NOTE 2 — COMPANY INQUIRY AND RESTATEMENT:

In October 2012, at the request and under the direction of the audit committee of the board of directors of the Company (the “Audit Committee”) the Company, with the assistance of counsel, commenced an inquiry into the Company’s provision for United States (“U.S.”) federal income taxes in light of certain provisions contained in the Company’s Unsecured Revolving Credit Facility scheduled to mature on February 8, 2013 and certain predecessor credit facilities (the “Credit Facilities”). In connection with the inquiry process, on October 19, 2012, the Audit Committee, on the recommendation of management, concluded that the Company’s previously issued financial statements for at least the three years ended December 31, 2011 and associated interim periods, and for each of the quarters ended March 31, 2012 and June 30, 2012, should no longer be relied upon. Upon completion of the inquiry, it was determined that there were errors in the Company’s previously issued financial statements for each of the years in the twelve year period ended December 31, 2011 (including the interim periods within those years), and for each of the calendar quarters ended March 31, 2012 and June 30, 2012, and such financial statements should be restated.

Specifically, because OSG International, Inc. (“OIN”), a wholly-owned subsidiary of the Company incorporated in the Marshall Islands, was a co-obligor with OSG and OSG Bulk Ships, Inc. (“OBS”), a wholly-owned subsidiary of the Company incorporated in the U.S., on a joint and several basis for amounts drawn under the Credit Facilities, the Company determined that OIN could be deemed under Section 956 of the U.S. Internal Revenue Code (“Section 956”) to have made taxable distributions to OSG for each taxable year in which such joint and several liability existed. Under the relevant tax rules, the amount of any deemed distributions for any taxable year that would be considered taxable income as a result of this issue generally (and subject to certain complex variables) would be determined by reference to the excess of: (i) the average of the quarter-end outstanding balances under the Credit Facilities for that year, over (ii) the average of the quarter-end balances for prior years, plus any other amounts that might have given rise to deemed distributions for prior years. In the case of OIN and OSG, this calculation could produce an aggregate amount of up to $1,317,500 of earnings deemed repatriated from OIN though the end of 2012 as a result of drawdowns under the Credit Facilities, although the final determination of the amount will depend upon several interrelated issues that have yet to be settled with the Internal Revenue Service (“IRS”). Furthermore, the Company determined that it had not properly accounted for the tax consequences of intercompany balances that have existed between domestic and international entities within the Company. The Company determined that, due to insufficient processes to identify and evaluate adequately the income tax accounting impact of Section 956 to certain intercompany balances, these intercompany balances could be deemed under Section 956 to have been taxable distributions to OSG in the years in which such balances existed. This resulted in the Company recording deemed dividend income aggregating $77,000 for taxable years 2012 and earlier. The Company’s financial statements for years prior to 2012 and for each of the quarters ended March 31, 2012 and June 30, 2012 did not properly take account of these issues and, therefore, these errors caused the financial statements to be misstated.

The IRS has asserted a number of other adjustments to the Company’s taxable income. These adjustments represent an additional $234,853 of asserted taxable income across taxable years 2009 and earlier. The Company disagrees with several of the IRS’s asserted adjustments and intends to dispute them vigorously. In some cases, the asserted adjustments, including certain adjustments resulting from intercompany balances described in the previous paragraph, interrelate with the calculation of any deemed dividends under Section 956 described above in a way that may reduce the amount of deemed dividends if the IRS’s asserted adjustments are sustained.

The Company believes, based on its analysis and its interactions with the IRS to date, that the actual amount of tax that the Company ultimately will be required to pay to the IRS in respect of the potential deemed dividends and other adjustments discussed above will be significant and could be as high as $460,000, or potentially higher, for all periods ending on or before December 31, 2012, not taking in account any potential penalties but including interest. However, the Company has several defenses available to mitigate its liability and intends to assert those defenses vigorously. The IRS has filed proofs of claim against the Company in its Chapter 11 proceedings in the aggregate liquidated amount of $463,013 that the Company believes are in respect of these issues, but no agreement has been made in respect of these claims. See Note 14, “Taxes,” for additional information with respect to amounts reflected in the financial statements as of December 31, 2012.

In addition to giving rise to a current tax liability, the potential deemed dividends from OIN in connection with the Credit Facilities (which effectively would treat OIN as having already repatriated significant earnings for U.S. tax purposes) have required the Company to reassess its intent and ability to permanently reinvest earnings from foreign shipping operations accumulated through December 31, 2012. As a result, the Company has concluded that, as of December 31, 2000 and at each subsequent year end through December 31, 2011, it could not assert its intent to permanently reinvest OIN’s earnings to the extent these earnings could be deemed repatriated as a result of OIN’s joint and several liability under the Credit Facilities, as discussed above. See Note 14 for information with respect to undistributed earnings that are still considered to be permanently reinvested in foreign operations on which U.S. income taxes have not been recognized.

For purposes of its financial statements as of December 31, 2012, the Company has recorded reserves related to the tax effects of the cumulative potential deemed dividends (1) in connection with the Credit Facilities based on a deemed repatriation of $1,194,150 of foreign earnings and (2) related to intercompany balances resulting in the inclusion of $77,000 of foreign earnings in taxable income. The potential deemed repatriation amount of $1,194,150 is derived from the aggregate amount of $1,317,500, discussed above, reduced to take account of certain defenses available to the Company that the Company believes are more- likely-than-not to be successful. The Company also has recorded a deferred tax liability of $103,388 for the tax effects of unremitted earnings of foreign subsidiaries, which reflects amounts that may be included in taxable income as deemed dividends for taxable year 2013 and future years.

The Company is also restating the accompanying consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations, comprehensive loss, changes in equity and cash flows for the year ended December 31, 2011 to reflect the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees. The credit risk valuation adjustments were incorrectly estimated without giving consideration to the credit enhancements that were contractually linked to the obligations under such contracts for the year ended December 31, 2011 and for the quarters ended March 31, 2012 and June 30, 2012. Such error overstated the investments in affiliated Companies by $19,015 and retained earnings by $1,499 and understated net loss by $1,499 and accumulated other comprehensive loss by $17,516 as of and for the year ended December 31, 2011.The appropriate estimation of the credit risk valuation adjustments has been applied within the consolidated financial statements for the year ended December 31, 2012.

The following tables present the effects of the correction of the errors described above that have been made to the Company’s previously reported consolidated balance sheet as of December 31, 2011 and the Company’s previously reported consolidated statements of operations and consolidated cash flows from operating activities for the years ended December 31, 2011 and 2010 and the Company’s previously reported consolidated statement of comprehensive loss for the year ended December 31, 2011 and opening retained earnings as of January 1, 2010.

	As of December 31, 2011
	As Previously
	Reported		Adjustment			As Restated

ASSETS
Current Assets:
Cash and cash equivalents	$	54,877				$	54,877
Voyage receivables		168,313					168,313
Income taxes recoverable		27,365	$	(21,924)	(a)		5,441
Other receivables		24,972		135	(a)		25,107
Inventories		19,219					19,219
Prepaid expenses and other current assets		47,401					47,401
Total Current Assets		342,147		(21,789)			320,358
Vessels and other property, less accumulated depreciation		3,226,923					3,226,923
Deferred drydock expenditures, net		66,023					66,023
Total Vessels, Deferred Drydock and Other Property		3,292,946					3,292,946
Investments in Affiliated Companies		251,385		(19,015)	(c)		232,370
Intangible Assets, less accumulated amortization		77,158					77,158
Goodwill		9,589					9,589
Other Assets		61,124					61,124
Total Assets	$	4,034,349	$	(40,804)		$	3,993,545

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	125,111	$	(368)	(b)	$	124,743
Income taxes payable		-		368	(b)		368
Current installments of long-term debt		14,990					14,990
Total Current Liabilities		140,101		-			140,101
Reserve for Uncertain Tax Positions		4,804		318,599	(a)(d)		323,403
Long-term Debt		2,050,902					2,050,902
Deferred Gain on Sale and Leaseback of Vessels		11,051					11,051
Deferred Income Taxes		203,129		193,550	(e)		396,679
Other Liabilities		69,117					69,117
Total Liabilities		2,479,104		512,149			2,991,253
Equity:
Common stock		44,291					44,291
Paid-in additional capital		413,016					413,016
Retained earnings		2,040,031		(535,437)	(f)		1,504,594
		2,497,338		(535,437)			1,961,901
Cost of treasury stock		840,302					840,302
		1,657,036		(535,437)			1,121,599
Accumulated other comprehensive loss		(101,791)		(17,516)	(c)		(119,307)
Total Equity		1,555,245		(552,953)			1,002,292
Total Liabilities and Equity	$	4,034,349	$	(40,804)		$	3,993,545

(a)	To adjust income taxes recoverable to reflect the reserve for uncertain tax positions.

(b)	To reclassify $ 368 to conform to 2012 balance sheet presentation of tax accounts.

(c)

To adjust for the cumulative overstatement in investments in affiliated companies and accumulated other comprehensive loss resulting from the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.

(d)	To record a reserve for the tax liability of uncertain tax positions, primarily resulting from deemed dividends by OIN and relating to intercompany balances as described in Note 2.

(e)	To adjust the deferred income tax liability for the tax effects of unremitted earnings of foreign subsidiaries, to reflect the utilization of net operating loss carryforwards to offset the deemed distributions by OIN, and to establish a deferred tax asset for the benefit of accrued interest.

(f)

To record cumulative reductions to retained earnings of $1,499 relating to the credit valuation error described above and of $533,938 resulting primarily from the errors relating to the Company’s assertion concerning its intent and ability to permanently reinvest earnings from foreign shipping operations accumulated through December 31, 2011.

	For the year ended December 31, 2011
	As Previously
	Reported		Adjustments			As Restated
Shipping Revenues:
Pool revenues	$	245,028				$	245,028
Time and bareboat charter revenues		267,159					267,159
Voyage charter revenues		537,344					537,344
		1,049,531					1,049,531
Operating Expenses:
Voyage expenses		259,330					259,330
Vessel expenses		287,610					287,610
Charter hire expenses		383,940					383,940
Depreciation and amortization		179,721					179,721
General and administrative		83,178					83,178
Gain on disposal of vessels, including impairments		(2,060)					(2,060)
Total Operating Expenses		1,191,719					1,191,719
Loss from Vessel Operations		(142,188)					(142,188)
Equity in Income of Affiliated Companies		22,054	$	(1,499)	(a)		20,555
Operating Loss		(120,134)		(1,499)			(121,633)
Other Income		2,154					2,154
Loss before Interest Expense and Taxes		(117,980)		(1,499)			(119,479)
Interest Expense		(79,898)					(79,898)
Loss before Income Taxes		(197,878)		(1,499)			(199,377)
Income Tax Benefit/(Provision)		4,962		(6,948)	(b)		(1,986)
Net Loss	$	(192,916)	$	(8,447)		$	(201,363)

Earnings per share:
Basic	$	(6.39)	$	(0.28)		$	(6.67)
Diluted	$	(6.39)	$	(0.28)		$	(6.67)
Cash dividends declared	$	1.53				$	1.53

Weighted Average Number of Common Shares Outstanding:
Basic		30,228,441					30,228,441
Diluted		30,228,441					30,228,441

	(a)	To adjust for the overstatement in equity in income of affiliated companies resulting from the correction of an error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.

(b)

To adjust for the understatement in the income tax provision benefit primarily related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to the reserve for uncertain tax positions offset by the reversal of the originally recorded valuation allowance.

	For the year ended December 31, 2010
	As Previously
	Reported		Adjustments			As Restated
Shipping Revenues:
Pool revenues	$	355,915				$	355,915
Time and bareboat charter revenues		276,636					276,636
Voyage charter revenues		413,059					413,059
		1,045,610					1,045,610

Operating Expenses:
Voyage expenses		192,332					192,332
Vessel expenses		265,251					265,251
Charter hire expenses		369,667					369,667
Depreciation and amortization		170,670					170,670
General and administrative		100,424					100,424
Shipyard contract termination recoveries		(2,061)					(2,061)
Loss on disposal of vessels, including impairments		28,622					28,622
Total Operating Expenses		1,124,905					1,124,905
Loss from Vessel Operations		(79,295)					(79,295)
Equity in Income of Affiliated Companies		3,593					3,593
Operating Loss		(75,702)					(75,702)
Other Income		1,047					1,047
Loss before Interest Expense and Taxes		(74,655)					(74,655)
Interest Expense		(67,044)					(67,044)
Loss before Income Taxes		(141,699)					(141,699)
Income Tax Benefit		7,456	$	11,701	(a)		19,157
Net Loss	$	(134,243)	$	11,701		$	(122,542)

Earnings per share:
Basic	$	(4.55)	$	0.40		$	(4.15)
Diluted	$	(4.55)	$	0.40		$	(4.15)
Cash dividends declared	$	1.75				$	1.75

Weighted Average Number of Common Shares Outstanding:
Basic		29,498,127					29,498,127
Diluted		29,498,127					29,498,127

(a)

To adjust the income tax benefit primarily related to the reversal of the originally recorded valuation allowance, changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions.

	For the year ended December 31, 2011
	As Previously Reported		Adjustments			As Restated

Net Loss	$	(192,916)	$	(8,447)	(a)	$	(201,363)
Other Comprehensive (Loss)/Income, net of tax:
Net change in unrealized holding losses on available-for-sale Securities		(231)					(231)
Net change in unrealized losses on cash flow hedges		(17,152)		(17,516)	(b)		(34,668)
Defined benefit pension and other postretirement benefit plans:
Net change in unrecognized transition obligation		(29)					(29)
Net change in unrecognized prior service costs		(968)					(968)
Net change in unrecognized actuarial losses		(6,523)					(6,523)
Other Comprehensive Loss		(24,903)		(17,516)			(42,419)
Comprehensive Loss	$	(217,819)	$	(25,963)		$	(243,782)

(a)

To adjust for the understatement of the net loss resulting from (1) the $1,499 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees and (2) the $6.948 understatement in the income tax provision primarily related to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions offset by the reversal of the originally recorded valuation allowance.

(b)

To adjust for the understatement of other comprehensive loss resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees.

The restatements did not affect total net cash flows from operating, investing or financing activities for the years ended December 2010 and 2011 or any prior period. However, the following components of total cash flows from operating activities have been restated as follows:

	For the year ended December 31, 2011
	As Previously Reported		Adjustments			As Restated

Net Loss	$	(192,916)	$	(8,447)	(a)	$	(201,363)
Items included in net loss not affecting cash flows:
Deferred income tax benefit		(4,667)		(24,969)	(b)		(29,636)
Undistributed earnings of affiliated companies		(9,127)		1,499	(c)		(7,628)
Changes in operating assets and liabilities:
Decrease/(increase) in receivables		33,808		(41,276)	(b)		(7,468)
Net change in prepaid items and accounts payable, accrued expenses and other current and long term liabilities		(12,228)		73,193	(b)		60,965

(a)

To adjust for the understatement of the net loss resulting from (1) the $1,499 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees and (2) the $6,948 understatement in the income tax provision relating to changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions offset by the reversal of the originally recorded valuation allowance.

(b)

To adjust for the understatement of the deferred tax benefit, the overstatement of income taxes recoverable which is a component of receivables, and the understatements of income taxes payable and reserve for uncertain tax positions.

(c)

To adjust undistributed earnings of affiliated companies for the $1,499 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuation adjustments associated with the fair valuation of the interest rate swap derivative contracts of certain of the Company’s equity method investees .

	For the year ended December 31, 2010
	As Previously Reported		Adjustments			As Restated

Net Loss	$	(134,243)	$	11,701	(a)	$	(122,542)
Items included in net loss not affecting cash flows:
Deferred income tax benefit		(10,176)		(6,938)	(b)		(17,114)
Changes in operating assets and liabilities:
Net change in prepaid items and accounts payable, accrued expenses and other current and long term liabilities		(34,766)		(4,763)	(b)		(39,529)

	(a)	To adjust for the understatement in the income tax benefit related to the reversal of the originally recorded valuation allowance, changes in reserves for uncertain tax positions and the after-tax effect of accrued interest related to reserves for uncertain tax positions.
	(b)	To adjust for the understatements of the deferred tax benefit, income taxes payable and the reserve for uncertain tax positions.

The following table provides a reconciliation of retained earnings, as previously reported and as restated, at December 31, 2009.

Retained earnings at December 31, 2009, as previously reported	$	2,465,949

Tax adjustments
Year ended December 31, 2000		(122,500)
Year ended December 31, 2001		(36,364)
Year ended December 31, 2002		12,919
Year ended December 31, 2003		(23,405)
Year ended December 31, 2004		(7,317)
Year ended December 31, 2005		(18,342)
Year ended December 31, 2006		(337,404)
Year ended December 31, 2007		(46,193)
Year ended December 31, 2008		43,130
Year ended December 31, 2009		(3,215)
Cumulative adjustment to retained earnings as of December 31, 2009		(538,691)
Retained earnings at December 31, 2009, as restated	$	1,927,258