term Liabilities: Other, to cover our potential exposure and recorded anticipated recoveries from insurance companies, included in Other Assets.  Although it is difficult to predict the costs of ultimately resolving such issues, we have determined that our current insurance coverage is sufficient to limit any additional exposure to an amount that would not be material to our financial position.  Therefore, we do not expect such changes in these estimates to have a material effect on our financial position or results of operations, although we cannot provide assurances to this effect.

We have been named as a defendant in numerous lawsuits claiming damages related to occupational diseases, primarily related to asbestos and hearing loss.  We believe that most of these claims are without merit, and that insurance and the indemnification of a previous owner of one of our subsidiaries may mitigate our exposure.  Our current overall exposure to the numerous lawsuits in question, after considering insurance coverage for these claims, has been estimated by our lawyers and internal staff to be approximately $280,000.  We believe those estimates are reasonable and have established reserves accordingly.  Our reserves for these lawsuits as of December 31, 2008 and 2007 were approximately $276,000 and $350,000, respectively.  There is a reasonable possibility that there will be additional claims associated with occupational diseases asserted against us. However, we do not believe that it is reasonably possible that our exposure from those claims will be material because (1) the lawsuits filed since 1989 claiming damages related to occupational diseases in which we have been named as a defendant have primarily involved seamen that served on-board our vessels and the number of such persons still eligible to file a lawsuit against us is diminishing and (2) we believe such potential additional claims, if pursued, would be covered under an indemnification agreement with a previous owner of one of our subsidiaries and/or under one or more of our existing insurance policies with deductibles ranging from $2,500 to $25,000 per claim.

F-10

NOTE J - LEASES

Direct Financing Leases

In 2007, we entered into a direct financing lease of a U.S. flag PCTC expiring in 2010; in 2005, we entered into a direct financing lease of a U.S. flag PCTC expiring in 2015; and, in 1999, we entered into a direct financing lease of a international flag PCTC expiring in 2019.  The schedule of future minimum rentals to be received by us under these direct financing leases in effect at December 31, 2008, is as follows:

	Receivables Under Financing Leases
(All Amounts in Thousands)
Year Ended December 31,
2009	$   17,528
2010	62,043
2011	13,096
2012	13,117
2013	13,097
Thereafter Total Minimum Lease Payments Receivable	46,955
	165,836
Estimated Residual Value of Leased Property	8,051
Less Unearned Income	(57,040)
Total Net Investment in Direct Financing Leases	116,847
Current Portion	(7,874)
Long-Term Net Investment in Direct Financing Leases at December 31, 2008	$  108,973

Operating Leases

As of December 31, 2008, the Company is obligated under certain operating leases for vessels and for office space. The Company is currently committed to leases for three vessels with terms expiring on July 2013, July 2016, and August 2017. The vessels under these leases are operated under fixed charter agreements covering the terms of the respective leases.

Our operating lease agreements have fair value renewal options and fair value purchase options.  Most of the agreements impose defined minimum working capital and net worth requirements, impose restrictions on the payment of dividends, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, except as defined.

The Mobile corporate office lease, which commenced on April 1, 2007, has a twenty year term with periodic graduating payments that are accounted for on a straight line basis. We incurred $730,000 in leasehold improvements and were provided with incentives in the amount of $1.4 million, both of which are amortized over the life of the lease with the incentives amortized as a credit to rent expense. In October 2008, the Company renewed its lease agreement on its New York office space under a ten year term with the first nine months as free rent and includes periodic graduating payments. The rent expense is amortized on a straight line basis. In addition, we expect to incur approximately $500,000 in leasehold improvements which will be amortized over the life of the lease. The Company also leases a Shanghai office, with the current term expiring in 2011.

In addition to those operating leases with terms expiring after December 31, 2008, we also operated certain vessels under short-term operating leases during 2008.

Rent expense related to all of our operating leases totaled approximately $33,837,000, $31,886,000 and $30,704,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  The following is a schedule, by year, of future minimum payments required under operating leases that have initial non-cancelable terms in excess of one year as of December 31, 2008:

	Payments Under Operating Leases
(All Amounts in Thousands)	U.S. Flag Vessels		International Flag Vessel		Other Leases		Total
Year Ended December 31,
2009	$	8,722	$	6,340	$	906	$	15,968
2010		8,203		6,340		919		15,462
2011		8,203		6,340		931		15,474
2012		8,203		6,340		931		15,474
2013		6,170		6,340		954		13,464
Thereafter		13,361		15,850		11,074		40,285
Total Future Minimum Payments	$	52,862	$	47,550	$	15,715	$	116,127

NOTE K - DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS

Deferred charges and acquired contract costs are comprised of the following:

	December 31,		December 31,
(All Amounts in Thousands)	2008		2007
Drydocking Costs	$	10,855	$	13,062
Financing Charges and Other		1,784		2,275
Acquired Contract Costs		1,819		3,274
	$	14,458	$	18,611

The Acquired Contract Costs represent the portion of the purchase price paid for Waterman Steamship Corporation applicable to that company’s three U.S. flag RO/RO vessels under maritime prepositioning ship contract agreements, which expire in 2009 and 2010.  The amortization expense for each of the years ended December 31, 2008 and 2007 was $1,455,000.  The estimated annual amortization expense is $1,455,000 for 2009 and $364,000 for 2010.

NOTE L - SIGNIFICANT OPERATIONS

Major Customers

We have several medium to long-term contracts related to the operations of various vessels (See Note I – Commitments and Contingencies on Page F-23), from which revenues represent a significant amount of our total revenue.  Revenues from the contracts with the MSC were $29,988,000, $32,387,000 and $31,796,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

We have six U.S. flag PCTCs, also under the MSP, five of which carry automobiles from Japan to the United States for a Japanese charterer, and one which carries for Far East charterers.  Revenues, including MSP revenue, were $50,208,000, $43,945,000 and $44,908,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

We have four international flag PCTCs under various contracts that transport automobiles from South Korea to the United States and Europe.  Revenues under these contracts were $26,065,000, $23,645,000 and $19,108,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

All of the aforementioned revenues are included in our Time Charter segment.

We have two Special Purpose vessels, which carry loaded rail cars between the U.S. Gulf and Mexico.  Revenues from this service were $39,410,000, $21,235,000 and $18,427,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  Revenues from these two Special Purpose vessels are included in our Rail-Ferry segment.

Concentrations

A significant portion of our traffic receivables is due from contracts with the MSC and transportation of government sponsored cargo.  There are no concentrations of receivables from customers or geographic regions that exceed 10% of stockholders’ investment at December 31, 2008 or 2007.

With only minor exceptions related to personnel aboard certain international flag vessels, all of our shipboard personnel are covered by collective bargaining agreements under multiple unions.  The percentage of the Company’s total work force that is covered by these agreements is approximately 78.2%.  One of these contracts representing 10% of our workforce expires on December 31, 2009.

Geographic Information

We have operations in several principal markets, including international service between U.S. Gulf and East Coast ports and ports in Mexico and the Far East, and domestic transportation services along the U.S. Gulf and East Coast.  Revenues attributable to the major geographic areas of the world are presented in the following table.  Revenues for our Time Charter Contracts, Contract of Affreightment, Rail-Ferry Service, and Other segments are assigned to regions based on the location of the customer.  Because we operate internationally, most of our assets are not restricted to specific locations.  Accordingly, an allocation of identifiable assets to specific geographic areas is not applicable.

	Year Ended December 31,
(All Amounts in Thousands)	2008		2007		2006
United States	$	154,068	$	122,641	$	114,820
Asian Countries		87,329		74,091		69,197
Rail-Ferry Service Operating Between U.S. Gulf and Mexico		39,410		21,235		18,427
Other Countries		1,094		146		1,054
Total Revenues	$	281,901	$	218,113	$	203,498

Operating Segments

Our operating segments are identified primarily based on the characteristics of the contracts or terms under which the fleet of vessels are operated.  Each of the reportable segments is managed separately as each requires different resources depending on the nature of the contract or terms under which each vessel within the segment operates.  Our operating segments are identified and described below.

Time Charter Contracts: Time charters are contracts by which our charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but we retain operating control over the vessel.  Typically, we fully equip the vessel and are responsible for normal operating expenses, repairs, crew wages, and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. Our Time Charter Contracts include contracts with Far Eastern shipping companies for ten PCTCs, with an electric utility for a conveyor-equipped, self-unloading Coal Carrier, and with a mining company providing ocean transportation services at its mine in Papua, Indonesia.  Also included in this segment are contracts under which the MSC charters three RO/ROs that are under an operating contract, and contracts with another shipping company for four container vessels.

Contract of Affreightment (“COA”):For this type of contract, we undertake to provide space on our vessel for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried.  Generally, we are responsible for all operating and voyage expenses.  Our COA segment includes one contract, which is for the transportation of molten sulphur.

 Rail-Ferry Service: This service uses our two Special Purpose vessels, which carry loaded rail cars between the U.S. Gulf and Mexico.  Each vessel currently has a capacity for 113 standard size rail cars.  With departures every four days from Coatzacoalcos, Mexico and the U.S. Gulf, it offers with each vessel a three-day transit between these ports and provides a total of 90 trips per year in each direction when both ships are operating.

Other:This segmentconsists of operations that include more specialized services than the above-mentioned three segments and ship charter brokerage and agency services.  Also included in the Other category are corporate related items, results of insignificant operations, and income and expense items not allocated to reportable segments.

The following table presents information about segment profit and loss and segment assets.  We do not allocate administrative and general expenses, gains or losses on sales of investments, investment income, gains or losses on early extinguishment of debt, equity in net income of unconsolidated entities, income taxes, or losses from discontinued operations to our segments.  Intersegment revenues are based on market prices and include revenues earned by our subsidiaries that provide specialized services to the operating segments.  Expenditures for segment assets represent cash outlays during the periods presented, including purchases of assets, improvements to assets, and drydock payments.

	Time Charter				Rail-Ferry
(All Amounts in Thousands)	Contracts		COA		Service			Other			Total
2008
Revenues from External Customers	$	218,805	$	19,195	$	39,410		$	4,491		$	281,901
Intersegment Revenues (Eliminated)		-		-		-			19,626			19,626
Intersegment Expenses (Eliminated)		-		-		-			(19,626	)		(19,626	)
Voyage Expenses		168,479		17,553		32,136			2,072			220,240
Depreciation and Amortization		21,499		977		6,016			45			28,537
Gross Voyage Profit		35,735		1,642		1,909			2,407			41,693
Interest Expense		4,803		-		1,502			581			6,886
Segment Profit		30,932		1,642		407			1,826			34,807
Segment Assets		227,821		3,933		67,470			27,155			326,380
Expenditures for Segment Assets		4,438		169		1,694			1,894			8,195
2007
Revenues from External Customers	$	178,336	$	16,652	$	21,235		$	1,890		$	218,113
Intersegment Revenues (Eliminated)		-		-		-			14,245			14,245
Intersegment Expenses (Eliminated)		-		-		-			(14,245	)		(14,245	)
Voyage Expenses		137,828		10,940		18,406			841			168,015
Depreciation and Amortization		23,231		2,046		5,223			601			31,101
Gross Voyage Profit (Loss)		25,198		4,100		(1,566	)		1,044			28,776
Interest Expense		7,122		625		2,172			(157	)		9,762
Gain on Sale of Other Asset		-		-		-			12			12
Segment Profit (Loss)		18,076		3,475		(3,738	)		1,213			19,026
Segment Assets		242,202		4,946		102,988			1,326			351,462
Expenditures for Segment Assets		32,620		3,932		12,630			16,700			65,882
2006
Revenues from External Customers	$	166,615	$	16,081	$	18,427		$	2,375		$	203,498
Intersegment Revenues (Eliminated)		-		-		-			13,582			13,582
Intersegment Expenses (Eliminated)		-		-		-			(13,582	)		(13,582	)
Voyage Expenses		124,289		9,522		19,734			1,967			155,512
Depreciation and Amortization		18,267		2,744		4,598			86			25,695
Impairment Loss		-		-		(8,866	)		-			(8,866	)
Gross Voyage Profit (Loss)		28,517		4,142		(14,002	)		397			19,054
Interest Expense		7,562		1,399		2,154			32			11,147
Segment Profit (Loss)		20,955		2,743		(16,156	)		365			7,907
Segment Assets		184,659		32,468		83,082			14,312			314,521
Expenditures for Segment Assets		6,990		-		16,429			6,812			30,231

In 2007, we elected to discontinue our U.S. flag LASH service and our International LASH service.  Those services were reported in the Liner Services segment in previous periods.  Financial information for all periods presented have been restated to remove the effects of those operations from the Liner Services segment to reflect the reclassification from continuing to discontinued operations.

Following is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements:

(All Amounts in Thousands)	Year Ended December 31,
Profit or Loss:	2008			2007			2006
Total Profit for Reportable Segments	$	34,807		$	19,026		$	7,907
Unallocated Amounts:
Administrative and General Expenses		(21,414	)		(18,158	)		(17,609	)
Gain on Sale of Investment		(148	)		352			23,058
Investment Income		525			2,592			1,397
(Loss) on Early Extinguishment of Debt		-			-			(248	)
(Loss) on Redemption of Preferred Stock		(1,371	)		-			-
Income from Continuing Operations Before (Benefit)
Provision for Income Taxes and Equity in Net
Income of Unconsolidated Entities	$	12,399		$	3,812		$	14,505

	December 31,		December 31,
Assets:	2008		2007
Total Assets for Reportable Segments	$	326,380	$	351,462
Unallocated Amounts:
Current Assets		90,305		61,843
Investment in Unconsolidated Entities		5,803		16,326
Due from Related Parties		6,195		5,897
Other Assets		5,428		5,127
Total Assets	$	434,111	$	440,655

F-11

NOTE M - UNCONSOLIDATED ENTITIES

Bulk Carriers

In 2003, we acquired a 50% investment in Dry Bulk Cape Holding Inc. (“Dry Bulk”) for $3,479,000, which owns 100% of subsidiary companies currently owning two Capesize Bulk Carriers, one Panamax Bulk Carriers and two Handymax Bulk Carrier Newbuildings on order for delivery in 2012.  This investment is accounted for under the equity method and our share of earnings or losses is reported in our consolidated statements of income net of taxes.  For the years ended December 31, 2008, 2007 and 2006, our portions of earnings net of taxes were $21,239,000, $6,659,000 and $4,131,000, respectively.  We received dividends of $31,500,000, $4,400,000 and $800,000 in 2008, 2007 and 2006, respectively. The 2008 amount included a cash distribution for our share of the proceeds from Dry Bulk’s subsidiary company’s sale of a Panamax Bulk Carrier in the amount of $25.5 million in July 2008.

The unaudited condensed financial position and results of operations of Dry Bulk are summarized below:

	December 31,		December 31,
(Amounts in Thousands)	2008		2007
Current Assets	$	5,700	$	6,783
Noncurrent Assets		95,049		119,129
Current Liabilities		1,709		525
Noncurrent Liabilities		95,712		102,146

	Year Ended December 31,
(Amounts in Thousands)	2008		2007		2006
Operating Revenues	$	25,682	$	30,778	$	25,174
Operating Income		14,249		18,959		13,846
Net Income		42,129		12,699		7,089

Terminal Management Company

In 2000, we acquired a 50% interest in Terminales Transgolfo (“TTG”) for $228,000, which operates a terminal in Coatzacoalcos, Mexico, utilized by our Rail-Ferry Service.  During 2005, the other unaffiliated 50% owner of TTG acquired 1% of our 50% interest in TTG.   As of December 31, 2008, we have a 49% interest in TTG.  In 2006, TTG began making improvements to the terminal in Mexico to accommodate the second decks that were added to the two vessels operating in our Rail-Ferry Service during the first half of 2007.  We are funding 49% of the cost of the terminal improvements, of which 30% is a capital contribution and is reported as an investment in unconsolidated entities.  The remaining 70% is a loan to TTG (see Note H-Transactions with Related Parties on Page F-23).  During the years ended December 31, 2008, 2007 and 2006, we made capital contributions of $120,000, $1,004,000 and $950,000 respectively, associated with funding improvements to the terminal.  The investment is accounted for under the equity method, and our share of earnings or losses is reported in our consolidated statements of income net of taxes.  No distributions were made by TTG during 2008, 2007 and 2006.  As of December 31, 2008 and 2007, TTG owed us $4,459,000 and $4,181,000, respectively. (See Note H- Transactions with Related Parties on Page F-23).

Transloading and Storage Facility Company

In 2005, we acquired a 50% interest in RTI Logistics L.L.C. (“RTI”), which owns a transloading and storage facility that was used in our Rail-Ferry Service, for $1,587,000.  We purchased our shares from a former owner at a premium, which resulted in a difference of approximately $973,000 between our investment in RTI and the underlying equity in net assets of the subsidiary.  Additional investments of approximately $386,000 were made in 2006. The investment is accounted for under the equity method, and our share of earnings or losses is reported in our consolidated statements of income net of taxes.  The Company’s interest in the earnings from the date of this investment through December 31, 2008, was immaterial.  No distributions were made by RTI during 2008, 2007 and 2006.  We have also loaned funds to RTI, and as of December 31, 2008 and 2007, RTI owed us $2,250,000 and $2,275,000, respectively (See Note H- Transactions with Related Parties on Page F-23).

NOTE N - SUPPLEMENTAL CASH FLOW INFORMATION

	Year Ended December 31,
(All Amounts in Thousands)	2008		2007		2006
Cash Payments:
Interest Paid	$	7,589	$	9,874	$	10,949
Taxes Paid		597		528		557

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES

The estimated fair values of our financial instruments and derivatives are as follows (asset/ (liability)):

             December 31,                                                                                                                                December 31,

                                 2008                       &# 160;             2007                     

	Carrying	Fair	Carrying	Fair
(All Amounts in Thousands)	Amount	Value	Amount	Value
Interest Rate Swap Agreements	($10,746)	($10,746)	($1,428)	($1,428)
Foreign Currency Contracts	($1,290)	($1,290)	($2)	($2)
Long-Term Debt	($140,126)	($140,126)	($143,204)	($143,204)

Disclosure of the fair value of all balance sheet classifications, including but not limited to certain vessels, property, equipment, direct financing leases, or intangible assets, which may have a fair value in excess of historical cost, is not required.  Therefore, this disclosure does not purport to represent the Company’s fair value.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Interest Rate Swap Agreements

We enter into interest rate swap agreements to manage well-defined interest rate risks. The Company records the fair value of the interest rate swaps as an asset or liability on its balance sheet. The Company’s interest rate swaps are accounted for as effective cash flow hedges,. Accordingly, the effective portion of the change in fair value of the swap is recorded in Other Comprehensive Income (Loss). As of December 31, 2008, the Company has the following swap contracts outstanding:

Effective Date	Termination Date	Current Notional Amount	Swap Rate	Type
9/18/07	9/10/10	¥4,659,090,910	1.15%	Fixed
9/28/07	9/30/10	$17,264,333	4.68%	Fixed
12/31/07	9/30/10	$17,264,333	3.96%	Fixed
11/30/05	11/30/12	$13,615,000	5.17%	Fixed
3/31/08	9/30/13	$17,264,333	3.46%	Fixed
9/30/10	9/30/13	$12,908,000	2.69%	Fixed
9/30/10	9/30/13	$12,908,000	2.45%	Fixed
9/26/05	9/28/15	$11,666,667	4.41%	Fixed
9/26/05	9/28/15	$11,666,667	4.41%	Fixed
3/15/09	9/15/20	¥ 6,200,000,000	2.065%	Fixed

Foreign Currency Contracts

We enter into forward exchange contracts to hedge certain firm purchase and sale commitments denominated in foreign currencies.  The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar cash inflows or outflows resulting from revenue collections from foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates.  The term of the currency contracts is rarely more than one year.  Our foreign currency contracts are accounted for  as effective cash flow hedges. Accordingly, the effective portion of the change in fair value is recorded in Other Comprehensive Income (Loss).

During 2007, we entered into five forward purchase contracts. Four contracts were for Mexican Pesos, the first of these was for $600,000 U.S. Dollar equivalents beginnings in July of 2007 that expired in December of 2007, the second contract was for $3,000,000 U.S. Dollar equivalents with a delivery basis of a monthly window, the third contract was for $450,000 U.S. Dollar equivalents beginning in July of 2007 that expired in December of 2007, and the fourth contract was for $1,800,000 U.S. Dollar equivalents beginning in January of 2008 that expired in December of 2008. The other contract was for Indonesian Rupiah for $3,420,000 U.S. Dollar equivalents beginning in January of 2008 that expired in December of 2008.

During 2008, we entered into six forward purchase contracts. Four contracts were for Mexican Pesos, the first of these was for $1,500,000 U.S. Dollar equivalents beginning in January of 2009 that expires in October of 2009, the second contract was for $750,000 U.S. Dollar equivalents beginning in January 2009 that expires in October of 2009, the third contract was for $450,000 U.S. Dollar equivalents beginning in November of 2009 that expires in December of 2009 and the fourth contract was for $900,000 U.S. Dollar equivalents beginning in January of 2009 that expires in December of 2009. The other two contracts were for Indonesian Rupiah, one for $2,100,000 U.S. Dollar equivalents beginning in January of 2009 that expires in December of 2009, and the second contract was for $1,500,000 U.S. Dollar equivalents beginning in January of 2009 that expires in December of 2009. There were no forward sales contracts as of December 31, 2008 or 2007.

Long-Term Debt

The fair value of our debt is estimated based on the current rates offered to us on outstanding obligations.

Amounts Due from Related Parties

The carrying amount of these notes receivable approximated fair market value as of December 31, 2008 and 2007.  Fair market value takes into consideration the current rates at which similar notes would be made.

Marketable Securities

We have categorized all marketable securities as available-for-sale.  The following table shows the cost basis, fair value and unrealized gains or losses recorded to Accumulated Other Comprehensive Income (Loss) for each security type at December 31, 2008 and 2007.

(All Amounts in Thousands)	December 31, 2008
Security Type	Cost Basis		Fair Value		Unrealized Gain (Loss) Net of Taxes
Equity Securities	$	3,570	$	2,707	$	(597	)
	$	3,570	$	2,707	$	(597	)
	December 31, 2007
Security Type	Cost Basis		Fair Value		Unrealized Gain (Loss) Net of Taxes
Equity Securities	$	3,708	$	4,090	$	247
Corporate Debt Securities		1,477		1,488		4
	$	5,185	$	5,578	$	251

We evaluate our investments periodically for possible other-than temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the investment for a period of time sufficient for anticipated recovery of market value.  Based on our evaluation at December 31, 2008, we recognized an other-than-temporary impairment charge of $369,000 on available-for-sale securities.  The charge primarily related to investments in financial institutions whose market values have been materially impacted by current economic conditions.  The charge represents approximately 14% of our  investment in marketable securities at December 31, 2008.

NOTE P - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Following are the components of the consolidated balance sheet classification Accounts Payable and Accrued Liabilities:
	December 31,		December 31,
(All Amounts in Thousands)	2008		2007
Accrued Voyage Expenses	$	11,294	$	15,454
Trade Accounts Payable		6,985		2,676
Lease Incentive Obligation		2,955		2,876
Short Term Derivative Liability		1,290		-
Self-Insurance Liability		1,754		1,880
Accrued Salaries and Benefits		1,904		59
Other Accrued Expenses		332		601
	$	26,514	$	23,546

F-12

NOTE Q – DISCONTINUED OPERATIONS

The Company decided in the fourth quarter of 2006 to dispose of certain LASH Liner Service assets.  The decision was based on the belief that we could generate substantial cash flow and profit on the disposition of the assets, while improving our future operating results.  Accordingly, we sold our LASH Feeder vessel and 114 barges in the first quarter of 2007.  In the second quarter of 2007, the company sold the one remaining U.S. flag LASH vessel and 111 LASH barges.  In the third quarter of 2007, the company elected to discontinue its International LASH service by the end of 2007.  The one remaining LASH vessel and the remaining barges were sold in the first quarter of 2008.

Our U.S. flag LASH service and International LASH service were reported in “Continuing Operations” as a part of our Liner segment in periods prior to June 30, 2007.  Our financial statements have been restated to remove the effects of those operations from “Continuing Operations”.

Revenues associated with these operations for the years ended December 31, 2008, 2007 and 2006 were $220,000, $42,005,000 and $89,417,000, respectively.

NOTE R - QUARTERLY FINANCIAL INFORMATION - (Unaudited)
	(All Amounts in Thousands Except Share Data)	Quarter Ended
		March 31		June 30			Sept. 30			Dec. 31
2008	Revenues	$	63,705	$	61,149		$	84,349		$	72,698
	Expenses		57,189		53,961			67,849			61,209
	Gross Voyage Profit		6,516		7,188			16,500			11,489
	Income from Continuing Operations		217		18,025			11,191			4,790
	Net Income (Loss) from Discontinued Operations		4,597		(9	)		119			120
	Net Income Available to Common Stockholders		4,726		18,016			11,310			4,910
	Basic and Diluted Earnings per Common Share:
	Net Income Available to Common Stockholders-Basic
	Continuing Operations		0.02		2.38			1.55			0.67
	Discontinued Operations		0.63		0.00			0.02			0.02
	Net Income Available to Common Stockholders-Diluted
	Continuing Operations		0.02		2.37			1.54			0.66
	Discontinued Operations		0.58		0.00			0.02			0.02
2007	Revenues	$	50,277	$	57,102		$	54,307		$	56,427
	Expenses		44,163		49,068			46,885			49,221
	Gross Voyage Profit		6,114		8,034			7,422			7,206
	Income from Continuing Operations		1,889		2,983			3,433			3,487
	Net (Loss) Gain from Discontinued Liner Service		2,851		3,970			(1,116	)		(81	)
	Net Income Available to Common Stockholders		4,140		6,353			1,717			2,806
	Basic and Diluted Earnings (Loss) per Common Share:
	Net Income (Loss) Available to Common Stockholders
	Continuing Operations		0.21		0.38			0.43			0.44
	Discontinued Operations		0.47		0.63			(0.17	)		(0.01	)
	Net Income (Loss) Available to Common Stockholders-Diluted
	Continuing Operations		0.23		0.36			0.40			0.41
	Discontinued Operations		0.35		0.48			(0.13	)		(0.01	)

NOTE S – EARNINGS PER SHARE

The calculation of basic and diluted earnings per share is as follows (in thousands except share amounts):

	Year Ended December 31,
	2008		2007		2006
Numerator
Net Income (Loss) Available to Common  Stockholders – Basic
Continuing *	$	34,135	$	9,392	$	15,794
Discontinued		4,827		5,624		(1,146	)
	$	38,962	$	15,016	$	14,648
Net Income (Loss) – Diluted
Continuing	$	34,223	$	11,792	$	18,194
Discontinued		4,827		5,624		(1,146	)
	$	39,050	$	17,416	$	17,048
Denominator
Weighted Average Shares of Common Stock Outstanding:
Basic		7,314,216		6,360,208		6,116,036
Plus:
Effect of dilutive restrictive stock		22,341		-		-
Effect of dilutive stock options		-		9,265		6,542
Effect of dilutive convertible shares from preferred stock		165,000		2,000,000		2,000,000
Diluted		7,501,555		8,369,473		8,122,578
Basic and Diluted Earnings Per Common Share
Net Income (Loss) Available to Common
Stockholders – Basic
Continuing Operations	$	4.67	$	1.48	$	2.58
Discontinued Operations		0.66		0.88		(0.18	)
	$	5.33	$	2.36	$	2.40
Net Income (Loss) Available to Common
Stockholders – Diluted
Continuing Operations	$	4.56	$	1.41	$	2.24
Discontinued Operations		0.64		0.67		(0.14	)
	$	5.20	$	2.08	$	2.10
* Income (Loss) from Continuing Operations less Preferred Stock Dividends

NOTE T - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other Comprehensive Income (Loss) is comprised of the following, net   of tax:
		December 31,
		2008	2007
	Unrealized gains (losses) on marketable securities	$                                           (597)	$                                             251
	Fair value of derivatives	(10,997)	(1,189)
	Funding status of benefit plans	(5,254)	(1,034)
		$                                     (16,848)	$                                       (1,972

NOTE U – STOCK BASED COMPENSATION

A summary of the activity for restricted stock awards during the year ended December 31, 2008 is as follows:

	Shares	Weighted Average Fair Value Per Share
Non-vested – January 1, 2008	-	-
Shares Granted	175,000	$18.40
Shares Vested	-	-
Shares Forfeited	-	-
Non-vested – December 31, 2008	175,000	$18.40

The following table summarizes the amortization of compensation cost, which we will include in administrative and general expenses, relating to all of the Company’s restricted stock grants as of December 31, 2008:

Grant Date	2009	2010	2011	2012	Total
April 30, 2008	$1,135,000	$  894,000	$    401,000	$    33,000	$3,220,000

For the year ended December 31, 2008, the Company’s income before taxes and net income included $757,000 and $492,000, respectively, of stock-based compensation expense charges, while basic and diluted earnings per share were each charged $0.07 per share.  There was no stock compensation expense during 2007 or 2006.

NOTE V – STOCK REPURCHASE PROGRAM

On January 25, 2008, the Company’s Board of Directors approved a share repurchase program for up to a total of 1,000,000 shares of the Company’s common stock. We expect that any share repurchases under this program will be made from time to time for cash in open market transactions at prevailing market prices. The timing and amount of any purchases under the program will be determined by management based upon market conditions and other factors. Purchases may be made pursuant to a program we have adopted under Rule 10b5-1 of the Securities Exchange Act.  Through the year ended December 31, 2008, we repurchased 491,572 shares of our common stock for $11.5 million.  Unless and until the Board otherwise provides, this program will remain open, or until we reach the 1,000,000 share limit.

NOTE W -  FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted the provisions of SFAS No. 157, "Fair Value Measurements," for financial assets and financial liabilities.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Under SFAS 157, the price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, and (iii) able and willing to complete a transaction.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

w      Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

w      Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (including interest rates, volatilities, prepayment speeds, credit risks) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 w   Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following table summarizes our financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(Amounts in thousands)	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Marketable securities	$	2,707	$	-		$	-	$	2,707
Derivative liabilities		-		(12,036	)		-		(12,036	)

NOTE X -  CHANGES IN ACCOUNTING ESTIMATE

In the first quarter of 2008, we adjusted the salvage value on our two container vessels and on our U.S. flag Coal Carrier.  We based this decision on expected future market values for scrap steel and the relatively short remaining economic life of those three vessels.  By reducing our depreciation expense, this adjustment increased our net income for the year ended December 31, 2008 by $2.7 million or $.36 per share.  The container vessels will be fully depreciated by the end of 2009 and the U.S. flag Coal Carrier by January of 2011.

F-13