Note 2 — Company Inquiry and Restatement:

As discussed in the 2012 Form 10-K, 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, conducted 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 in June 2013, 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 through 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 into 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 11, “Taxes,” of this Quarterly Report on Form 10-Q and Note 14, “Taxes,” of the Annual Report on Form 10-K for 2012, for additional information with respect to amounts reflected in the financial statements as of December 31, 2012.

In addition to giving rise to a 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, 2012, 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 11 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 as of December 31, 2012 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.

Such tax related errors:

	·	understated both the income tax provision and the comprehensive loss by $1,875 for the three month period ended March 31, 2012;
	·	overstated income taxes recoverable (a component of other receivables) by $21,434; understated the noncurrent portion of the reserve for uncertain tax positions by $323,003; and understated noncurrent deferred income taxes by $191,376, each as of March 31, 2012; and
	·	overstated total equity by $535,813 as of March 31, 2012.

The Company is restating, and also restated in the 2012 Form 10-K, the accompanying condensed consolidated statements of operations, comprehensive loss, changes in equity and cash flows for the three months ended March 31, 2012 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 $23,298 and retained earnings by $1,671 and understated accumulated other comprehensive loss by $21,627 each as of March 31, 2012; and
	·	understated net loss by $172 and other comprehensive loss by $4,111 for the three month period ended March 31, 2012.

The appropriate estimation of the credit risk valuation adjustments has been applied within the consolidated financial statements as of March 31, 2013 and December 31, 2012.

The accompanying condensed consolidated statements of operations, comprehensive loss, cash flows and changes in equity for the three months ended March 31, 2012 have been restated to reflect the matters described above.

The following tables present the effects of the correction of the errors described above that have been made to the Company’s previously reported condensed consolidated statements of operations, comprehensive loss, cash flows from operating activities for the quarter ended March 31, 2012 and retained earnings as of January 1, 2012.

	Three months ended March 31, 2012
	As Previously					As
	Reported		Adjustments			Restated
Shipping Revenues:
Pool revenues	$	72,526				$	72,526
Time and bareboat charter revenues		67,985					67,985
Voyage charter revenues		151,867					151,867
		292,378		-			292,378
Operating Expenses:
Voyage expenses		78,349					78,349
Vessel expenses		70,703					70,703
Charter hire expenses		95,771					95,771
Depreciation and amortization		49,262					49,262
General and administrative		21,136					21,136
Severance and relocation costs		905					905
Gain on disposal of vessels		(106)					(106)
Total Operating Expenses		316,020		-			316,020
Loss from Vessel Operations		(23,642)					(23,642)
Equity in Income of Affiliated Companies		7,080	$	(172)	(a)		6,908
Operating Loss		(16,562)		(172)			(16,734)
Other Income		3,412					3,412
Loss before Interest Expense and Taxes		(13,150)		(172)			(13,322)
Interest Expense		(23,010)					(23,010)
Loss before Income Taxes		(36,160)		(172)			(36,332)
Income Tax Benefit/(Provision)		1,347		(1,875)	(b)		(528)
Net Loss	$	(34,813)	$	(2,047)		$	(36,860)

Weighted Average Number of Common Shares Outstanding:
Basic		30,282,899					30,282,899
Diluted		30,282,899					30,282,899
Per Share Amounts:
Basic net loss	$	(1.15)	$	(0.07)		$	(1.22)
Diluted net loss	$	(1.15)	$	(0.07)		$	(1.22)

^(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 overstatement in the income tax benefit primarily related to changes in for uncertain tax positions and the after-tax effect of accrued interest related to the reserve for uncertain tax positions.

	Three Months Ended March 31, 2012
	As Previously
	Reported		Adjustments			As Restated

Net Loss	$	(34,813)	$	(2,047)	(a)	$	(36,860)
Other Comprehensive (Loss)/Income, net of tax:
Net change in unrealized holding losses on available-for-sale securities		(282)					(282)
Reduction in unrealized losses on cash flow hedges		14,275		(4,111)	(b)		10,164
Defined benefit pension and other postretirement benefit plans:
Net change in unrecognized prior service costs		(21)					(21)
Net change in unrecognized actuarial losses		(291)					(291)
Other Comprehensive Income		13,681		(4,111)			9,570
Comprehensive Loss	$	(21,132)	$	(6,158)		$	(27,290)

^(a) To adjust for the understatement of the net loss resulting from (1) the $172 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 $1,875 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.

^(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 quarter ended March 31, 2012. However, the following components of total cash flows from operating activities have been restated as follows:

	Three months ended March 31, 2012
	As Previously					As
	Reported		Adjustment			Restated

Net Loss	$	(34,813)	$	(2,047)	(a)	$	(36,860)
Items included in net loss not affecting cash flows
Deferred income tax benefit		(1,683)		(1,892)	(b)		(3,575)
Undistributed earnings of affiliated companies		1,760		172	(c)		1,932
Changes in operating assets and liabilities		6,369		3,767	(b)		10,136

^(a) To adjust for the understatement in the net loss resulting from (1) the $172 overstatement in equity in income of affiliated companies resulting from the error in the method used to estimate the credit valuations 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 $1,875 understatement in the 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.

^(b) To adjust for the understatement in 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 affiliates for the $172 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.

The following table is a reconciliation of the retained earnings and accumulated other comprehensive loss as previously reported and as restated at December 31, 2011.

			Accumulated Other
	Retained		Comprehensive
	Earnings			Loss
December 31, 2011, as previously reported	$	2,040,031	$	(101,791)

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)
Year ended December 31, 2010		11,701
Year ended December 31, 2011		(6,948)
Credit valuation adjustments
Year ended December 31, 2011		(1,499)		(17,516)
Cumulative adjustment as of December 31, 2011		(535,437)		(17,516)
December 31, 2011, as restated	$	1,504,594	$	(119,307)