10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

(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, 2005

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from . . . . . . . . . . . .  to . . . . . . . . . . . . . .

Commission File No. 2-63322

International Shipholding Corporation

(Exact name of registrant as specified in its charter)

   Delaware

     36-2989662

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

650 Poydras Street, New Orleans, Louisiana

        70130

(Address of principal executive offices)

      (Zip Code)

Registrant's telephone number, including area code: (504) 529-5461

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

                              Name of each exchange

Title of each class

     on which registered    

      Common Stock, $1 Par Value

New York Stock Exchange

       6.0% Convertible Exchangeable Preferred Stock

New York Stock Exchange

     7¾% Senior Notes Due 2007

New York Stock Exchange

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 Ö  No

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.  Ö

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes   NoÖ

State the aggregate market value of the voting stock held by non-affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Date

   Amount

       June 30, 2005

$63,197,873

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

Common stock, $1 par value. . . . . . . . 6,112,087 shares outstanding as of February 22, 2006

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement dated March 14, 2006, have been incorporated by reference into Part III of this Form 10-K.

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PART I

ITEM 1.  BUSINESS

General

In this report, the terms “we,” “us,” “our,” and “the Company” refer to International Shipholding Corporation and its subsidiaries.  Through our subsidiaries, we operate a diversified fleet of U.S. and foreign flag vessels that provide international and domestic maritime transportation services to commercial and governmental customers primarily under medium- to long-term charters or contracts.  At December 31, 2005, we owned and/or operated 39 ocean-going vessels, 850 LASH (Lighter Aboard SHip) barges, and related shoreside handling facilities.  

Our fleet includes (i) five U.S. flag Pure Car/Truck Carriers (“PCTCs”) specifically designed to transport fully assembled automobiles, trucks and larger vehicles and two foreign flag PCTCs with the capability of transporting heavy weight and large dimension trucks and buses, as well as automobiles; (ii) one Breakbulk/Multi-Purpose vessel, two Container vessels and one Tanker vessel, which are used to transport supplies for the Indonesian operations of a mining company; (iii) one U.S. flag Molten Sulphur vessel, which is used to carry molten sulphur from Louisiana and Texas to a processing plant on the Florida Gulf Coast; (iv) two Special Purpose vessels modified as Roll-On/Roll-Off vessels (“RO/ROs”) to transport loaded rail cars between the U.S. Gulf and Mexico; (v) one U.S. flag conveyer-equipped self-unloading Coal Carrier, which carries coal in the coastwise and near-sea trade; (vi) three RO/RO ve ssels that permit rapid deployment of rolling stock, munitions, and other military cargoes requiring special handling; (vii) two Container vessels we time charter to a third party; (viii) two Cape-Size Bulk Carriers and two Panamax-Size Bulk Carriers in which we own a 50% interest; and (ix) eleven Cement Carriers, including nine vessels, one barge and one tug boat, in which we own a 26.1% interest.

Our fleet also includes three LASH vessels, one Dockship, and 850 LASH barges.  In our transoceanic liner services, we use the LASH system primarily to gather cargo on rivers and in harbors that are too shallow for traditional vessels.

Our fleet is deployed by our principal operating subsidiaries, Central Gulf Lines, Inc. (“Central Gulf”), LCI Shipholdings, Inc. (“LCI”) which includes a transatlantic liner service doing business as “Forest Lines,” Waterman Steamship Corporation (“Waterman”), and CG Railway, Inc. (“CG Railway”).  Other of our subsidiaries provide ship charter brokerage, agency and other specialized services.  

We have five operating segments, Liner Services, Time Charter Contracts, Contracts of Affreightment (“COA”), Rail-Ferry Service, and Other, as described below.  For additional information about our operating segments see Note K - Significant Operations of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-22.  In addition to our five operating segments, we have investments in several unconsolidated entities of which we own 50% or less and do not exercise significant influence over operating and financial activities.  

Liner Services.  In our Liner Services segment we operate four vessels, including a Dockship that positions barges for pick-up and discharge, on established trade routes with regularly scheduled sailing dates.  We receive revenues for the carriage of cargo within the established trading area and pay the operating and voyage expenses incurred.  Our Liner Services include a U.S. flag Liner Service operating between the U.S. Gulf and East Coast ports and ports in the Red Sea and in South Asia, and a foreign flag transatlantic Liner Service operating between the U.S. Gulf and East Coast ports and ports in northern Europe.  

Time Charter Contracts.   Time Charters are contracts by which the charterer obtains the right for a specified time period to direct the movements and utilization of the vessel in exchange for payment of aspecified 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 charters of three RO/RO vessels to the United States Navy’s Military Sealift Command (“MSC”) for varying terms.  Other vessels operating in this segment are our seven PCTCs; a conveyor-equipped, self-unloading coal carrier under contract with an electric utility; four vessels providing transportation services to a mining comp any at its mine in Papua, Indonesia; and two container vessels.  

Contracts of Affreightment (“COA”).  COAs are contracts by which we undertake to provide space on our vessels 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 a molten sulphur transportation contract.  

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 60 standard size rail cars, but we are in the process of adding a second deck to each vessel in order to essentially double their capacity. We have also made improvements to the terminal in Louisiana and will be making improvements to the terminal in Mexico.  Additionally, we have invested in a

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transloading and storage facility in New Orleans.  We expect the installation of the decks on both ships and the terminal in Mexico to be completed by the end of the third quarter of 2006 (See Risk Factors Section on risks relating to this service on page 11).

Other.  This segment consists of operations that include more specialized services than the former four segments and subsidiaries that provide ship charter brokerage and agency services.  

Unconsolidated Entities.  We have a 26.1% interest in a company owning and operating eleven Cement Carriers, including nine vessels, one barge and one tug boat, and a 50% interest in a company owning two Cape-Size Bulk Carriers and two Panamax-Size Bulk Carriers.  We also have a 49% interest in a company that operates a terminal in Coatzacoalcos, Mexico that is used by our Rail-Ferry Service, and a 50% interest in a company that owns and operates a transloading and storage facility in New Orleans, Louisiana providing services to our Rail-Ferry Service.

Business Strategy

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, and (iii) provide our customers with reliable, high quality service at a reasonable cost.  

Because our strategy is to seek medium- to long-term contracts and because we have diversified customer and cargo bases, we are generally insulated from the cyclical nature of the shipping industry.  However, of our five operating segments, our Liner Service and Rail-Ferry Service segments are the most susceptible to the shipping industry’s cyclical nature and are impacted by, among other things, fluctuations in the worldwide supply of and demand for vessel capacity, fuel oil cost and the seasonal demands for certain cargoes that we ship.

We plan to continue this strategy by expanding our relationships with existing customers, seeking new customers, and selectively pursuing acquisitions.

History

The Company was originally founded as Central Gulf Steamship Corporation in 1947 by the late Niels F.  Johnsen and his sons, Niels W. Johnsen, a director of the Company, and Erik F. Johnsen, our Chairman and Chief Executive Officer.  Central Gulf was privately held until 1971 when it merged with Trans Union Corporation (“Trans Union”).  In 1978, International Shipholding Corporation was formed to act as a holding company for Central Gulf, LCI, and certain other affiliated companies in connection with the 1979 spin-off by Trans Union of our common stock to Trans Union’s stockholders.  In 1986, we acquired the assets of Forest Lines, and in 1989, we acquired Waterman.  Since our spin-off from Trans Union, we have continued to act solely as a holding company, and our only significant assets are the capital stock of our subsidiaries.

Competitive Strengths

Diversification. Our strategy for many years has been to seek and obtain contracts that contribute to a diversification of operations.  These diverse operations vary from chartering vessels to the United States government, to chartering vessels for the transportation of automobiles and military vehicles, transportation of paper, steel, wood and wood pulp products, carriage of supplies for a mining company, transporting molten sulphur, transporting coal for use in generating electricity, and transporting standard size railroad cars.  As a result, our management believes that the outlook for fulfilling current contracts, obtaining extensions through the exercise of options by current customers, and obtaining new contracts is good.

Consistently Sufficient Operating Cash Flows. We believe that our operations have consistently generated cash flows sufficient to cover operating expenses, including the recurring drydocking requirements of our fleet, and our debt service requirements.  The length and structure of our contracts, the creditworthiness of our customers and our diversified customer and cargo bases all contribute to our ability to consistently meet such requirements in an industry that tends to be cyclical in nature.  Our medium- to long-term charters provide for a daily charter rate that is payable whether or not the charterer utilizes the vessel.  These charters generally require the charterer to pay certain voyage operating costs, including fuel, port, and stevedoring expenses, and often include cost escalation features covering certain of our expenses.  In addition, our COAs guarantee a minimum amount of cargo for tra nsportation.  Our cash flow from operations was approximately $23.8 million, $29 million and $38.6 million for the years ended December 31, 2005, 2004 and 2003, respectively, after deducting cash used for drydocking payments of $5 million, $7.5 million, and $2.2 million for each of those years, respectively.  Scheduled repayment of debt during those periods was $9.6 million, $12.7 million, and $18.6 million for the years ended December 31, 2005, 2004, and 2003, respectively.

Longstanding Customer Relationships.  We currently have medium- to long-term time charters with, or contracts to carry cargo for, the MSC (10.8% of our fiscal year 2005 revenues) and a variety of high credit quality commercial customers. Most of these companies have been customers of ours for over ten years.  Substantially all of our current cargo

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contracts and charter agreements are renewals or extensions of previous agreements.  In recent years, we have been successful in winning extensions or renewals of substantially all of the contracts rebid by our commercial customers, and we have been operating vessels for the MSC for more than 30 years.  We believe that our longstanding customer relationships are in part due to our excellent reputation for providing quality specialized maritime service in terms of on-time performance, low cargo loss, minimal damage claims and reasonable rates.

Experienced Management Team.   Our management team has substantial experience in the shipping industry.  Our Chairman has served the Company in various management capacities since its founding in 1947.  In addition, our President, Executive Vice President, and Chief Financial Officer have over 95 years of collective experience with the Company.  We believe that the experience of our management team is important to maintaining long-term relationships with our customers.

Types of Service

Through our principal operating subsidiaries, we provide specialized maritime transportation services to our customers primarily under medium- to long-term contracts.  Our five operating segments, Liner Services, Time Charter Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are described below:

      I.   Liner Services

       LASH Vessels

Foreign Flag.  We operate two foreign flag LASH vessels and a self-propelled, semi-submersible feeder vessel on a scheduled transatlantic liner service under the name “Forest Lines.”  One of the two foreign flag LASH vessels is under an operating lease through 2007 with options to extend thereafter.  Each Forest Lines LASH vessel normally makes 10 round trip sailings per year between U.S. Gulf ports and ports in northern Europe.  We have diversified our eastbound cargo among various commercial shippers and carry significant quantities of rice and petroleum coke as well as paper products.  

Over the years, we have established a base of commercial shippers to which we provide space on the westbound Forest Lines service.  The principal westbound cargoes are steel and other metal products, high-grade paper and wood products, and other general cargo.  Over the last five years, the westbound utilization rate for these vessels averaged approximately 88.7% per year.  

U.S. Flag.  We own a U.S. flag LASH vessel operating in a liner service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East.  

The Maritime Security Act of 1996 (“MSA”), which provides for a program for certain U.S. flag vessels, was signed into law in October of 1996.  Under this program, the Maritime Security Program (“MSP”), each participating vessel was eligible to receive an annual payment of $2.1 million, which is subject to annual appropriations and not guaranteed.  In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 to 60, and increased the annual payment per vessel, all effective on October 1, 2005.  Annual payments for each vessel in the new program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015.  As of December 31, 2005, our U.S. flag LASH vessel mentioned earlier, five PCTCs and two Container ships included in the Time Charter Contracts segment have qualified for participation.  

As of December 31, 2005, the U.S. Congress had not yet enacted the legislation to appropriate funding for this program for fiscal year 2006 at $2.6 million per year per vessel.  Therefore, Congress passed a continuing resolution allowing this program to continue at fiscal year 2005 funding levels for all vessels qualifying for the program.  Since the number of vessels in this program increased October 1, 2005, which was the beginning of the new fiscal year, and the total funds appropriated for fiscal year 2006 are higher than for fiscal year 2005, the payments per vessel were lower for the period until the legislation was passed in January of 2006 and the funds were appropriated for fiscal year 2006. In January of 2006, payments were received that resulted in fully compensating us for all periods since October 1, 2005, based on $2.6 million per vessel per year.

      II.  Time Charter Contracts

        Military Sealift Command Charters

We have had contracts with the MSC (or its predecessor) almost continuously for over 30 years.  In 1983, Waterman was awarded a contract to operate three U.S. flag RO/RO vessels under time charters to the MSC for use by the United States Navy in its maritime prepositioning ship (“MPS”) program.  These vessels represent three of the sixteen MPS vessels currently in the MSC’s worldwide fleet providing support to the U.S. Marine Corps.  These ships are designed primarily to carry rolling stock and containers, and each can carry support equipment for 17,000 military personnel.  Waterman sold the three vessels to unaffiliated corporations shortly after being awarded the contract but retained the right to operate the vessels under operating agreements.  The MSC time charters commenced in late 1984

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and early 1985 for initial five-year periods and were renewable at the MSC’s option for additional five-year periods up to a maximum of twenty-five years.  In 1993, the Company reached an agreement with the MSC to make certain reductions in future charter hire payments in consideration of fixing the period of these charters for the full 25 years.  The charters and related operating agreements will expire in 2009 and 2010.  

       Pure Car/Truck Carriers

U.S. Flag.  We currently operate five U.S. flag PCTCs, of which three are owned by us and two are leased.  In 1986, we entered into multi-year charters to carry Toyota and Honda automobiles from Japan to the United States.  To service these charters, we had constructed two car carriers that were specially designed to carry 4,000 and 4,660 fully assembled automobiles, respectively.  Both vessels were built in Japan and were registered under the U.S. flag.  In 2000 and 2001, we replaced these two vessels with larger PCTCs, which are operating under the initial term of their contracts through 2010 and 2011 with the same Japanese shipping company, which had been nominated by Toyota Motor Corporation as our vessel’s time charterer.  Both of these contracts may be extended beyond the initial term at the option of the shipping company.

In 1998, we acquired a 1994-built U.S. flag PCTC.  Immediately after being delivered to us in April of 1998, this vessel entered a long-term charter through 2008 with the same Japanese shipping company.  In 1999, we acquired a newly built U.S. flag PCTC, which immediately after being delivered to us in September of 1999 entered a long-term charter through 2011 with the same Japanese shipping company.  Both of these contracts may be extended beyond the initial term at the option of the shipping company.  These two PCTCs were subsequently sold to unaffiliated parties and leased back under operating leases expiring in 2009 and 2013, respectively.

In 2005, we acquired a 1998-built U.S. flag PCTC.  Immediately after being delivered to us in September of 2005, this vessel entered a charter through 2015 with the same Japanese shipping company.  

Foreign Flag.  In 1988, we had two new car carriers constructed by a shipyard affiliated with Hyundai Motor Company, each with a carrying capacity of 4,800 fully assembled automobiles, to transport Hyundai automobiles from South Korea primarily to the United States and Europe under two long-term charters.  In 1998 and 1999, we sold these car carriers and replaced them with two newly built PCTCs, each with the capacity to carry heavy and large size rolling stock in addition to automobiles and trucks.  We immediately entered into a long-term charter of these vessels through 2018 and 2019 to a Korean shipping company.  One of these PCTCs was subsequently sold to an unaffiliated party and leased back under an operating lease through 2016, and we have an option to purchase the vessel thereafter.

Under each of our PCTC charters, the charterers are responsible for voyage operating costs such as fuel, port, and stevedoring expenses, while we are responsible for other operating expenses including crew wages, repairs, and insurance.  During the terms of these charters, we are entitled to our full fee irrespective of the number of voyages completed or the number of cars carried per voyage.

In 2002, the Korean shipping company, the charterer of our foreign flag PCTCs, sold its car carrier division to a joint venture controlled by Wallenius Lines AB, Wilhelm Wilhelmsen ASA and Hyundai Motor Company.  We were not impacted by the transaction as all terms and conditions of the charter parties remained in effect.

       Coal Carrier

In 1995, we purchased an existing U.S. flag conveyor-equipped, self-unloading Coal Carrier that was chartered to a New England electric utility under a 15-year time charter expiring in 2010 to carry coal in the coastwise and near-sea trade.  Since the base charter provides approximately 60% utilization, the ship will also be used, from time to time during this charter period, to carry coal and other bulk commodities in the spot market for the account of other charterers.  The utility company filed for bankruptcy protection in July of 2003, and in November of 2004, the bankruptcy court approved the utility company’s sale of a substantial portion of its power generation assets to a third party.  Pursuant to the asset purchase agreement, which became effective on January 1, 2005, the third party has assumed the charter in place of the utility company.  

       Southeast Asia Transportation Contract

The contract to transport supplies for a mining company in Indonesia is serviced by a Breakbulk/Multi-Purpose vessel, a small Tanker, and two Container vessels.  The contract was recently renewed through 2010 and has options to extend thereafter on a year-to-year basis.

III.  Contracts of Affreightment

 In 1994, we entered into a 15-year transportation contract with Freeport-McMoRan Sulphur LLC, a sulphur transporter for which we had built a 28,000 DWT Molten Sulphur Carrier that carries molten sulphur from Louisiana and Texas to a fertilizer plant on the Florida Gulf Coast.  Under the terms of this contract, we are guaranteed the

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transportation of a minimum of 1.8 million tons of molten sulphur per year.  The contract also gives the charterer three five-year renewal options.  The vessel was delivered and began service during late 1994.  During the second quarter of 2002, the contract was assigned by Freeport-McMoRan Sulphur LLC to Gulf Sulphur Services Ltd.  The terms of the contract were not affected by the assignment.

       IV.  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 60 standard size rail cars.  When both ships are operating, the service provides departures every four days from Coatzacoalcos, Mexico and New Orleans, Louisiana, respectively, and offers with each vessel a three-day transit between these ports and provides approximately 90 trips per year in each direction.  

We are in the process of adding a second deck to each vessel in order to essentially double their capacity, and have made improvements to the terminal in Louisiana and will be making improvements to the terminal in Mexico.  Additionally, we have invested in a transloading and storage facility in New Orleans.  We expect the installation of the decks on both ships and the terminal in Mexico to be completed by the end of the third quarter of 2006 (See Risk Factors Section on risks relating to this service on page 11).

       V.  Other

We lease a cargo transfer facility at the river port of Memphis, Tennessee, and several of our subsidiaries provide ship charter brokerage, agency, and other specialized services to our operating subsidiaries and, in the case of ship charter brokerage and agency services, to unaffiliated companies.  The income produced by these services substantially covers the related overhead expenses.  These services facilitate our operations by allowing us to avoid reliance on third parties to provide these essential shipping services.  

Marketing

We maintain marketing staffs in New York and New Orleans, and a network of marketing agents in major cities around the world who market our liner, charter, and contract services.  We market our transatlantic LASH Liner Service under the trade name “Forest Lines,” and our U.S. flag LASH Liner Service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East under the Waterman house flag.  We market our Rail-Ferry Service under the name “CG Railway.”  We advertise our services in trade publications in the United States and abroad.  

Insurance

We maintain protection and indemnity (“P&I”) insurance to cover liabilities arising out of our ownership and operation of vessels with the Standard Steamship Owners’ Protection & Indemnity Association (Bermuda) Ltd., which is a mutual shipowners’ insurance organization commonly referred to as a P&I club.  The club is a participant in and subject to the rules of its respective international group of P&I associations.  The premium terms and conditions of the P&I coverage provided to us are governed by the rules of the club.

We maintain hull and machinery insurance policies on each of our vessels in amounts related to the value of each vessel.  This insurance coverage, which includes increased value, freight, and time charter hire, is maintained with a syndicate of hull underwriters from the U.S., British, and French insurance markets.  We maintain war risk insurance on each of our vessels in an amount equal to each vessel’s total insured hull value.  War risk insurance is placed through U.S., British, and French insurance markets and covers physical damage to the vessels and P&I risks for which coverage would be excluded by reason of war exclusions under either the hull policies or the rules of the P&I club.  Our war risk insurance also covers liability to third parties caused by war or terrorism and damages to our land-based assets caused by war, but does not cover damage to our land-based assets caused by terror ism.

The P&I insurance also covers our vessels against liabilities arising from the discharge of oil or hazardous substances in U.S., international, and foreign waters.  

We also maintain loss of hire insurance with U.S., British, and French insurance markets to cover our loss of revenue in the event that a vessel is unable to operate for a certain period of time due to loss or damage arising from the perils covered by the hull and machinery policy and war risk policy.  

Insurance coverage for shoreside property, shipboard consumables and inventory, spare parts, workers’ compensation, office contents, and general liability risks is maintained with underwriters in U.S. and British markets.

Insurance premiums for the coverage described above vary from year to year depending upon our loss record and market conditions.  In order to reduce premiums, we maintain certain deductible and co-insurance provisions that we believe are prudent and generally consistent with those maintained by other shipping companies (See Note D – Self-Retention Insurance of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-14).

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New Tax Legislation

Under United States tax laws in effect prior to 2005, U.S. companies such as ours and their domestic subsidiaries generally were taxed on all income, which in our case includes 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 of 2004  (“Jobs Creation Act”), which became effective for us on January 1, 2005, changed the United States tax treatment of the foreign operations of our U.S. flag vessels and the operations of our foreign flag vessels.  The Jobs Creation Act also allowed us to make an election to have our U.S. flag operations (other than those of two ineligible vessels used exclusively in United States coastwise commerce) taxed under a new “tonnage tax” regime rather than under the usual U.S. corporate income tax regime, and we made that election in December of 2004.  

Because we made the tonnage tax election referred to above, our gross income for United States income tax purposes with respect to our eligible U.S. flag vessels for 2005 and subsequent years does 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.  Our taxable income with respect to the operations of our eligible U.S. flag vessels is based on a “daily notional taxable income,” which is taxed at the highest corporate income tax rate.  The daily notional taxable income from the operation of a qu alifying vessel is 40 cents per 100 tons of the net tonnage of the vessel up to 25,000 net tons, and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons.  The taxable income of each qualifying vessel is the product of its daily notional taxable income and the number of days during the taxable year that the vessel operates in United States foreign trade.

Also as a result of the Jobs Creation Act, the taxable income from the shipping operations of CFCs will generally no longer be subject to United States income tax until that income is repatriated.  As of December 31, 2004, our CFCs had an accumulated deficit of $12.4 million.  We recorded a valuation allowance for 100% of the related tax benefits and until the CFCs earn enough income to fully recoup this accumulated deficit, no net income tax provision or benefit is expected related to these CFCs.  

Regulation

Our operations between the United States and foreign countries are subject to the Shipping Act of 1984 (the “Shipping Act”), which is administered by the Federal Maritime Commission, and certain provisions of the Federal Water Pollution Control Act, the Oil Pollution Act of 1990, the Act to Prevent Pollution from Ships, and the Comprehensive Environmental Response Compensation and Liability Act, all of which are administered by the U.S. Coast Guard and other federal agencies, and certain other international, federal, state, and local laws and regulations, including international conventions and laws and regulations of the flag nations of our vessels.  On October 16, 1998, the Ocean Shipping Reform Act of 1998 was enacted, and it amended the Shipping Act of 1984 to promote the growth and development of United States exports through certain reforms in the regulation of ocean transportation.  This legislation, in part, repealed the requirement that a common carrier or conference file tariffs with the Federal Maritime Commission, replacing it with a requirement that tariffs be open to public inspection in an electronically available, automated tariff system.  Furthermore, the legislation required that only the essential terms of service contracts be published and made available to the public.  

On October 8, 1996, Congress adopted the Maritime Security Act of 1996, which created the MSP and authorized the payment of $2.1 million per year per ship for 47 U.S. flag ships through fiscal year 2005.  This program eliminated the trade route restrictions imposed by the previous federal program and provides flexibility to operate freely in the competitive market.  On December 20, 1996, Waterman entered into four MSP contracts with the United States Maritime Administration (“MarAd”), and Central Gulf entered into three MSP contracts with MarAd.  We also participate in the Voluntary Intermodal Sealift Agreement (“VISA”) program administered by MarAd.  Under this VISA program, and as a condition of participating in the MSP, we have committed to providing vessel and commercial intermodal capacity for the movement of military and other cargoes in times of war or na tional emergency.  By law, the MSP is subject to annual appropriations.  In the event that sufficient appropriations are not made for the MSP by Congress in any fiscal year, the Maritime Security Act of 1996 permits MSP contractors, such as Waterman and Central Gulf, to re-flag their vessels under foreign registry expeditiously.  In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all made effective on October 1, 2005.  Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015.  On October 15, 2004, Waterman and Central Gulf each filed applications to extend their MSP contracts for another 10 years through September 30, 2015, all seven of which were effectively grandfathered in the MSP reauthorization. & nbsp;Simultaneously, we

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offered additional ships for participation in the MSP.  On January 12, 2005, MarAd awarded Central Gulf four MSP contracts and Waterman four MSP contracts, effective October 1, 2005, for a net increase of one MSP contract.  

Under the Merchant Marine Act, U.S. flag vessels are subject to requisition or charter by the United States whenever the President declares that the national security requires such action.  The owners of any such vessels must receive just compensation as provided in the Merchant Marine Act, but there is no assurance that lost profits, if any, will be fully recovered.  In addition, during any extension period under each MSC charter or contract, the MSC has the right to terminate the charter or contract on 30 days’ notice.  However, terms of our RO/RO operating contract call for significant early termination penalties.

Certain laws governing our operations, as well as our molten sulphur transportation contract, require us to be as much as 75% owned by U.S. citizens.  We monitor our stock ownership to verify our continuing compliance with these requirements and have never had more than 1% of our capital stock held of record by non-U.S. citizens (including corporations or other entities controlled by non-U.S. citizens).  Our certificate of incorporation allows our board of directors to restrict the acquisition of our capital stock by non-U.S. citizens.  Under our certificate of incorporation, our board of directors may, in the event of a transfer of our capital stock that would result in non-U.S. citizens owning more than 23% (the “permitted amount”) of our total voting power, declare such transfer to be void and ineffective.  In addition, our board of directors may, in its sole discretio n, deny voting rights and withhold dividends with respect to any shares of our capital stock owned by non-U.S. citizens in excess of the permitted amount.  Furthermore, our board of directors is entitled under our certificate of incorporation to redeem shares owned by non-U.S. citizens in excess of the permitted amount in order to reduce the ownership of our capital stock by non-U.S. citizens to the permitted amount.

We are required by various governmental and quasi-governmental agencies to obtain permits, licenses, and certificates with respect to our vessels.  The kinds of permits, licenses, and certificates required depend upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew, the age of the vessel, and the status of the Company as owner or charterer.  We believe that we have, or can readily obtain, all permits, licenses, and certificates necessary to permit our vessels to operate.  

The International Maritime Organization (“IMO”) amended the International Convention for the Safety of Life at Sea (“SOLAS”), to which the United States is a party, to require nations that are parties to SOLAS to implement the International Safety Management (“ISM”) Code.  The ISM Code requires that responsible companies, including owners and/or operators of vessels engaged on foreign voyages, develop and implement a safety management system to address safety and environmental protection in the management and operation of vessels.  Companies and vessels to which the ISM Code applies are required to receive certification and documentation of compliance.  Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denied entry into ports, detained in ports or fined.  We implemente d a comprehensive safety management system and obtained timely IMO certification and documentation for our companies and all of our vessels.  In addition, our ship management subsidiary, LMS Shipmanagement, Inc., is certified under the ISO 9002 Quality Standard.

More recently, in 2003, SOLAS was again amended to require parties to the convention to implement the International Ship and Port Facility Security (“ISPS”) Code.  The ISPS Code requires owners and operators of vessels engaged on foreign voyages to conduct vulnerability assessments and to develop and implement company and vessel security plans, as well as other measures, to protect vessels, ports and waterways from terrorist and criminal acts.  In the U.S., these provisions were implemented through the Maritime Transportation Security Act of 2002 (“MTSA”).  These provisions became effective on July 1, 2004.  As with the ISM Code, companies and vessels to which the ISPS Code applies must be certificated and documented.  Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denie d entry into ports, detained in ports or fined.  Vessels subject to fines in the U.S. are liable in rem, which means vessels may be subject to arrest by the U.S. government.  For U.S. flag vessels, company and vessel security plans must be reviewed and approved by the U.S. Coast Guard.  We have conducted the required security assessments and submitted plans for review and approval as required, and we believe that we are in compliance in all material respects with all ISPS Code and MTSA security requirements.

The Coast Guard and Maritime Transportation Act of 2004, signed into law on August 9, 2004, amended the Oil Pollution Act of 1990 (“OPA”) to require owners or operators of all non-tank vessels of 400 gross tons or greater to develop and submit plans for responding, to the maximum extent practicable, to worst case discharges and substantial threats of discharges of oil from these vessels.  This statute extends to all types of vessels of 400 gross tons or greater the vessel response planning requirements of the OPA that had previously only applied to tank vessels.  We have submitted our plan and are awaiting approval from the Coast Guard.

Also, under the OPA, vessel owners, operators and bareboat charterers are responsible parties that are jointly, severally and strictly liable for all response costs and other damages arising from oil spills from their vessels in waters subject to U.S. jurisdiction, with certain limited exceptions.  Other damages include, but are not limited to, natural resource damages, real and personal property damages, and other economic damages such as net loss of taxes, royalties, rents, profits or earning capacity, and loss of subsistence use of natural resources.  For non-tank vessels, the OPA limits the liability of

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responsible parties to the greater of $600 per gross ton or $500,000.  The limits of liability do not apply if it is shown that the discharge was proximately caused by the gross negligence or willful misconduct of, or a violation of a federal safety, construction or operating regulation by, the responsible party, an agent of the responsible party or a person acting pursuant to a contractual relationship with the responsible party.  Further, the limits do not apply if the responsible party fails or refuses to report the incident, or to cooperate and assist in oil spill removal activities.  Additionally, the OPA specifically permits individual states to impose their own liability regimes with regard to oil discharges occurring within state waters, and some states have implemented such regimes.

Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) also applies to owners and operators of vessels, and contains a similar liability regime for cleanup and removal of hazardous substances and natural resource damages.  Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million.

Under the OPA, vessels are required to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the highest limit of their potential liability under the act.  Under Coast Guard regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty.  An owner or operator of more than one vessel must demonstrate financial responsibility for the entire fleet in an amount equal to the financial responsibility of the vessel having greatest maximum liability under the OPA and CERCLA.  We insure each of our vessels with pollution liability insurance in the amounts required by law.  A catastrophic spill could exceed the insurance coverage available, in which event our financial condition and results of operations could be adversely affected.

While the U.S. is not a party, for our vessels operating in foreign waters, many countries have ratified and follow the liability plan adopted by the IMO as set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the “1969 Convention”) and the Convention for the Establishment of an International Fund for Oil Pollution of 1971.  Under these conventions, the registered owner of a vessel is strictly liable for pollution damage caused in the territorial seas of a state party by the discharge of persistent oil, subject to certain complete defenses.  Liability is limited to approximately $183 per gross registered ton (a unit of measurement of the total enclosed spaces in a vessel) or approximately $19.3 million, whichever is less.  If a country is a party to the 1992 Protocol to the International Convention on Civil Liability for Oil Pollution Da mage (the “1992 Protocol”), the maximum liability limit is $82.7 million.  The limit of liability is tied to a unit of account that varies according to a basket of currencies.  The right to limit liability is forfeited under the 1969 Convention when the discharge is caused by the owner's actual fault, and under the 1992 Protocol, when the spill is caused by the owner's intentional or reckless misconduct.  Vessels operating in waters of states that are parties to these conventions must provide evidence of insurance covering the liability of the owner.  In jurisdictions that are not parties to these conventions, various legislative schemes or common law govern.  We believe that our pollution insurance policy covers the liability under the IMO regimes.

Competition

The shipping industry is intensely competitive and is influenced by events largely outside the control of shipping companies.  Varying economic factors can cause wide swings in freight rates and sudden shifts in traffic patterns.  Vessel redeployments and new vessel construction can lead to an overcapacity of vessels offering the same service or operating in the same market.  Changes in the political or regulatory environment can also create competition that is not necessarily based on normal considerations of profit and loss.  Our strategy is to reduce competitive pressures and the effects of cyclical market conditions by operating specialized vessels in niche market segments and deploying a substantial number of our vessels under medium- to long-term charters or contracts with creditworthy customers and on trade routes where we have established market share.  We also seek to compete effectively in th e traditional areas of price, reliability, and timeliness of service.  

Our Liner Services and our Rail-Ferry Service are affected more by competitive factors than our other segments as our Time Charter Contracts and Contracts of Affreightment primarily include medium and long-term contracts with specific customers.  While our PCTCs in our Time Charter Contracts segment operate worldwide in markets where foreign flag vessels with foreign crews predominate, we believe that our U.S. flag PCTCs can compete effectively in obtaining renewals of existing contracts if we continue to participate in the Maritime Security Program and receive cooperation from our seamen’s unions in controlling costs.

Our Liner Services face competition principally from numerous break bulk vessels and, occasionally, container ships.  Competitors are primarily foreign flag liner operators and, to a lesser degree, from U.S. flag liner operators.  In addition, during periods in which we participate in conference agreements or rate agreements, competition includes other participants with whom we may agree to charge the same rates and non-participants charging lower rates.  

Because our LASH barges operating in these services are used primarily to transport large unit size items, such as forest products and steel that cannot be transported as efficiently in container ships, our LASH fleet often has a competitive advantage over these vessels for this type of cargo.  In addition, we believe that the ability of our LASH system to operate in shallow harbors and river systems and our specialized knowledge of these harbors and river systems give us a competitive advantage over operators of container ships and break bulk vessels that are too large to operate in these areas.  

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Our Rail-Ferry Service faces competition principally from companies who transport cargo over land rather than water including railroads that cross land borders and trucking companies.

Risk Factors

We are highly leveraged.  We are highly leveraged and devote a substantial portion of our operating income to debt service.  To date, we have been able to generate sufficient cash from operations, including planned sales of assets and sale leaseback transactions, to meet annual interest and principal payments on our indebtedness.  However, following the completion in January of 2005 of our convertible exchangeable preferred stock offering, our combined debt service and preferred stock dividend requirements will be greater than they have been in the past, and our ability to satisfy our debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control.  If our cash flow and capital resources are insufficient to fund our debt service and preferred stock dividend obli gations, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital or restructure our debt.   There can be no assurance that we will be able to generate sufficient operating cash flows to service our debt and meet our preferred stock dividend requirements.  

Subject to compliance with various financial and other covenants imposed by the agreements governing our existing indebtedness and that of our subsidiaries, we may incur additional indebtedness from time to time, thus increasing our leverage.  As of December 31, 2005, 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 2006, although we can give no assurance to that effect.  

The degree to which we are leveraged could have important adverse consequences.  Among other things, high leverage may: (i) impair our ability to obtain additional financing for working capital, capital expenditures, vessel and other acquisitions, and general corporate purposes; (ii) require us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest; (iii) limit the funds available to meet our preferred stock dividend requirements; (iv) place us at a competitive disadvantage to less highly-leveraged competitors; and (v) make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures.

A default under one of our debt agreements may result in a default under one or more of our other debt agreements.  Our debt obligations are represented by separate agreements with different lenders.  A default under any agreement can result in the acceleration of principal and interest, and in some cases penalties, under that agreement.  In some cases, a default under one agreement may create an event of default under other agreements, resulting in the acceleration of principal, interest and penalties under such other agreements even though we are otherwise in compliance with all payment and other obligations under those agreements.  Thus, an event of default under a single agreement, including one that is technical in nature or otherwise not material, may create an event of default under multiple lending agreements, which could result in the acceleration of significant indebtedness under multiple a greements that we may not be able to pay or refinance at that time.  

The agreements governing certain of our debt instruments impose restrictions on our business.  The agreements governing certain of our debt instruments contain a number of covenants imposing restrictions on our business. The restrictions these covenants place on us include limitations on our ability to: (i) redeem and pay dividends on our capital stock; (ii) make investments; (iii) engage in transactions with affiliates; and (iv) create or permit to exist liens on our assets.  These agreements also require us to meet a number of financial ratios.  As a result of these covenants, our ability to respond to changes in business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that otherwise might be considered beneficial to the Company.

In addition, the breach of any of these covenants could result in a default under several other of these agreements. Upon the occurrence of an event of default under any such agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable.  If we were unable to repay those amounts, such lenders could proceed against the collateral securing that indebtedness.  If amounts outstanding under such agreements were to be accelerated, there can be no assurance that our assets would be sufficient to generate sufficient cash flow to repay the accelerated indebtedness.

Our business and operations are highly-regulated.  Our business is materially affected by government regulation in the form of international conventions, national, state and local laws and regulations, and laws and regulations of the flag nations of our vessels, including laws relating to the discharge of materials into the environment.  Because such conventions, laws and regulations are often revised, we are unable to predict the ultimate costs of compliance.  In addition, we are required by various governmental and quasi-governmental agencies to obtain and maintain certain permits, licenses and certificates with respect to our operations.  In certain instances, the failure to obtain or maintain such permits, licenses or certificates could have a material adverse effect on our business.  In the event of war or national emergency, our U.S. flag vessels are subject to requisition by the United St ates without any guarantee of compensation for lost profits, although the United States government has traditionally paid fair compensation in such circumstances.

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If sufficient appropriations under the Maritime Security Act of 1996 are not made in any fiscal year, we may not continue to receive annual payments with respect to certain of our vessels.  The Maritime Security Act of 1996, which provides for a program for certain U.S. flag vessels, was signed into law in October of 1996.  Under this program, each participating vessel is eligible to receive an annual payment of $2.1 million through the government’s fiscal year 2005.  In 2003, Congress authorized an extension of the program through 2015, increased the number of ships eligible industry-wide to participate in the program from 47 to 60, and increased payments to companies in the program, all effective on October 1, 2005.  Annual payments for each vessel in the MSP are $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015.  

As of December 31, 2005, eight of our vessels operated under MSP contracts.  Payments under this program are subject to annual appropriation by Congress and are not guaranteed.  Congress may not make sufficient appropriations under the program in one or more fiscal years and, as a result, we can provide no assurance as to our continued receipt, in full or in part, of the annual payments.

As of December 31, 2005, the U.S. Congress had not yet enacted the legislation to appropriate funding for this program for fiscal year 2006 at $2.6 million per year per vessel.  Therefore, Congress passed a continuing resolution allowing this program to continue at fiscal year 2005 funding levels for all vessels qualifying for the program.  Since the number of vessels in this program increased October 1, 2005, which was the beginning of the new fiscal year, and the total funds appropriated for fiscal year 2006 are higher than for fiscal year 2005, the payments per vessel were lower for the period until the legislation was passed in January of 2006 and the funds were appropriated for fiscal year 2006. In January of 2006, payments were received that resulted in fully compensating us for all periods since October 1, 2005, based in $2.6 million per vessel per year.

An increase in the supply of vessels without a corresponding increase in demand for vessels could cause our charter and cargo rates to decline, which could have a material adverse effect on our revenues and earnings.  Historically, the shipping industry has been cyclical.  The profitability and asset values of companies in the industry have fluctuated in part because of changes in the supply and demand of vessels.  The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels. If the number of new vessels delivered exceeds the number of vessels being scrapped, vessel capacity will increase.  If the supply of vessels increases and the demand for vessels does not, the charter and cargo rates for our vessels could decline significantly.  A decline in our charter and cargo rates could have a material adverse effect on our revenues and earn ings.

The revenues of our liner services segment are subject to seasonal and cyclical variations, which may cause material fluctuations in our reported earnings. The demand for certain cargoes carried in our Liner Services, such as agricultural products, steel and forest products, and the corresponding demand for Liner Services to ship these cargoes, has historically exhibited seasonal and cyclical variations.  As a result, the revenues of our Liner Services segment are subject to seasonal and cyclical variations, which may cause material fluctuations in our revenues and earnings on a quarterly or annual basis, or both.

Our Rail-Ferry Service has been unprofitable to date, and we can give no assurance as to its future profitability.  Our Rail-Ferry Service began operating in February of 2001.  The introduction of this service in a competitive market contributed $7.5 million to our net loss in fiscal year 2001, and the service had losses of $3.7 million, $2.9 million and $4.3 million in fiscal years 2002, 2003 and 2004, respectively.  Additionally, the service had losses of $6.7 million in fiscal year 2005, although $2.5 million was directly related to losses from hurricane Katrina.

We are in the process of adding a second deck to each vessel in order to essentially double their capacity, and have made improvements to the terminal in Louisiana and will be making improvements to the terminal in Mexico.  Additionally, we have invested in a transloading and storage facility in New Orleans.  We expect the installation of the decks on both ships and the terminal in Mexico to be completed by the end of the third quarter of 2006.

We believe that this expansion will significantly reduce our cost per unit of cargo carried and significantly increase our cash flow, but only if we are able to book substantially all of the additional capacity, and we can give no assurance at this time that we will be successful in doing so.  

Our Rail-Ferry Service requires access to the Mississippi River Gulf Outlet (“MR-GO”), the continuing viability of which is under question as a result of flooding in eastern New Orleans following Hurricane Katrina.  Our Rail-Ferry Service operates from a terminal in New Orleans, Louisiana.  Specifically, the terminal is located on the MR-GO which is a Federal waterway connecting to the U.S. Gulf of Mexico.  As a result of the devastating flooding caused by Hurricane Katrina, the Federal funding that the U.S. Army Corps of Engineers requires to dredge the MR-GO has been suspended.  While the current depth of the MR-GO is adequate to allow us to continue to operate, any further silting would prevent our long-term utilization of the MR-GO.  Therefore, as a result, we must review all options available to us regarding the continued operation of our Rail-Ferry Service including relocating the U.S. operations out of the New Orleans area.  

The total cost to build our terminal on the MR-GO was approximately $31 million. The City of New Orleans and the State of Louisiana have contributed approximately $17 million towards that cost, leaving our investment at risk at approximately $14 million.  We have begun dialogue with the State of Louisiana to discuss our options regarding our

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terminal on the MR-GO.  While we can give no assurance of the ultimate outcome of those discussions, we are satisfied that we will agree upon a fair solution.  In any event, the maximum impairment loss associated with our investment at the facility resulting from a relocation from the MR-GO, if we received no compensation, would be approximately $14 million.  Our investment of approximately $14 million was funded with the proceeds from a financing agreement.  Relocation of the terminal from our current location could potentially place us in default on this debt requiring us to repay the unamortized balance.  Additionally, we could potentially be required to compensate the lender for their cost if they lost the ability to utilize certain federal tax credits available to them in relation to our financing agreement.

We are subject to the risk of continuing high prices, and increasing prices, of the fuel we consume in our Liner and Rail-Ferry operations.  We are exposed to commodity price risks with respect to fuel consumption in our Liner and Rail-Ferry operations, and we can give no assurance that we will be able to offset higher fuel costs due to the competitive nature of these operations.  Moreover, while we entered into hedging arrangements with respect to a portion of our 2003 fuel requirements and a small portion of our 2004 fuel requirements for our Liner and Rail-Ferry segments to reduce our exposure to increases in fuel prices, we did not enter into any hedging arrangements in 2005 and we currently have no hedging arrangements in place with respect to our estimated 2006 fuel requirements.  We currently have fuel surcharges in place, however, a material increase in current f uel prices that we cannot recover through these fuel cost surcharges could adversely affect our results of operations and financial condition.  For an analysis of the effect of our operating costs and earnings per share of an increase in fuel prices, see Item 7a. Quantitative and Qualitative Disclosures About Market Risk on pages 26 and 27.

We operate in a highly competitive industry.  The shipping industry is intensely competitive and can be influenced by economic and political events that are outside the control of shipping companies.  There can be no assurance that we will be able to renew expiring charters on economically attractive terms, maintain attractive freight rates, pass cost increases through to our customers or otherwise successfully compete against our competitors.

We are subject to the control of our principal stockholders.  Four of our directors, Niels W. Johnsen, Erik F. Johnsen, Niels M. Johnsen and Erik L. Johnsen, and their family members and affiliated entities, beneficially owned an aggregate of 36.6% (which includes currently exercisable options to acquire 400,000 shares) of the common stock of the Company as of December 31, 2005.  As a result, the Johnsen family has the power to determine many of our policies, the election of our directors and officers, and the outcome of various corporate actions requiring shareholder approval.

Operating hazards may increase our operating costs; our insurance coverage is limited.  Our vessels are subject to operating risks such as: (i) catastrophic marine disaster; (ii) adverse weather conditions; (iii) mechanical failure; (iv) collisions; (v) hazardous substance spills; (vi) war, terrorism and piracy; and (vii) navigation and other human errors.  The occurrence of any of these events may result in damage to or loss of our vessels and our vessels' cargo or other property, and in injury to personnel.  Such occurrences may also result in a significant increase in our operating costs or liability to third parties.  In addition, such occurrences may result in our company being held strictly liable for pollution damages under the Oil Pollution Act of 1990, the Comprehensive Environmental Response Compensation and Liability Act or one of the international conventions to which our vessels operatin g in foreign waters may be subject.

We maintain insurance coverage against certain of these risks, which our management considers to be customary in the industry.  We cannot assure you, however, that we will be able to renew our existing insurance coverage at commercially reasonable rates or that such coverage will be adequate to cover future claims that may arise.  In addition, the terrorist attacks that occurred in the U.S. on September 11, 2001, as well as the potential for future attacks, compliance with recently enacted maritime security laws and other factors, have caused significant increases in the cost of our war risk insurance coverage, which covers damages to our vessels and liability to third parties arising from acts of terrorism.

We are subject to risks associated with operating internationally.  Our international shipping operations are subject to risks inherent in doing business in countries other than the United States.  These risks include, among others: (i) economic, political and social instability; (ii) potential vessel seizure, expropriation of assets and other governmental actions, which are not covered by our insurance; (iii) currency restrictions and exchange rate fluctuations; (iv) potential submission to the jurisdiction of a foreign court or arbitration panel; and (v) import and export quotas, the imposition of increased environmental and safety regulations and other forms of public and governmental regulation.  Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of any such events.  However, if such an event should occur, it could have a material adverse effect on our financial condition and results of operations.

Our vessels could be seized by maritime claimants, which could result in a significant loss of earnings and cash flow for the related off-hire period.  Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts or claims for damages.  In many jurisdictions, a maritime lienholder may enforce its lien by either arresting or attaching a vessel through foreclosure proceedings.  The arrest or attachment of one or more of our vessels could result in a significant loss of earnings and cash flow for the related off-hire period.

In addition, international vessel arrest conventions and certain national jurisdictions allow so-called “sister ship” arrests, that allow the arrest of vessels that are within the same legal ownership as the vessel which is subject to the claim or

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lien.  Certain jurisdictions go further, permitting not only the arrest of vessels within the same legal ownership, but also any “associated” vessel.  In nations with these laws, an “association” may be recognized when two vessels are owned by companies controlled by the same party.  Consequently, a claim may be asserted against us, any of our subsidiaries or our vessels for the liability of one or more of the other vessels we own.  While we have insurance coverage for these type of claims, we cannot guarantee it will cover all of our exposure.

A substantial number of our employees are unionized; in the event of a strike or other work stoppage our business and operations may be adversely affected.  As of December 31, 2005, all of our shipboard personnel and certain of our shoreside personnel were covered by collective bargaining agreements. While we have experienced no strikes, work stoppages or other significant labor problems during the last ten years, we cannot assure you that such events will not occur in the future.  In the event we experience one or more strikes, work stoppages or other labor problems, our business and operations and, in turn, our results of operations, may be materially and adversely affected.

We may not be able to renew our time charters and contracts when they expire.  There can be no assurance that any of our existing time or bareboat charters or contracts of affreightment will be renewed or, if renewed, that they will be renewed at favorable rates.  If upon expiration of our existing charters and contracts, we are unable to obtain new charters or contracts at rates comparable to those received under the expired charters or contracts, our revenues and earnings may be adversely affected.

Older vessels have higher operating costs and are less desirable to charterers.  The average age of the vessels in our fleet, excluding the vessels in which we have a partial ownership, is approximately 16 years.  In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase as the age of the vessel increases.  Accordingly, it is likely that the operating costs of our older vessels will increase.  In addition, changes in governmental regulations and compliance with classification society standards may require us to make expenditures for new equipment.  In order to add such equipment, we may be required to take our vessels out of service, thereby reducing our revenues.  Moreover, customers generally prefer modern vessels over older vessels, which places the older vessels at a competitive disadvantage, especially in weak markets. &nbs p;There can be no assurance that market conditions will justify the expenditures necessary to maintain our older vessels in good operating condition or enable us to operate our older vessels profitably during the remainder of their estimated useful lives.

We face periodic drydocking costs for our vessels, which can be substantial.  Vessels must be drydocked periodically.  The cost of repairs and renewals required at each drydock are difficult to predict with certainty and can be substantial and our insurance does not cover these costs.

Employees

As of December 31, 2005, we employed approximately 476 shipboard personnel and 142 shoreside personnel.  We consider relations with our employees to be excellent.

All of our shipboard personnel and certain of our shoreside personnel are covered by collective bargaining agreements.  Some of these agreements relate to particular vessels and have terms corresponding with the terms of their respective vessel’s charter, including agreements relating to two of our vessels that have been renewed in early 2006.  Moreover, the collective bargaining agreements covering eight of our vessels operating under MSP contracts have been renewed in early 2006.  In addition, Central Gulf, Waterman, and other U.S. shipping companies are subject to collective bargaining agreements for shipboard personnel in which the shipping companies servicing U.S. Gulf and East Coast ports also must make contributions to pension plans for dockside workers.  We have experienced no strikes or other significant labor problems during the last ten years.

Available Information

Our internet address is www.intship.com.  We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The information found on our website is not part of this or any other report.

ITEM 2.  PROPERTIES

Vessels and Barges

Of the 39 ocean-going vessels in our fleet at December 31, 2005, 14 were 100% owned by us, eleven were 26.1% owned by us, four were 50% owned by us, seven were leased by us, and three were operated by us under operating contracts.  Of the 850 LASH barges we own, 771 are operated in conjunction with our LASH vessels.  The remaining 79 LASH barges are not required for current vessel operations.  All of our LASH barges are registered under the U.S. flag.  

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All of the vessels and barges owned, operated, or leased by us are in good condition except for the LASH barges not required for current vessel operations.  Under governmental regulations, insurance policies, and certain of our financing agreements and charters, we are required to maintain our vessels in accordance with standards of seaworthiness, safety, and health prescribed by governmental regulations or promulgated by certain vessel classification societies. We have implemented the quality and safety management program mandated by the IMO and have obtained certification of all vessels currently required to have a Safety Management Certificate.  Vessels in the fleet are maintained in accordance with governmental regulations and the highest classification standards of the American Bureau of Shipping, Det Norske Veritas, or Lloyd's Register classification societies.  

Certain of the vessels and barges owned by our subsidiaries are mortgaged to various lenders to secure such subsidiaries’ long-term debt (See Note C - Long-Term Debt of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-13).

Other Properties

We lease our corporate headquarters in New Orleans, Louisiana, our administrative and sales office in New York, and office space in Shanghai.  During 2005, we entered into an agreement to lease office space in Mandeville, Louisiana, and expect the five-year lease term to commence in 2006 when the facility is ready for occupancy.  Additionally, we lease a totally enclosed multi-modal cargo transfer terminal in Memphis, Tennessee, under a lease that expires in May of 2008.  In 2005, the aggregate annual rental payments under these operating leases totaled approximately $1.4 million.

We own a facility in Jefferson Parish, Louisiana, which is used primarily for the maintenance and repair of barges.  

ITEM 3.  LEGAL PROCEEDINGS

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 mitigate our exposure.

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 the outcome of such claims cannot be predicted with certainty, we believe that our insurance coverage and reserves with respect to such claims are adequate and that such claims should not have a material adverse effect on our business or financial condition  (See Note H – Commitments and Contingencies of the Notes to the Company’s Consolidated Financial Statements contained in this Form 10-K on page F-19).

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 4a.  EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

Set forth below is information concerning the directors and executive officers of the Company.  Directors are elected by the shareholders for one-year terms.  Executive officers serve at the pleasure of the Board of Directors.  

Name	Current Position
Erik F. Johnsen	Chairman and Chief Executive Officer
Niels M. Johnsen	President and Director
Erik L. Johnsen	Executive Vice President and Director
Manuel G. Estrada	Vice President and Chief Financial Officer
Niels W. Johnsen	Director
Harold S. Grehan, Jr.	Director
Raymond V. O'Brien, Jr.	Director
Edwin Lupberger	Director
Edward K. Trowbridge	Director
H. Merritt Lane, III	Director

Erik F. Johnsen, 80, is the Chairman and Chief Executive Officer of the Company.  He served as the President, Chief Operating Officer, and Director of the Company since its commencement of operations in 1979 until April of 2003 when he assumed his current position.  Until April of 1997, Mr. Johnsen also served as the President and Chief Operating Officer of each of the Company's principal subsidiaries, except Waterman, for which he served as Chairman of the

14

Executive Committee.  Along with his brother, Niels W. Johnsen, he was one of the founders of Central Gulf in 1947 and served as its President from 1966 until April of 1997.  

Niels M. Johnsen, 60, is President of the Company.  Mr. Johnsen has served as a Director of the Company since April of 1988.  He joined Central Gulf on a full time basis in 1970 and held various positions with the Company before being named President in April of 2003.  He has also served as chairman of each of the Company’s principal subsidiaries, except Waterman, since April of 1997.  He is also President of Waterman and N. W. Johnsen & Co., Inc., subsidiaries of the Company engaged in LASH liner service and ship and cargo charter brokerage, respectively.  In 2002, he became a trustee and director of Atlantic Mutual Companies.  He is the son of Niels W. Johnsen.

Erik L. Johnsen, 48, is Executive Vice President of the Company.  He joined Central Gulf in 1979 and held various positions with the Company before being named Executive Vice President in April of 1997.  He has served as a Director of the Company since 1994.  He has also served as the President of each of the Company’s principal subsidiaries, except Waterman, since April of 1997, and as Executive Vice President of Waterman since September of 1989.  He is responsible for all operations of the Company’s vessel fleet and leads the Company’s Ship Management Group.  He is the son of Erik F. Johnsen.

Manuel G. Estrada, 51, is Vice President and Chief Financial Officer of the Company.  He joined Central Gulf in 1978 and held various positions with the Company prior to being named Vice President and Controller in 1996, and Vice President and Chief Financial Officer in 2005.

Niels W. Johnsen, 83, is a Director of the Company.  He served as the Chairman and Chief Executive Officer of the Company from its commencement of operations in 1979 until April of 2003 and served as Chairman and Chief Executive Officer of each of the Company's principal subsidiaries until April of 1997.  He previously served as Chairman of Trans Union’s ocean shipping group of companies from December of 1971 through May of 1979.  He was one of the founders of Central Gulf in 1947 and held various positions with Central Gulf until Trans Union acquired Central Gulf in 1971.  He is also a former director of Reserve Fund, Inc., a money market fund and a former trustee of Atlantic Mutual Companies, an insurance company.  He is the brother of Erik F. Johnsen.

Harold S. Grehan, Jr., 78, is a Director of the Company.  He joined Central Gulf in 1958 and became Vice President in 1959, Senior Vice President in 1973 and Executive Vice President and Director in 1979.  Mr. Grehan retired from the Company at the end of 1997, and continued to serve as a Director since that time.

Raymond V. O'Brien, Jr., 78, has served as a Director of the Company since 1979 and in early 2003 was named Chairman of the Compensation Committee of the Board of Directors.  He served as Chairman of the Board and Chief Executive Officer of the Emigrant Savings Bank from January of 1978 through December of 1992.

Edwin Lupberger, 69, has served as a Director of the Company since April of 1988 and in early 2003 was named Chairman of the Audit Committee of the Board of Directors.  He is the President of Nesher Investments, LLC.  Mr. Lupberger served as the Chairman of the Board and Chief Executive Officer of Entergy Corporation from 1985 to 1998.  

Edward K. Trowbridge, 77, has served as a Director of the Company since April of 1994 and in early 2003 was named Chairman of the Nominating and Governance Committee of the Board of Directors.  He served as Chairman of the Board and Chief Executive Officer of the Atlantic Mutual Companies from July of 1988 through November of 1993.

H. Merritt Lane, III, 44, has served as a Director of the Company since March of 2004.  He has served as President and Chief Executive Officer of Canal Barge Company, Inc. since January of 1994 and as director of that company since 1988.

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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

COMMON STOCK PRICES AND DIVIDENDS FOR EACH QUARTERLY PERIOD OF 2004 AND 2005
(Source:  New York Stock Exchange)
			Dividends
2004	High	Low	Paid
1st Quarter	15.59	13.60	N/A
2nd Quarter	17.10	14.10	N/A
3rd Quarter	16.90	13.40	N/A
4th Quarter	16.40	13.01	N/A
			Dividends
2005	High	Low	Paid
1st Quarter	17.10	14.40	N/A
2nd Quarter	15.75	14.20	N/A
3rd Quarter	17.10	14.55	N/A
4th Quarter	17.89	15.32	N/A
Approximate Number of Common Stockholders of Record at February 23, 2006:  501

In accordance with New York Stock Exchange rules, Erik F. Johnsen, our Chief Executive Officer, has certified to the NYSE that, as of April 30, 2005, he was not aware of any violation by us of the NYSE’s corporate governance listing standards.   The certification is to be submitted to the NYSE each year no later than 30 days after our annual shareholders meeting.

The Chief Executive Officer and Chief Financial Officer certifications required for 2004 by Section 302 of the Sarbanes-Oxley Act of 2002 were included as exhibits to our 2004 Form 10-K.

ITEM 6.  SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

The following summary of selected consolidated financial data is not covered by the auditors' report 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,
		2005	2004 (1)	2003	2002	2001 (2)
Income Statement Data:
	Revenues	$  262,156	$  259,164	$  255,301	$  226,985	$  304,370
	Impairment Loss	-	-	-	66	(81,038)
	Gross Voyage Profit (Loss)	25,780	28,046	33,140	30,875	(53,808)
	Operating Income (Loss)	10,312	12,503	19,932	15,924	(73,885)
	Income from Continuing Operations	8,266	13,194	5,715	253	(64,419)
	Discontinued Operations (4)	(1,270)	(409)	(224)	(389)	-
	Net Income (Loss) Available to Common Stockholders	4,629	12,785	5,491	(136)	(64,419)
	Basic and Diluted Earnings Per Common Share:
	Net Income (Loss) Available to Common Stockholders - Basic	0.76	2.10	0.90	(0.02)	(10.59)

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	Net Income (Loss) Available to Common Stockholders - Diluted	0.75	2.10	0.90	(0.02)	(10.59)
Balance Sheet Data:
	Working Capital	16,120	17,650	10,248	1,849	25,631
	Total Assets	449,507	385,048	382,451	406,752	461,722
	Long-Term Debt, Less Current Maturities
	(including Capital Lease Obligations)	161,720	168,622	164,144	192,297	240,276
	Stockholders' Investment	140,714	135,454	121,367	115,227	114,905
Other Data:
	Cash Flow from Operations	23,778	28,989	38,616	18,439	21,318
	Cash Flow from Investing Activities	(61,208)	(25,589)	1,772	9,456	81,808
	Cash Flow from Financing Activities	43,095	(1,768)	(35,926)	(48,626)	(93,169)
	Cash Dividends Per Share of Common Stock (3)	-	-	-	-	0.125
	Weighted Average Shares of Common Stock Outstanding:
	Basic	6,083,005	6,082,887	6,082,887	6,082,887	6,082,887
	Diluted	6,114,510	6,092,302	6,082,887	6,082,887	6,082,887

(1)

Results for 2004 were significantly impacted by certain income tax adjustments relating to the Jobs Creation Act of 2004.

(2)

Results for 2001 reflect an Impairment Loss of approximately $81.0 million.  This non-cash charge was made to write down certain assets to estimated market value as part of the reclassification of our U.S. flag LASH Service, our Cape-Size Bulk Carrier and certain Special Purpose barges to "Assets Held for Disposal" and impairment charges recorded on our foreign flag LASH Liner Service.

(3)

For 2001, cash dividends represent payments applicable

for only first and second quarters.

(4)

During 2005, we sold the assets associated with our over-the-road car transportation truck company.  The sale of these assets was completed in July of 2005 and the net loss on the sale before taxes was $769,000.  

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

NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made by us or on our behalf in this Form 10-K or elsewhere that are not based on historical facts are intended to be 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 (1) 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; (2) estimated scrap values of assets held for disposal; (3) estimated fair values of financial instruments, such as interest rate and commodity swap agreements; (4) estimated losses (including independent actuarial estimates) under self-insurance arrangements, as well as estimated losses on certain contracts, trade routes, lines of business or asset dispositions; (5) estimated losses attributable to asbestos claims; (6) estimated obligations, and the timing thereof, to the U.S. Customs Service relating to foreign repair work; (7) the adequacy of our capital resources and the availability of addition al capital resources on commercially acceptable terms; (8) our ability to remain in compliance with our debt covenants; (9) anticipated trends in government sponsored cargoes; (10) our ability to maintain or increase our government subsidies; (11) the anticipated improvement in the results of our Rail-Ferry Service; (12) the possible closure of the Mississippi River Gulf Outlet and our ability to relocate our Rail-Ferry Service operations or redeploy the vessels used in those operations in the event of such a closure; (13) the estimated effect on our results of operations of the American Jobs Creation Act of 2004; and (14) assumptions

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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.

Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ from those projected or assumed in our forward-looking statements, and those variations could be material.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties.  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.  

Other factors include (vi) changes in cargo, charterhire, fuel, and vessel utilization rates which could increase or decrease our gross voyage profit from our Liner Services; (vii) the rate at which competitors add or scrap vessels in the markets in which we operate; (viii) 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; (ix) 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; (x) changes in accounting policies and practices adopted voluntarily or as required by accounting principles generally accepted in the United States; (xi) changes in laws and regulations such as those related to government assistance programs and tax rates; (xii) the frequenc y and severity of claims against us, and unanticipated outcomes of current or possible future legal proceedings; (xiii) unplanned maintenance and out-of-service days on our vessels; (xiv) the ability of customers to fulfill obligations with us; (xv) the performance of unconsolidated subsidiaries; (xvi) our ability to 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; and (xvii) other economic, competitive, governmental, and technological factors which may affect our operations.

We caution readers that we assume no obligation to update or publicly release any revisions to forward-looking statements made in this report or elsewhere by us or on our behalf.

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, uncertainties and/or estimates. Information regarding our other accounting policies is included in the Notes to Consolidated Financial Statements.

Voyage Revenue and Expense Recognition

Revenues and expenses relating to our Liner and Rail-Ferry segments' voyages are recorded over the duration of the voyage.  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.  On our Liner Services, the voyage revenues are known at the beginning of the vessel's voyage and are reported through the date of the financial statements based on the relative transit time, which is the time between the vessel's loading port to the vessel's discharge port.  Variances from initial revenue estimates are generally not material.  Voyage expenditures are estimated at the beginning of the vessel's voyage based on historical cost standards and current estimates received from our vendors and port agents.  Provisions for loss voyages are recorded when contracts for the voyages are fixed and when losses become apparent for voyages in progress.  During the course of the vessel's voyage, typically 30 to 60 days, actual costs replace the original estimates and become part of the historical cost standards.  Because of our on-going voyage review process, all variances from our original revenue and expense estimates are reported timely and generally are not material or recurring.

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.

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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.

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.  The Jobs Creation Act, which became effective for our company on January 1, 2005, changed the United States tax treatment of the foreign operations of our U.S. flag vessels and our foreign flag shipping operations.  We made an election under th e Jobs Creation Act to have our qualifying U.S. flag operations taxed under a new “tonnage tax” regime rather than under the usual U.S. corporate income tax regime.  

Self-Retention Insurance

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 independent actuarial estimates, and to maintain the provisions at those levels for the estimated run-off period, approximately two years from the inception of that period.  We also establish provisions for P&I insurance deductibles based on internal estimates.  We believe most claims will be reported, or estimates for existing claims will be revised, within this two-year period. Subsequent to this two-year period, self-insurance provisions are adjusted to reflect our current estimate of loss exposure for the policy year.  Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estima ted 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.  However, if during this two-year period our estimate of loss exposure exceeds the actuarial estimate, then additional loss provisions are recorded to increase the self-insurance provisions to 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 coul d 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 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 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 from those estimate s.

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.  

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RESULTS OF OPERATIONS

Our vessels are operated under a variety of charters and contracts.  The nature of these arrangements is such that, without a material variation in gross voyage profits (total revenues less voyage expenses and vessel and barge depreciation), the revenues and expenses attributable to a vessel deployed under one type of charter or contract can differ substantially from those attributable to the same vessel if deployed under a different type of charter or contract.  Accordingly, depending on the mix of charters or contracts in place during a particular accounting period, our revenues and expenses can fluctuate substantially from one period to another even though the number of vessels deployed, the number of voyages completed, the amount of cargo carried, and the gross voyage profit derived from the vessels remain relatively constant.  As a result, fluctuations in voyage revenues and expenses are not necessarily ind icative of trends in profitability, and our management believes that gross voyage profit is a more appropriate measure of operating performance than revenues.  Accordingly, the discussion below addresses variations in gross voyage profits rather than variations in revenues.

Executive Summary

Our net income for the twelve months ended December 31, 2005, was $7.0 million as compared to $12.8 million for same period of 2004.  Net income for 2004 included a tax adjustment discussed later in this summary of $7.7 million associated with the Jobs Creation Act.  Our 2005 operating results were impacted by the hurricanes that struck the U.S. Gulf Coast in August and September of 2005 resulting in after-tax losses of approximately $2.1 million primarily related to our Rail-Ferry and Liner Services segments.  We also decided during the year to discontinue the operations of our over-the-road car transportation truck company and sold the associated assets early in the third quarter.  The operating losses for the year and the loss on the sale of those assets totaled approximately $1.3 million after taxes.  

The operating results for 2005 were favorably impacted by carrying more supplemental cargoes on our PCTC’s than in 2004 and profitable results from two container ships that were acquired near the end of 2004.  Late in the third quarter of 2005, we acquired a fifth modern high specification U.S. flag PCTC that we fixed on a long-term charter.

Our investments in two companies owning cement carrier vessels and bulk carrier vessels, respectively, contributed approximately $3.8 million, after taxes, to our net income for the year as compared to $4.6 million, after taxes, for 2004.  This included a before tax gain of $1.2 million from the sale of one of the cement carriers.  The company owning bulk carriers had a high percentage of voyage cargo contract of affreightment coverage in 2005, but a significant increase in unhedged bunker fuel costs and a change in market rates resulted in lower results for the year.

Our U.S. flag Coal Carrier operating in our Time Charter Contracts segment did not operate as many days beyond its charter obligation in 2005 as in 2004 due to market conditions.  The charter obligation does not require employment of the vessel for the full year.

Our U.S. flag and foreign flag LASH Liner Services experienced stronger cargo volumes and a more profitable cargo mix during 2005 as compared to 2004.  The U.S. flag service was affected by higher fuel costs while the effect on the foreign flag service was mitigated by fuel surcharges passed on to our customers that substantially covered those costs.  This segment was impacted by Hurricanes Katrina and Rita, which caused operational delays and had implications on vessel scheduling resulting in lost revenue and additional costs.  Lower productivity at our LASH barge maintenance facility resulted from reduced labor availability after the hurricanes has forced us to delay planned maintenance.  After considering that the cost of that maintenance has been deferred to later periods, we estimate the total impact of the hurricanes on this segment for the year to be approximately $375,000.

Our Rail-Ferry Service, which operates between Mexico and the U.S. Gulf Coast, moved its U.S. operations from Mobile, Alabama to New Orleans, Louisiana, during the year, which resulted in lost revenues and additional costs associated with the interruption in the service.  Soon after the service was operating from New Orleans, it was forced to cease operations due to the effects of Hurricane Katrina on the New Orleans area in late August.  Damages to the New Orleans facility have been repaired, and the service resumed limited operations in early November from New Orleans.  As discussed in the Risk Factors section of this report on page 11, we are considering all of our options regarding the service’s U.S. operations due to the uncertainty about the ability of the service continuing to operate from its New Orleans terminal due to the effects of Hurricane Katrina.  We estimate that the lost revenue s and additional associated costs related to Hurricane Katrina for this service during 2005 were approximately $2.5 million.  During 2005, we also began the process of adding a second cargo deck to each of the two vessels operating in the Rail-Ferry Service in order to essentially double their capacity, and we will be making improvements during 2006 to the terminal utilized by this service in Mexico to accommodate those decks.  While these projects were delayed after the hurricane, we expect the installation of the decks on both vessels and the terminal improvements in Mexico to be completed by the end of the third quarter of 2006.

The Jobs Creation Act, which became effective for us January 1, 2005, provided us with the ability to elect to have our U.S. flag international operations taxed under a tonnage tax rate rather than the U.S. corporate income tax rate and changed the treatment of shipping income from controlled foreign corporations, which is generally no longer subject to U.S. income tax until repatriated.  We made the tonnage tax election, and in 2005 we recognized a tax benefit of $2.5 million on

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income from continuing operations before equity in net income of unconsolidated entities of $2.0 million.  Our tax provision would have been $2.9 million higher under the U.S. corporate income tax rate.  In 2004, we adjusted our net deferred tax assets for the effects of the Jobs Creation Act resulting in an adjustment to the tax benefit in that year of $7.7 million.

In January of 2005, we completed our public offering of $40 million of 6% Convertible Exchangeable Preferred Stock.  Net income available to common stockholders for 2005 of $4.6 million is after payment of dividends on this preferred stock of $2.4 million.

YEAR ENDED DECEMBER 31, 2005

COMPARED TO YEAR ENDED DECEMBER 31, 2004

Gross Voyage Profit

 Gross voyage profit decreased 8.1% from $28.0 million in 2004 to $25.8 million in 2005.  The changes associated with each of our segments are discussed below.

Liner Services: Gross voyage results for this segment improved slightly from a loss of $1.6 million in 2004 to a loss of $1.5 million in 2005.  The improvement was primarily a result of stronger cargo volumes and a more profitable cargo mix for both the foreign flag and U.S. flag LASH Liner Services, partially offset by higher fuel costs on the U.S. flag service, higher vessel operating expenses and unanticipated costs associated with Hurricanes Katrina and Rita.  Increases in fuel costs during 2005 for our foreign flag LASH Liner Service were substantially covered by fuel surcharges passed on to our customers.

When Hurricane Katrina struck New Orleans in late August of 2005, the ships operating in this service were not located in the Gulf of Mexico.  After Katrina, these ships berthed at Lake Charles, Louisiana, rather than New Orleans as an operating focal point.  Two of the ships in the Liner Services were in, or in route to, the Port of Lake Charles when Hurricane Rita struck that area in September of 2005.  Although the ships safely weathered the impact of the storm, they experienced significant scheduling delays as a result of port and waterway closures.  The costs associated with diverting to Lake Charles and Baton Rouge and the delays and other incremental operating costs attributable to the hurricanes were approximately $1.2 million in 2005.  Operations at our LASH barge repair facilities were significantly curtailed as a result of the hurricanes during the year deferring the cost of scheduled maintenance to future periods.  We estimated the net impact of the hurricanes for the Liner Services in 2005 was $375,000.  

Time Charter Contracts: The increase in this segment’s gross voyage profit from $26.9 million in 2004 to $27.8 million in 2005 was attributable to gross profit from the two Container ships acquired in December of 2004, which we simultaneously chartered-out, our U.S. flag PCTCs carrying higher volumes of supplemental cargoes, which provide revenues in addition to those provided by the time charter agreements, during 2005 as compared to 2004, and the addition of our fifth U.S. flag PCTC in September of 2005.  The increase in gross voyage profit was partially offset by a scheduled charterhire rate decrease on one of our PCTCs during 2005.  Additionally, the results of our U.S. flag Coal Carrier were lower than 2004 as the vessel, due to market conditions, did not operate as many days beyond its charter obligation, which does not require employment of the vessel for the full year.

Contracts of Affreightment: Gross voyage profit for this segment decreased from $5.4 million in 2004 to $4.7 million in 2005 due to higher operating expenses, primarily fuel costs, in 2005.  Although the contract for the vessel operating in this segment includes provisions to escalate freight rates based on increases in fuel costs, that rate escalation occurs annually in September.  Therefore, operating expenses for periods in which fuel prices increase will be higher for the time before rates escalate.  However, periods in which fuel prices decrease will benefit from the escalation since it is based on the previous years costs.

Rail-Ferry Service: Gross voyage loss for this segment increased from a loss of $4.3 million in 2004 to a loss of $6.7 million in 2005.  This service normally operates between New Orleans, Louisiana and Coatzacalcos, Mexico, but the service was forced to cease operations after Hurricane Katrina at the end of August of 2005 through November 10, 2005, when we resumed partial operations.  We estimate that revenues lost in 2005, because of the suspension of service, were approximately $1.7 million and other costs related to the service interruption were approximately $832,000, resulting in an estimated direct impact of the hurricane on this service during the year of approximately $2.5 million.  We expect the service to be operating with both ships, each with a second cargo deck, by the end of the third quarter of 2006.

The New Orleans transfer facility, rail yard, and vessel loading/unloading facility are currently operating.  Damages to the facility have been repaired, and repairs to railcars in our possession at the time of the storm are in progress.  Our costs to repair damages in excess of our deductible levels are covered by third party insurance.    

The service experienced some out of service days before Hurricane Katrina due to operational delays related to the move of our domestic operations from Mobile, Alabama, to New Orleans, Louisiana, that also contributed to the increased losses in 2005 compared to 2004 (See Risk Factors Section on risks relating to this service on page 11).

Other: Gross voyage profit for this segment decreased slightly from $1.6 million in 2004 to $1.5 million in 2005.  

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Other Income and Expenses

The gain on the sale of other assets of $584,000 in 2005 primarily related to the sale of 67 LASH barges no longer needed for current operations.  In 2004, we had no sales of significant assets.  

Interest expense decreased 9% from $10.6 million in 2004 to $9.6 million, net of capitalized interest of $243,000, in 2005.  The decrease resulted primarily from early debt repayments in the second half of 2004, repurchase of $18.5 million of our 7¾% Senior Notes in 2005, and regularly scheduled payments on outstanding debt, partially offset by higher interest rates in 2005.

The gain on sale of investment in 2005 of $287,000 was related to the sale of stock from our portfolio of investments in our captive insurance company.

Investment income increased from $691,000 in 2004 to $1.1 million in 2005 primarily as a result of an increase in the balance of funds invested in the current period, primarily due to cash proceeds received from the sale of preferred stock completed in January of 2005.

Loss on early extinguishment of debt of $68,000 reported in 2005 was due to the early retirement of one of our loans, offset by the retirement at a slight discount of $18.5 million of our 7¾% Senior Notes due in 2007.  The loss of $361,000 reported in 2004 was due to the early retirement of debt associated with our Molten Sulphur Carrier, as well as the retirement of $410,000 of our 7¾% Senior Notes due in 2007 at a slight premium.  

Income Taxes

In December of 2004, we made an election under the Jobs Creation Act to have our qualifying U.S. flag operations taxed under the new tonnage tax regime, which became effective for us on January 1, 2005.  Primarily because of the changes resulting from the Jobs Creation Act, our federal tax benefit on our income from continuing operations for 2005, varied significantly from the federal provision that would have been recorded using our statutory federal tax rate of 35%.  In 2005, we recorded a benefit of $2.5 million on our $2 million of income from continuing operations before income from unconsolidated entities.  We would have recognized a tax provision during the period if we were still subject to the 35% statutory rate.  However, income from our subsidiaries whose ships qualify for tonnage tax treatment had an effective tax rate of only 1.67% for the period, which only slightly offset the tax benefit on t he losses generated by a subsidiary whose ships do not qualify for tonnage tax treatment.  This resulted in a tax benefit for a period in which we reported pre-tax income.

We had a tax benefit for federal income taxes of $6.9 million on income from continuing operations before income from unconsolidated entities in 2004, which included an addition to net income in the amount of $7.7 million reflecting a reduction in our net deferred tax provision brought about by the enactment of the Jobs Creation Act during the fourth quarter of 2004.  Passage of this new tax act, and our election in December of 2004 for our qualified domestic operations to be taxed under the tonnage tax provision of the new law, rendered certain net deferred tax provisions booked in prior years unnecessary.  For a discussion of the Jobs Creation Act and its estimated effect on our results of operations, see Note F – Income Taxes of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-17.

Equity in Net Income of Unconsolidated Entities

Equity in net income of unconsolidated entities, net of taxes, decreased from $4.6 million in 2004 to $3.8 million in 2005.  Our 50% investment in a company owning two Cape-Size Bulk Carriers and two Panamax-Size Bulk Carriers, contributed $2 million in 2005, net of taxes of $1.1 million, compared to $3.8 million, net of $2 million in taxes, in 2004 reflecting lower charter rates.  Our 26.1% investment in a Cement Carrier company contributed $1.9 million, net of $606,000 in taxes, in 2005 including a pre-tax gain of $1.2 million from our share of the sale of a Cement Carrier, compared to $827,000, net of $446,000 in taxes, in 2004.

Discontinued Operations

In 2005, we sold the assets associated with our over-the-road car transportation truck company.  The decision to sell these assets was primarily the result of a decrease during 2005 in the volume of business available to us due to the loss of market share by one of our customers and an industry-wide shortage of drivers that caused underutilization of the assets.  The sale of these assets resulted in a net loss before taxes of $769,000.   Losses before taxes from operations were $1.1 million in 2005 and $629,000 in 2004.

The over-the-road car transportation truck company was reported in the “Other” segment in previous periods.  Those periods have been restated to remove the effects of those operations from the “Other” segment to reflect the reclassification from continuing to discontinued operations.

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YEAR ENDED DECEMBER 31, 2004

COMPARED TO YEAR ENDED DECEMBER 31, 2003

Gross Voyage Profit

 Gross voyage profit decreased 15.4% from $33.1 million in 2003 to $28 million in 2004.  The changes associated with each of our segments are discussed below.

Liner Services: Gross voyage results for this segment improved from a loss of $4.2 million in 2003 to a loss of $1.6 million in 2004.  The improvement was primarily a result of higher cargo volumes in 2004 compared to 2003 for both our U.S. flag LASH Liner Service and foreign flag LASH Liner Service resulting primarily from the repeal of steel tariffs which increased inbound steel tonnage.  Additionally, the U.S. flag LASH Liner Service experienced a more profitable cargo mix in 2004 as compared to 2003.

Time Charter Contracts: The decrease in this segment’s gross voyage profit from $33 million in 2003 to $27 million in 2004 was attributable primarily to our U.S. flag PCTCs carrying lower volumes of supplemental cargoes, which provide revenues in addition to those provided by the time charter agreements, during 2004 as compared to 2003.  The gross voyage profit from our U.S. flag Coal Carrier was reduced approximately $1.9 million by an accelerated drydocking due to required repair and upgrade work resulting in sixty-four out-of-service days during 2004.  

Contracts of Affreightment: Gross voyage profit for this segment was approximately the same for 2004 compared to 2003.   This segment experienced an increase in cargo volume in 2004 but also experienced higher operating costs as a result of machinery deficiencies, which contributed approximately $100,000 to the segment’s operating costs, and weather delays resulting from hurricanes in the Gulf of Mexico, which contributed approximately $314,000 to the segment’s operating costs.

Rail-Ferry Service: Gross voyage loss for this segment increased from a loss of $2.9 million in 2003 to a loss of $4.3 million in 2004.  This service experienced higher operating costs due to unanticipated maintenance problems (which contributed approximately $570,000 to the segment’s operating costs), higher fuel costs (which contributed approximately $580,000 to the segment’s operating costs), and weather delays as a result of hurricanes in the Gulf of Mexico (which contributed approximately $160,000 to the segment’s operating costs) (See Risk Factors Section on risks relating to this service on page 11).

Other: Gross voyage profit for this segment decreased from $1.7 million in 2003 to $1.6 million in 2004.  The decrease resulted primarily from a casualty on one of our vessels that our insurance subsidiary covered for the policy year ended June 26, 2004.

Other Income and Expenses

In 2004, we had no sales of significant assets.  Gain on sale of other assets of $1.4 million in 2003 primarily related to the sale of our Multi-Purpose vessel, which completed its commitment under charter with the MSC and was no longer needed for operations, and the sale of Special Purpose barges no longer needed for current operations.  

Interest expense decreased 15.4% from $12.5 million in 2003 to $10.6 million in 2004.  Decreases due to regularly scheduled payments on outstanding debt accounted for $854,000 of the difference.  Reduced cost from the early repayment of our 7¾% Senior Notes due in 2007, as well as other early debt retirements, accounted for approximately $1 million of the decrease.

Investment income decreased from $2.2 million in 2003 to $691,000 in 2004 primarily as a result of $1.4 million of dividends received in 2003 from our investment in bulk carrier companies accounted for under the cost method.  We sold our investment in these bulk carrier companies at the end of 2003.  The decrease also resulted from lower interest rates earned on invested funds in the current period, partially offset by higher invested balances.

Loss on early extinguishment of debt of $361,000 reported in 2004 was due to the early retirement of debt associated with our Molten Sulphur Carrier, as well as the retirement at a slight premium of $410,000 of our 7¾% Senior Notes due in 2007.  The loss of $1.3 million in 2003 resulted from a "make-whole" prepayment penalty and write-off of deferred financing charges associated with the prepayment of our Coal Carrier loan. This was partially offset by the retirement at a discount of approximately $10.7 million of our 7¾% Senior Notes due in 2007.

Income Taxes

We had a tax benefit for federal income taxes of $6.9 million in 2004 and a tax provision of $3.0 million in 2003 on income from continuing operations before equity in net income of unconsolidated entities.  The statutory rate was 35% for both years.  Year 2004 included an addition to net income in the amount of $7.7 million reflecting a reduction in our net deferred tax provision brought about by the enactment of the Jobs Creation Act during the fourth quarter of 2004.  Passage of this new tax act, and our election in December of 2004 for our qualified domestic operations to be taxed under the tonnage tax provision of the new law, rendered certain net deferred tax provisions booked in prior years unnecessary.  For a

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discussion of the Jobs Creation Act and its estimated effect on our results of operations, see Note F – Income Taxes of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-17.

Equity in Net Income of Unconsolidated Entities

Equity in net income of unconsolidated entities, net of taxes, increased from $422,000 in 2003 to $4.6 million in 2004.  The improvement was primarily related to our 50% investment in a company owning Cape-Size Bulk Carriers and our minority interest in companies owning and operating Cement Carriers.   Our investment in the Cape-Size Bulk Carrier company, which was acquired in November of 2003, contributed $3.8 million net of taxes in 2004 compared with $80,000 in 2003.  Our investment in the Cement Carrier company contributed $827,000 net of taxes in 2004 compared to $339,000 net of taxes in 2003.  The increase in 2004 resulted primarily from higher charter rates.

Discontinued Operations

In 2005, we sold the assets associated with our over-the-road car transportation truck company.  The decision to sell these assets was primarily the result of a decrease during 2005 in the volume of business available to us due to the loss of market share by one of our customers and an industry-wide shortage of drivers that caused underutilization of the assets.  Losses before taxes from operations were $629,000 in 2004 and $345,000 in 2003.

The over-the-road car transportation truck company was reported in the “Other” segment in previous periods.  Those periods have been restated to remove the effects of those operations from the “Other” segment to reflect the reclassification from continuing to discontinued operations.

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 decreased from $17.7 million at December 31, 2004, to $16.1 million at December 31, 2005.  Cash and cash equivalents increased during 2005 by $5.7 million to a total of $16.2 million.  This increase was due to cash provided by operating activities of $23.8 million and by financing activities of $43.1 million, partially offset by cash used for investing activities of $61.2 million. Of the $57.7 million in current liabilities at December 31, 2005, $10.3 million related to current maturities of long-term debt.  

Operating activities generated a positive cash flow after adjusting net income of $7 million for non-cash provisions such as depreciation and amortization.  Cash provided by operating activities also included an increase in accounts receivable of $8.2 million primarily due to the timing of collections of receivables from the MSC and U.S. Department of Transportation, slightly offset by an increase in accounts payable and accrued liabilities of $1.8 million primarily from the deferral of payroll tax payments until February of 2006, resulting from relief provided to companies affected by Hurricane Katrina.  Also included was cash used of $5 million primarily to cover payments for vessel drydocking costs in 2005, offset by cash distributions received from our investments in unconsolidated entities.

Cash used for investing activities of $61.2 million included the purchase of a PCTC vessel in September of 2005 for approximately $32.1 million, upgrade work on our Rail-Ferry Service assets of $35 million of which $14.3 million was reimbursed by the State of Louisiana and City of New Orleans, and our investment of $1.6 million in a transloading and storage facility related to our Rail-Ferry Service, in which we have a 50% interest.  These uses of cash were offset by the proceeds from the sale of the over-the-road car transportation truck company assets of approximately $3.0 million and certain of our LASH barges of $700,000.

Cash provided by financing activities of $43.1 million included proceeds from the issuance of debt and preferred stock of $85.7 million.  In January of 2005, we received proceeds of $37.7 million from our preferred stock offering.  We used $20 million of the proceeds to repay the draws on our line of credit that were made in December of 2004 to purchase two container ships, and we have been using the remaining proceeds to fund the addition of the second decks to each of the two vessels operating in our Rail-Ferry Service.  We also received proceeds of $32.0 million from the financing of a PCTC vessel that we acquired in 2005 and $14.0 million to fund a portion of our costs associated with the improvements to the Louisiana terminal and the transloading and storage facility related to our Rail-Ferry Service.  Cash provided by financing activities also included $14.3 million for reimbursement of costs incurred for our Rail-Ferry Service expansion.  These sources of funds were offset by repayments of debt of $54.1 million, of which $22.0 million was for repayment on the line of credit draws, including the $20.0 million discussed earlier, $18.3 million used to repurchase $18.5 million of our 7¾% Senior Notes at a discount, $4.0 million used to prepay a loan, and regularly scheduled payments.

At December 31, 2005, $49.6 million was available on our $50.0 million revolving credit facility.  The facility expires in December of 2009.

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Preferred Stock Offering

On January 6, 2005, we announced the completion of our public offering of 800,000 shares of 6.0% convertible exchangeable preferred stock with a liquidation preference of $50 per share, or $40.0 million in total.  The preferred stock accrues cash dividends from the date of issuance at a rate of 6.0% per annum.  The preferred stock is initially convertible into two million shares of our common stock, equivalent to an initial conversion price of $20.00 per share of our common stock and reflecting a 34% conversion premium to the $14.90 per share closing price of our common stock on the New York Stock Exchange on December 29, 2004.  All shares of the preferred stock, which is a new series of our capital stock, were sold.  

Debt and Lease Obligations

We operate several vessels under operating leases, including three PCTCs, a LASH vessel, a Breakbulk Multi-purpose vessel, a Container vessel and a Tanker vessel.  We also conduct certain of our operations from leased office facilities and use certain transportation and other equipment under operating leases.  

The following is a summary of the scheduled maturities by period of our debt and lease obligations that were outstanding as of December 31, 2005:

Debt and lease obligations (000’s)	2006	2007	2008	2009	2010	Thereafter
Long-term debt (including current maturities)	$  10,275	$  62,808	$   10,275	$  10,275	$   10,275	$    68,157
Operating leases	19,444	19,372	17,331	16,267	32,818	46,612
Total by period	$  29,719	$  82,180	$   27,606	$  26,542	$   43,093	$  114,769

We are considering various options to refinance our 7¾% Senior Notes when they mature in 2007, including our available line of credit.

Debt Covenant Compliance Status

 As of December 31, 2005, 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 2006, although we can give no assurance to that effect.  If our cash flow and capital resources are not sufficient to fund our debt service obligations or if we are unable to meet our covenant requirements, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, enter into additional financings of our unencumbered vessels or restructure debt.

Rail-Ferry Service Expansion

We are in the process of adding a second deck to each vessel in order to essentially double their capacity, and we have made improvements to the terminal in Louisiana and will be making improvements to the terminal in Mexico.  Additionally, we have invested in a transloading and storage facility in New Orleans.  We anticipate our costs to complete these upgrades to be approximately $49.0 million, and we expect reimbursement of $15.0 million of our costs from the State of Louisiana (the “State”) and $2.0 million from the City of New Orleans (“the “City”), resulting in a net cost to us of approximately $32.0 million.  As of December 31, 2005, we have incurred costs totaling $40.8 million and have been reimbursed $14.3 million.  We have also recorded receivables from the State and City of $2.7 million for reimbursement of costs incurred as of December 31, 2005.  Total project cost s incurred include $28.1 million for the Louisiana terminal, $1.1 million for improvements to the transloading and storage facility, $10.0 million for the second decks, and $1.6 million for our 50% interest in the transloading and storage facility company.  The costs associated with the Louisiana terminal and improvements to the transloading and storage facility are reported in leasehold improvements on our Balance Sheet as of December 31, 2005, and the reimbursements to us from the State and the City are recorded as deferred credits under lease incentive obligation for the long-term portion and accounts payable and accrued liabilities for the current portion.  The leasehold improvements and deferred credits are being amortized over the 10-year lease term, which began in the third quarter of 2005.

The receivables of $2.7 million for reimbursements as of December 31, 2005, include $1.9 million from the State and $746,000 from the City.  The State funds have been appropriated for this project and are held by a trustee.  Although we believe the City funds of $746,000 are collectible, we cannot guarantee that the impact of Hurricane Katrina on the City will not affect our ability to collect these funds.  If the City does not reimburse that portion of the project, the aforementioned deferred credit will be reduced by $746,000, which would reduce the amortization of the deferred credit over the remainder of the lease term and result in higher net costs for the project.  

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Early in the fourth quarter of 2005, we received proceeds of $14.0 million from a seven year loan that we are using to fund a portion of our costs associated with the improvements to the Louisiana terminal and the transloading and storage facility.  

We expect the installation of the decks on both ships and the terminal in Mexico to be completed by the end of the third quarter of 2006.  We believe that this expansion will significantly reduce our cost per unit of cargo carried and significantly increase our cash flow, but only if we are able to book substantially all of the additional capacity, and we can give no assurance at this time that we will be successful in doing so.  We believe that the market will sustain these vessels for the foreseeable future; however, in the event that market conditions change, the vessels could be reassigned to other business subject to retrofitting.  Although the Rail-Ferry Service operations were suspended due to Hurricane Katrina, we do not expect long-term delays in completing the work planned for this expansion project.  The Rail-Ferry Service’s transfer facility, rail yard, and vessel loading/unloading facility were intact after Hurricane Katrina.  The railroads serving New Orleans are actively working to repair the rail infrastructure and rail connections to New Orleans.  We expect the cost of repairing the damages to the facility, including repairs to the railcars in our possession at the time of the storm, in excess of the applicable deductible levels to be covered by insurance.  

Our Rail-Ferry Service operates from a terminal in New Orleans, Louisiana.  Specifically, the terminal is located on the MR-GO which is a Federal waterway connecting to the U.S. Gulf of Mexico.  As a result of the devastating flooding caused by Hurricane Katrina, the Federal funding that the U.S. Army Corps of Engineers requires to dredge the MR-GO has been suspended.  While the current depth of the MR-GO is adequate to allow us to continue to operate, any further silting would prevent our long-term utilization of the MR-GO.  Therefore, as a result, we must review all options available to us regarding the continued operation of our Rail-Ferry Service including relocating the U.S. operations out of the New Orleans area.  

The total cost to build our terminal on the MR-GO was approximately $31 million. The City of New Orleans and the State of Louisiana have contributed approximately $17 million towards that cost, leaving our investment at risk at approximately $14 million.  We have begun dialogue with the State of Louisiana to discuss our options regarding our terminal on the MR-GO.  While we can give no assurance of the ultimate outcome of those discussions, we are satisfied that we will agree upon a fair solution.  In any event, the maximum impairment loss associated with our investment at the facility resulting from a relocation from the MR-GO, if we received no compensation, would be approximately $14 million.  Our investment of approximately $14 million was funded with the proceeds from a financing agreement.  Relocation of the terminal from our current location could potentially place us in default on this debt req uiring us to repay the unamortized balance.  Additionally, we could potentially be required to compensate the lender for their cost if they lost the ability to utilize certain federal tax credits available to them in relation to our financing agreement.

Maritime Security Program Contracts

In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all effective on October 1, 2005.  Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015.  As of December 31, 2005, our U.S. flag LASH vessel, five PCTCs and two Container ships qualified for participation.  

As of December 31, 2005, the U.S. Congress had not yet enacted the legislation to appropriate funding for this program for fiscal year 2006 at $2.6 million per year per vessel.  Therefore, Congress passed a continuing resolution allowing this program to continue at fiscal year 2005 funding levels for all vessels qualifying for the program.  Since the number of vessels in this program increased October 1, 2005, which is the beginning of the new fiscal year, and the total funds appropriated for fiscal year 2006 are higher than for fiscal year 2005, the payments per vessel were lower for the period until the legislation was passed in January of 2006 and the funds were appropriated for fiscal year 2006. In January of 2006, payments were received that resulted in fully compensating us for all periods since October 1, 2005, based on $2.6 million per vessel per year.

Cargo Transfer Facility

As reported previously, we are evaluating whether to continue to operate our intermodal terminal facility in Memphis, Tennessee, because the volume of cargo from our LASH liner services that is moving through that facility has decreased.  Our lease of that facility extends through May of 2008 with future lease obligations of approximately $798,000.  We are exploring the possibility of terminating the lease and are also marketing our assets associated with the facility, which are fully depreciated and have no carrying value, to partially offset any cost of the termination.  The impact on net income and cash flows of a lease termination and sale of assets could be significant and would be dependent upon our ongoing discussions with the lessor of the facility and our ability to sell the assets as well as the amount of proceeds received from any sale.  We are also reviewing other possibilities for utilizing the facility through the lease term.

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Dividend Payments

Our preferred stock accrues cash dividends from the date of issuance at a rate of 6.0% per annum, which are payable quarterly.  The payment of preferred stock dividends is at the discretion of our board of directors.  As a result of our preferred stock offering, we are restricted from paying common stock dividends and acquiring any of our common stock prior to December 31, 2007.  

Environmental Issues

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, provided for in our self-retention insurance reserves or otherwise indemnified.  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 each occurrence, with a deductible amount of $25,000 for each incident.

New Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”  Statement No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.”  Statement 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.  Pro forma disclosures are no longer an alternative.  Statement No. 123(R) was effective for calendar year public companies at the beginning of 2006.  Effective January 1, 2006, we have adopted Statement No. 123(R), which had no impact on our financial position and results of operation.

Statement 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 modifi ed prospective method.  We have adopted this statement using the modified prospective method.

As permitted by Statement No. 123, we account for share-based payments to employees using APB Opinion No. 25 and as such no compensation expense has been recognized for employee options granted under the Stock Incentive Plan.  Accordingly, the adoption of Statement No. 123(R)’s fair value method will have an impact on our results of operations in future periods if we were to grant additional awards.  The impact of adoption of Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.  However, had we adopted Statement No. 123(R) in prior periods, there would have been no impact as described in the disclosure of pro forma net income and earnings per share in Note E – Employee Benefit Plans of the Notes to the Consolidated Financial Statements contained in this Form 10-K on page F-14.

In November 2004, FASB issued SFAS No. 151, “Inventory Costs.”  SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.  SFAS 151 requires that those amounts, if abnormal, be recognized as expenses in the period incurred.  In addition, SFAS 151 requires the allocation of fixed production overheads to the cost of conversion based upon the normal capacity of the production facilities.  SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  Effective January 1, 2006, we have adopted SFAS 151, which had no impact on our financial position and results of operation.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of our business, we are exposed to foreign currency, interest rate, and commodity price risk.  We utilize derivative financial instruments including interest rate swap agreements, forward exchange contracts and commodity swap agreements to manage certain of these exposures.  We hedge only firm commitments or anticipated transactions and do not use derivatives for speculation.  We neither hold nor issue financial instruments for trading purposes.  

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Interest Rate Risk

The fair value of our cash and short-term investment portfolio at December 31, 2005, approximated carrying value due to its short-term duration.  The potential decrease in fair value resulting from a hypothetical 10% increase in interest rates at year-end for our investment portfolio is not material.

The fair value of long-term debt, including current maturities, was estimated to be $173 million compared to a carrying value of $172 million.  The potential increase in fair value resulting from a hypothetical 10% adverse change in the borrowing rates applicable to our long-term debt at December 31, 2005, would be approximately $671,000 or 0.3% of the carrying value.

We entered into three interest rate swap agreements with commercial banks, two in September of 2005 and another in November of 2005, in order to reduce the possible impact of higher interest rates in the long-term market by utilizing the fixed rate available with the swap.  For each of these agreements, the fixed rate payor is the Company, and the floating rate payor is the commercial bank.  While these arrangements are structured to reduce our exposure to increases in interest rates, it also limits the benefit we might otherwise receive from any decreases in interest rates.

The fair value of these agreements at December 31, 2005, estimated based on the amount that the banks would receive or pay to terminate the swap agreements at the reporting date, taking into account current market conditions and interest rates, is an asset of $217,000.  A hypothetical 10% decrease in interest rates as of December 31, 2005 would have resulted in a $713,000 decrease in the fair value of the asset.

Commodity Price Risk

As of December 31, 2005, we do not have commodity swap agreements in place to manage our exposure to price risk related to the purchase of the estimated 2006 fuel requirements for our Liner Services or Rail-Ferry Service segments.  We have fuel surcharges in place for our foreign flag LASH Liner Service and our Rail-Ferry Service, which we expect to effectively manage the price risk for those services during 2006.  If we had commodity swap agreements, they would be structured to reduce our exposure to increases in fuel prices, however, they would also limit the benefit we might otherwise receive from any price decreases associated with this commodity.  A 20% increase in the price of fuel for the period January 1, 2005 through December 31, 2005 would have resulted in an increase of approximately $3.3 million in our fuel costs for the same period, and in a corresponding decrease of appr oximately $0.55 in our earnings per share based on the shares of our common stock outstanding as of December 31, 2005.  However, a significant portion of that price increase would have been passed on to our customers through the aforementioned fuel surcharges during the same period.

Foreign Exchange Rate Risk

We have entered into foreign exchange contracts to hedge certain firm purchase commitments with varying maturities throughout 2006.  The exchange rates at which these hedges were entered into did not materially differ from the exchange rates in effect at December 31, 2005.  The potential fair value of these contracts that would have resulted from a hypothetical 10% adverse change in the exchange rates applicable to these contracts at December 31, 2005, is an asset of approximately $100,000 assuming that none of the rate increases could have been passed on to our customers through currency surcharges.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by Item 8 begins on page F-1 of this Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9a.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation of the effectiveness of our “disclosure controls and procedures,” as that phrase is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  The evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this report, in timely alerting them to material information required to be disclosed in our periodic filings with the Securities and Exchange Commission (“SEC”), and in ensuring that the

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information required to be disclosed in those filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

ITEM 9b.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have adopted a written Code of Business Conduct and Ethics applicable to all officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer.  Interested persons may obtain a copy of our Code of Business Conduct and Ethics without charge by writing to International Shipholding Corporation, Attention: Manuel G. Estrada, Vice President and Chief Financial Officer, 1700 Poydras Center, 650 Poydras Street, New Orleans, LA 70130.

The information relating to Directors and Executive Officers called for by Item 10 is incorporated herein by reference to Item 4a, Executive Officers and Directors of the Registrant.  The information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 called for by Item 10 is included on page 12 of our definitive proxy statement dated March 14, 2006, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The information called for by Item 11 is included on pages 9, 10 and 11 of our definitive proxy statement dated March 14, 2006, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 12 is included on pages 2, 3, 4, and 5 of our definitive proxy statement dated March 14, 2006, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 is included on pages 2, 3, 4, 5 and 12 of our definitive proxy statement dated March 14, 2006 filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by Item 14 is included on page 8 of our definitive proxy statement dated March 14, 2006 filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference.

29

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 Statements

The following financial statements and related notes are included on pages F-1 through F-29 of this Form 10-K.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003

Consolidated Balance Sheets at December 31, 2005 and 2004

Consolidated Statements of Changes in Stockholders' Investment for the years ended December 31, 2005, 2004, and 2003

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003

Notes to Consolidated Financial Statements

2.

Financial Statement Schedules

The following financial statement schedules are included on pages S-1 through S-3 of this Form 10-K.

Report of Independent Registered Public Accounting Firm

Schedule II -- Valuation and Qualifying Accounts and Reserves

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

3.

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, 2004 and incorporated herein by reference)

(3.3)

Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 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)

(4.2)

Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the 7¾% Senior Notes due October 15, 2007 (filed with the Securities and Exchange Commission as Exhibit 4.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)

(4.3)

Form of 7¾% Senior Note due October 15, 2007 (included in Exhibit 4.2 hereto and incorporated herein by reference)

(4.4)

Indenture, dated as of January 6, 2005, by and between the Registrant and The Bank of New York, as Trustee, with respect to the 6.0% Convertible Subordinated Notes due 2014 (filed with the Securities and Exchange Commission as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 and incorporated herein by reference)

(4.5)

Form of 6.0% Convertible Subordinated Note due 2014 (included in Exhibit 4.4 hereto and incorporated herein by reference)

(4.6)

Specimen of 6.0% Convertible Exchangeable Preferred Stock Certificate (filed with the Securities and Exchange Commission as Exhibit 4.6 to Pre-Effective Amendment No. 3, dated December 23, 2004 and filed with the Securities and Exchange Commission on December 23, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)

30

(4.7)

Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed as Exhibit 3.3 hereto 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, HSBC Bank PLC, as Facility Agent, DnB NOR Bank ASA, as Documentation Agent, Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee, 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

(10.5)

Consulting Agreement, dated January 1, 2006, between the Registrant and Niels W. Johnsen

(10.6)

Summary of Executive Officer’s Salaries

(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 Stock Option Agreement for the Grant of Non-Qualified Stock Options under the International Shipholding Corporation Stock Incentive Plan (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, 2004 and incorporated herein by reference)

(10.9)

Description of Non-Management Director Compensation (filed with the Securities and Exchange Commission as Exhibit 10.7 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)

(10.10)

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)

(21.1)

Subsidiaries of International Shipholding Corporation

(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

 (c)

The Index of Exhibits and required Exhibits are included following the signatures beginning at page 34 of this Report.

31

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)

/s/ Manuel G. Estrada

March 10, 2006

By

______________________________

Manuel G. Estrada

Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

INTERNATIONAL SHIPHOLDING CORPORATION

(Registrant)

/s/ Erik F. Johnsen

March 10, 2006

By

____________________________

Erik F. Johnsen

Chairman of the Board, Director and

Chief Executive Officer

/s/ Niels M. Johnsen

March 10, 2006

By

____________________________

Niels M. Johnsen

President and Director

/s/ Erik L. Johnsen

March 10, 2006

By

____________________________

Erik L. Johnsen

Executive Vice President and Director

/s/ Niels W. Johnsen

March 10, 2006

By

____________________________

Niels W. Johnsen

Director

/s/ Harold S. Grehan, Jr.

March 10, 2006

By

____________________________

Harold S. Grehan, Jr.

Director

/s/ Raymond V. O’Brien, Jr.

March 10, 2006

By

____________________________

Raymond V. O’Brien, Jr.

Director

32

/s/ Edwin Lupberger

March 10, 2006

By

____________________________

Edwin Lupberger

Director

/s/ Edward K. Trowbridge

March 10, 2006

By

____________________________

Edward K. Trowbridge

Director

/s/ H. Merritt Lane, III

March 10, 2006

By

____________________________

H. Merritt Lane, III

Director

/s/ Manuel G. Estrada

March 10, 2006

By

____________________________

Manuel G. Estrada

Vice President and Chief Financial Officer

/s/ Ada Pratt Boutchard

March 10, 2006

By

____________________________

Ada Pratt Boutchard

Vice President and Controller

33

EXHIBIT  INDEX

Exhibit

Number

----------

(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, 2004 and incorporated herein by reference)

(3.3)

Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 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)

(4.2)

Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the 7¾% Senior Notes due October 15, 2007 (filed with the Securities and Exchange Commission as Exhibit 4.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference)

(4.3)

Form of 7¾% Senior Note due October 15, 2007 (included in Exhibit 4.2 hereto and incorporated herein by reference)

(4.4)

Indenture, dated as of January 6, 2005, by and between the Registrant and The Bank of New York, as Trustee, with respect to the 6.0% Convertible Subordinated Notes due 2014 (filed with the Securities and Exchange Commission as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 6, 2005 and filed with the Securities and Exchange Commission on January 7, 2005 and incorporated herein by reference)

(4.5)

Form of 6.0% Convertible Subordinated Note due 2014 (included in Exhibit 4.4 hereto and incorporated herein by reference)

(4.6)

Specimen of 6.0% Convertible Exchangeable Preferred Stock Certificate (filed with the Securities and Exchange Commission as Exhibit 4.6 to Pre-Effective Amendment No. 3, dated December 23, 2004 and filed with the Securities and Exchange Commission on December 23, 2004, to the Registrant's Registration Statement on Form S-1 (Registration No. 333-120161) and incorporated herein by reference)

(4.7)

Certificate of Designations of the 6.0% Convertible Exchangeable Preferred Stock of the Registrant filed with the Delaware Secretary of State on January 5, 2005 (filed as Exhibit 3.3 hereto 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, HSBC Bank PLC, as Facility Agent, DnB NOR Bank ASA, as Documentation Agent, Deutsche Schiffsbank Aktiengesellschaft, as Security Trustee, 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

(10.5)

Consulting Agreement, dated January 1, 2006, between the Registrant and Niels W. Johnsen

(10.6)

Summary of Executive Officer’s Salaries

34

(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 Stock Option Agreement for the Grant of Non-Qualified Stock Options under the International Shipholding Corporation Stock Incentive Plan (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, 2004 and incorporated herein by reference)

(10.9)

Description of Non-Management Director Compensation (filed with the Securities and Exchange Commission as Exhibit 10.7 to the Registrant's Form 10-K for the annual period ended December 31, 2004 and incorporated herein by reference)

(10.10)

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)

(21.1)

Subsidiaries of International Shipholding Corporation

(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

35

INDEX OF FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2

Consolidated Statements of Income for the years ended

   December 31, 2005, 2004, and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-3

Consolidated Balance Sheets at December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Changes in Stockholders' Investment

   for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-6

Consolidated Statements of Cash Flows for the years ended

   December 31, 2005, 2004, and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-8

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, 2005 and 2004, 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, 2005. 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 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 Company’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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonab le 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

        /s/   Ernst & Young LLP

New Orleans, Louisiana

February 22, 2006

F-2

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
	Year Ended December 31,
	2005	2004	2003
Revenues	$       262,156	$     259,164	$      255,301
Operating Expenses:
Voyage Expenses	213,997	212,860	202,362
Vessel and Barge Depreciation	22,379	18,258	19,799
Gross Voyage Profit	25,780	28,046	33,140
Administrative and General Expenses	16,052	15,536	14,601
(Gain) Loss on Sale of Other Assets	(584)	7	(1,393)
Operating Income	10,312	12,503	19,932
Interest and Other:
Interest Expense	9,626	10,585	12,514
Loss (Gain) on Sale of Investment	(287)	623	-
Investment Income	(1,111)	(691)	(2,162)
Loss on Early Extinguishment of Debt	68	361	1,310
	8,296	10,878	11,662
Income from Continuing Operations Before (Benefit) Provision for
Income Taxes and Equity in Net Income Unconsolidated Entities	2,016	1,625	8,270
(Benefit) Provision for Income Taxes:
Current	129	-	183
Deferred	(2,609)	(6,946)	2,755
State	23	23	39
	(2,457)	(6,923)	2,977
Equity in Net Income of Unconsolidated Entities (Net of Applicable Taxes)	3,793	4,646	422
Income from Continuing Operations	8,266	13,194	5,715
Loss from Discontinued Over-the-Road Transportation Operations
(Net of Applicable Taxes)	(1,270)	(409)	(224)
Net Income	$           6,996	$       12,785	$          5,491
Preferred Stock Dividends	2,367	-	-
Net Income Available to Common Stockholders	$           4,629	$       12,785	$          5,491
Basic and Diluted Earnings Per Common Share:
Net Income Available to Common Stockholders - Basic
Continuing Operations	$             0.97	$           2.17	$            0.94
Discontinued Operations	(0.21)	(0.07)	(0.04)
	$             0.76	$           2.10	$            0.90
Net Income Available to Common Stockholders - Diluted
Continuing Operations	$             0.96	$           2.17	$            0.94
Discontinued Operations	(0.21)	(0.07)	(0.04)
	$             0.75	$           2.10	$            0.90
Weighted Average Shares of Common Stock Outstanding:
Basic	6,083,005	6,082,887	6,082,887
Diluted	6,114,510	6,092,302	6,082,887

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	2005		2004
Current Assets:
Cash and Cash Equivalents	$	16,178	$	10,513
Marketable Securities		6,614		6,138
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $184 and $146 in 2005 and 2004:
Traffic		22,649		20,953
Agents'		4,929		3,509
Claims and Other		10,990		5,135
Federal Income Taxes Receivable		324		459
Deferred Income Tax		149		187
Net Investment in Direct Financing Leases		3,923		2,337
Other Current Assets		4,432		4,756
Material and Supplies Inventory, at Lower of Cost or Market		3,575		3,239
Current Assets Held for Disposal		55		89
Total Current Assets		73,818		57,315
Investment in Unconsolidated Entities		14,926		11,115
Net Investment in Direct Financing Leases		74,642		46,776
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges		366,026		348,307
Leasehold Improvements		29,319		-
Other Equipment		2,077		7,082
Furniture and Equipment		3,762		3,624
		401,184		359,013
Less -  Accumulated Depreciation		(151,640)		(129,560)
		249,544		229,453
Other Assets:
Deferred Charges, Net of Accumulated Amortization
of $10,968 and $16,374 in 2005 and 2004, Respectively		13,839		14,809
Acquired Contract Costs, Net of Accumulated Amortization
of $24,341 and $22,886 in 2005 and 2004, Respectively		6,185		7,640
Restricted Cash		6,541		6,541
Due from Related Parties		1,600		2,535
Other		8,412		8,864
		36,577		40,389
	$	449,507	$	385,048

The accompanying notes are an integral part of these statements.

F-4

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share Data)
	December 31,		December 31,
	2005		2004
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Maturities of Long-Term Debt	$	10,275	$	9,468
Accounts Payable and Accrued Liabilities		47,423		30,197
Total Current Liabilities		57,698		39,665
Billings in Excess of Income Earned and Expenses Incurred		4,062		4,723
Long-Term Debt, Less Current Maturities		161,720		168,622
Other Long-Term Liabilities:
Deferred Income Taxes		13,169		15,222
Lease Incentive Obligation		14,450		-
Other		20,140		21,362
		47,759		36,584
Commitments and Contingent Liabilities
Convertible Exchangeable Preferred Stock		37,554		-
Stockholders' Investment:
Common Stock, $1.00 Par Value, 10,000,000 Shares
Authorized, 6,759,730 and 6,756,330 Shares Issued at
December 31, 2005 and 2004, Respectively		6,760		6,756
Additional Paid-In Capital		54,495		54,450
Retained Earnings		87,344		82,715
Less - 673,443 Shares of Common Stock in Treasury,
at Cost, at December 31, 2005 and 2004		(8,704)		(8,704)
Accumulated Other Comprehensive Income		819		237
		140,714		135,454
	$	449,507	$	385,048

The accompanying notes are an integral part of these statements.

F-5

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, 2002	$   6,756	$    54,450	$  64,439	$ (8,704)	$        (1,714)	$ 115,227
Comprehensive Income:
Net Income for Year Ended December 31, 2003	-	-	5,491	-	-	5,491
Other Comprehensive Income (Loss):
Unrealized Holding Gain on Marketable Securities,
Net of Deferred Taxes of $207	-	-	-	-	387	387
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of $141	-	-	-	-	262	262
Total Comprehensive Income						6,140
Balance at December 31, 2003	$   6,756	$    54,450	$  69,930	$ (8,704)	$        (1,065)	$  121,367
Comprehensive Income:
Net Income for Year Ended December 31, 2004	-	-	12,785	-	-	12,785
Other Comprehensive Income:
Recognition of Unrealized Holding Loss on Marketable
Securities, Net of Deferred Taxes of $216	-	-	-	-	402	402
Unrealized Holding Gain on Marketable Securities,
Net of Deferred Taxes of $118	-	-	-	-	220	220
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of $366	-	-	-	-	680	680
Total Comprehensive Income						14,087
Balance at December 31, 2004	$   6,756	$    54,450	$  82,715	$ (8,704)	$              237	$  135,454
Comprehensive Income:
Net Income for Year Ended December 31, 2005	-	-	6,996	-	-	6,996
Other Comprehensive Income:
Recognition of Unrealized Holding Gain on Marketable
Securities, Net of Deferred Taxes of ($88)	-	-	-	-	(163)	(163)
Unrealized Holding Gain on Marketable Securities,
Net of Deferred Taxes of $224	-	-	-	-	416	416
Net Change in Fair Value of Derivatives, Net of
Deferred Taxes of ($91)	-	-	-	-	329	329
Total Comprehensive Income						7,578
Preferred Stock Dividends	-	-	(2,367)	-	-	(2,367)
Options Exercised	4	45	-	-	-	49
Balance at December 31, 2005	$  6,760	$    54,495	$  87,344	$ (8,704)	$            819	$  140,714

The accompanying notes are an integral part of these statements.

F-6

INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
	Year Ended December 31,
	2005	2004	2003
Cash Flows from Operating Activities:
Net Income	$           6,996	$       12,785	$            5,491
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation	23,116	19,420	20,855
Amortization of Deferred Charges and Other Assets	8,071	7,844	7,525
(Benefit) Provision for Deferred Federal Income Taxes	(3,245)	(7,166)	2,634
Equity in Net Income of Unconsolidated Entities	(3,793)	(4,646)	(422)
Distributions from Unconsolidated Entities	3,280	4,542	-
(Gain) Loss on Sale of Other Assets	(584)	7	(1,393)
Loss on Sale of Assets from Discontinued Operations	769	-	-
Loss on Early Extinguishment of Debt	68	361	1,310
(Gain) Loss on Sale of Investment	(287)	623	-
Changes in:
Accounts Receivable	(8,185)	7,031	(7,390)
Inventories and Other Current Assets	722	1,308	231
Deferred Drydocking Charges	(5,043)	(7,450)	(2,210)
Other Assets	884	1,277	2,668
Accounts Payable and Accrued Liabilities	1,802	(3,089)	3,536
Federal Income Taxes Payable	(331)	(1,066)	8,379
Billings in Excess of Income Earned and Expenses Incurred	(661)	(548)	3,270
Other Long-Term Liabilities	199	(2,244)	(5,868)
Net Cash Provided by Operating Activities	23,778	28,989	38,616
Cash Flows from Investing Activities:
Net Investment in Direct Financing Leases	(29,452)	2,151	1,944
Additions to Vessels, Leasehold Improvements, and Other Assets	(35,000)	(25,565)	(5,360)
Proceeds from Sale of Other Assets	3,756	-	3,299
Purchase of and Proceeds from Short Term Investments	200	(3,155)	126
Proceeds from Sale of Marketable Equity Securities	-	-	200
Investment in Unconsolidated Entities	(1,647)	-	(3,362)
Partial Sale of Unconsolidated Entities	-	-	4,223
Net Decrease in Restricted Cash Account	-	865	690
Net Decrease in Related Party Note Receivables	935	-	-
Other Investing Activities	-	115	12
Net Cash (Used) Provided by Investing Activities	(61,208)	(25,589)	1,772
Cash Flows from Financing Activities:
Proceeds from Issuance of Preferred Stock	37,725	-	-
Proceeds from Issuance of Common Stock	49	-	-
Proceeds from Issuance of Debt	48,000	29,000	139,000
Repayment of Debt	(54,095)	(29,920)	(173,675)
Additions to Deferred Financing Charges	(421)	(766)	(1,054)
Preferred Stock Dividends Paid	(2,367)	-	-
Reimbursements for Leasehold Improvements	14,310	-	-
Other Financing Activities	(106)	(82)	(197)
Net Cash Provided (Used) by Financing Activities	43,095	(1,768)	(35,926)
Net Increase in Cash and Cash Equivalents	5,665	1,632	4,462
Cash and Cash Equivalents at Beginning of Year	10,513	8,881	4,419
Cash and Cash Equivalents at End of Year	$    16,178	$   10,513	$        8,881

The accompanying notes are an integral part of these statements.

F-7

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 exercise significant influence over 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 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.

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, 2005, our fleet consisted of 39 ocean-going vessels, 850 LASH (Lighter Aboard SHip) barges, 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 wit h 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 Liner and Rail-Ferry Service segments’ voyages are recorded over the duration of the voyage.  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.  On our Liner Services, the voyage revenues are known at the beginning of the vessel’s voyage and are reported through the date of the financial statements based on the relative transit time, which is the time between the vessel’s loading port to the vessel’s discharge port.  Voyage expenditures are estimated at the beginning of the vessel’s voyage based on historical cost standards and current estimates received from our vendors and port agents.  Provisions for loss voyages are recorded when contracts for the voyages are fixed and when losses become a pparent for voyages in progress.

Maritime Security Program

 The Maritime Security Act  (“MSA”), which provides for a program, the Maritime Security Program (“MSP”), for certain U.S. flag vessels, was signed into law in October of 1996.  As of December 31, 2005, our U.S. flag LASH vessel, four of our Pure Car/Truck Carriers (“PCTCs”), two Container vessels, and an additional PCTC that we purchased in October of 2005 were qualified and received contracts for MSA participation.  In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all effective on October 1, 2005.  Annual payments for each vessel in the new MSP program are $2,600,000 in years 2006 to 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 guara nteed.  We recognize MSP revenue on a monthly basis over the duration of the qualifying contracts.   

As of December 31, 2005, the U.S. Congress had not yet enacted the legislation to appropriate funding for this program for fiscal year 2006 at $2,600,000 per year per vessel.  Therefore, Congress passed a continuing resolution allowing this program to continue at fiscal year 2005 funding levels for all vessels qualifying for the program.  Since the number of vessels in this program increased October 1, 2005, which was the beginning of the new fiscal year, and the total

F-8

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

funds appropriated for fiscal year 2006 are higher than for fiscal year 2005, the payments per vessel were lower for the period until the legislation was passed in January of 2006 and the funds were appropriated for fiscal year 2006. In January of 2006, payments were received that resulted in fully compensating us for all periods since October 1, 2005, based on $2,600,000 per vessel per year.

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 are stated at the lower of cost or market.  The first-in, first-out method is used for inventories aboard our vessels, including fuel.  As of December 31, 2005, inventory included approximately $2,628,000 for ordinary maintenance materials and parts and $947,000 for operating supplies.

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.  Estimated useful lives of Vessels and Barges, Leasehold Improvements, Other Equipment, and Furniture and Equipment are as follows:

	Years
2 LASH Vessels	30
4 Pure Car/Truck Carriers	20
1 Coal Carrier	15
7 Other Vessels *	25
Leasehold Improvements	10
Other Equipment	3-12
Furniture and Equipment	3-10

* Includes two Special Purpose vessels, a Molten Sulphur Carrier, a Dockship, and three Container vessels.  

At December 31, 2005, our fleet of 39 vessels also included (i) three Roll-On/Roll-Off (“RO/RO”) vessels, which we operate, (ii) a Breakbulk/Multi-Purpose vessel, a Tanker and a Container vessel, which we charter in for one of our services, (iii) three PCTCs which we charter in for our Time Charter contracts, (iv) one LASH vessel which we charter in for our Transatlantic service, (v) two Cape-Size Bulk Carriers and two Panamax-Size Bulk Carriers in which we own a 50% interest, and (vi) eleven Cement Carriers, including nine vessels, one barge and one tug boat in which we own a 26.1% 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 $243,000 for the year ended December 31, 2005.  Capitalized interest was calculated based on our weighted average interest rate on our outstanding debt.  No interest was capitalized in 2004 or 2003.  

At December 31, 2005, our fleet also included 850 LASH barges.  We group our LASH barges, excluding those held for disposal, into pools with estimated useful lives corresponding to the remaining useful lives of the vessels with which they are utilized.  Major barge refurbishments are capitalized and included in the aforementioned group of barge pools.  From time to time, we dispose of barges in the ordinary course of business.  

We are in the process of disposing of 11 LASH barges, which are not needed for current operations and are included in our balance sheet as Current Assets Held for Disposal.  

We are in the process of adding a second deck to both of our Special Purpose vessels in order to essentially double their capacity, and have made improvements to the terminal in Louisiana and will be making improvements to the terminal in Mexico.  Additionally, we have invested in a transloading and storage facility in New Orleans.  We anticipate our costs to complete these upgrades to be approximately $49 million, and we expect reimbursement of $15 million of our costs from the State of Louisiana (the “State”) and $2 million from the City of New Orleans (“the “City”), resulting in a net cost to us

F-9

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of approximately $32 million.  As of December 31, 2005, we have incurred costs totaling $40.8 million and have been reimbursed $14.3 million.  We have also recorded receivables from the State and City of $2.7 million for reimbursement of costs incurred as of December 31, 2005.  Total project costs incurred include $28.1 million for the Louisiana terminal, $1.1 million for improvements to the transloading and storage facility, $10 million for the second decks, and $1.6 million for our 50% interest in the transloading and storage facility company.  The costs associated with the Louisiana terminal and improvements to the transloading and storage facility are reported in leasehold improvements on our Balance Sheet as of December 31, 2005, and the reimbursements to us from the State and the City are recorded as deferred credits under lease incentive obligations for the long-term portion and accounts payable and accrued liabilitie s for the current portion.  The leasehold improvements and deferred credits are being amortized over the ten-year lease term, which began in the third quarter of 2005.  We expect the installation of the decks on both ships and the terminal in Mexico to be completed by the end of the third quarter of 2006.

During 2005, we recognized a net gain on the sale of assets of $584,000 from the sale of 67 LASH barges no longer needed for operations.  In 2005, we sold the assets associated with our over-the-road car transportation truck company, resulting in a loss on the sale of these assets of $769,000 (See Note P).  During 2004, we had no sales of significant assets.  During 2003, we recognized a net gain on the sale of assets of $1,393,000 primarily as a result of a gain of $756,000 on the sale of the remaining Special Purpose barges, a gain of $482,000 from the sale of our Multi-Purpose vessel, which completed its commitment under charter with the Military Sealift Command (“MSC”) and was no longer needed for operations, a gain of $115,000 relating to the sale of certain of our investments in unconsolidated entities, and the gain of $40,000 for the sale of terminal land and facilities no longer needed for oper ations.

We monitor all of 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.  

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) (See Note J).

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 J).

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 independent actuarial estimates, and to maintain the provisions at those levels for the estimated run-off period, approximately two years from the inception of that period.  We believe most claims will be reported, or estimates for existing claims will be revised, within this two-year period.  Subsequent to this two-year period, self-insurance provisions are adjusted to reflect our current estimate of loss exposure for the policy year.  However, if during this two-year period our estimate of loss exposure exceeds the actuarial estimate, then additional loss provisions are recorded to increase the self-insurance provisions to our estimate of the eventual claims’ settlement cos t.  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 D).

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.

F-10

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 American Jobs Creation Act of 2004 (“Jobs Creation Act”), which became effective for our company on January 1, 2005, changed the United States tax treatment of the foreign operations of our U.S. flag vessels and our foreign flag shipping operations.  In late 2004, we recognized the effects of the Jobs Creation Act on our deferred federal income tax liability as of December 31, 2004, and began recognizing the effects of the Jobs Creation Act in 2005 on income earned beginning January 1, 2005.  We made an election under the Jobs Creation Act to have our qualifying U.S. flag operations taxed under a new “tonnage tax” regime rather than under the usual U.S. corporate income tax regime.  Throughout 2005, the U.S. tax on these operations has been based on the tonnage of the vessels, rather than their contribution to our income or profits (See Note F).

Foreign Currency Transactions

Certain of our revenues and expenses are converted into or denominated in foreign currencies, primarily 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. Exchange losses of $74,000, $20,000 and $96,000 were recognized for the years ended December 31, 2005, 2004 and 2003, respectively.  

Dividend Policy

 On January 6, 2005, we announced the completion of our public offering of 6% convertible exchangeable preferred stock, and we have paid quarterly cash dividends commencing in March of 2005 at a rate of 6% per annum.  The payment of preferred stock dividends is at the discretion of our board of directors.  Through our preferred stock offering, we are restricted from paying common stock dividends and acquiring any of our common stock prior to December 31, 2007.  

Earnings Per Share

Basic and diluted earnings per share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods.  Stock options covering 471,600 and 475,000 shares (See Note E) were included in the computation of diluted earnings per share in the years ended December 31, 2005 and 2004, respectively, but were excluded from the computation of diluted earnings per share in the year ended December 31, 2003, as the effect would have been antidilutive.  

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 recognize the fair market value of the hedge through earnings at the time of maturity, sale or termination of the hedge.  We currently employ, or have employed in the past , interest rate swap agreements, foreign currency contracts, and commodity swap contracts (See Note N).

Stock-Based Compensation

We account for stock-based compensation using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation expense is 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 E).

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.  

F-11

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”  Statement No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.”  Statement 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.  Pro forma disclosures are no longer an alternative.  Statement No. 123(R) was effective for calendar year public companies at the beginning of 2006.  Effective January 1, 2006, we have adopted Statement No. 123(R), which had no impact on our financial position and results of operation.

Statement 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 pro spective method. We have adopted this statement using the modified prospective method.

As permitted by Statement No. 123, we account for share-based payments to employees using APB Opinion No. 25 and as such no compensation expense has been recognized for employee options granted under the Stock Incentive Plan.  Accordingly, the adoption of Statement No. 123(R)’s fair value method will have an impact on our results of operations in future periods if we were to grant additional awards.  The impact of adoption of Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.  However, had we adopted Statement No. 123(R) in prior periods, there would have been no impact as described in the disclosure of pro forma net income and earnings per share in Note E – Employee Benefit Plans of the Notes to the Consolidated Financial Statements contained in our December 31, 2004 Form 10-K.  

In November 2004, FASB issued SFAS No. 151, “Inventory Costs.”  SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.  SFAS 151 requires that those amounts, if abnormal, be recognized as expenses in the period incurred.  In addition, SFAS 151 requires the allocation of fixed production overheads to the cost of conversion based upon the normal capacity of the production facilities.  SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  Effective January 1, 2006, we have adopted SFAS 151, which had no impact on our financial position and results of operation.

NOTE B –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.  Cash dividends are cumulative and payable quarterly in arrears at an annual rate of 6% per share, when and as declared by our Board of Directors.  

Each share of the preferred stock has a liquidation preference of $50 per share and may be converted into shares of our common stock based on the initial conversion price of $20.00 per share, subject to adjustment upon the occurrence of certain events.  We may elect to redeem the preferred stock, in whole or in part, for cash at any time on or after December 31, 2006, provided that prior to December 31, 2007, we may elect to redeem the preferred stock only if the closing price of our common stock has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption.  We may also elect to redeem the preferred stock for cash upon a change in control of our company.  In addition, upon a change in control of our company and to the extent we have not exercised our change in control redemption option, preferred stockholders may require us to redeem for cash any or all of the shares of the preferred stock at the liquidation preference of the preferred stock, plus any accrued and unpaid cash dividends to, but not including, the date of redemption.  Preferred stockholders have no other rights to require us to redeem the preferred stock.

At our option, we may exchange the preferred stock in whole, but not in part, on any dividend payment date beginning on March 31, 2006 and prior to December 31, 2014, for our 6.0% convertible subordinated notes due 2014.  If we elect to exchange the preferred stock for the notes, the exchange rate will be $50 principal amount of the notes for each share of preferred stock.  The notes, if issued, will mature on December 31, 2014 and will have terms substantially similar to those of the preferred stock.

F-12

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The preferred stock has no maturity date and no voting rights prior to conversion to common stock.  The notes, if issued, will have no voting rights prior to conversion to common stock.

NOTE C - LONG-TERM DEBT

(All Amounts in Thousands)	Interest Rate			Total Principal Due
	December 31,	December 31,	Maturity	December 31,		December 31,
Description	2005	2004	Date	2005		2004
Unsecured:
Senior Notes – Fixed Rate	7.75%	7.75%	2007	$    52,465		$     70,925
Secured:
Notes Payable – Variable Rate	5.53%	N/A	2015	31,333		-
Notes Payable – Variable Rate	3.869%	N/A	2012	14,000		-
Notes Payable – Variable Rate	5.45-5.65%	3.6875-4.00%	2013	74,197		81,665
Notes Payable – Variable Rate	N/A	3.92%	2007	-		5,500
Line of Credit	N/A	4.3063%	2009	-		20,000
				$   171,995		$   178,090
	Less Current Maturities			(10,275)	(9,468)
				$   161,720	$   168,622

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

Our variable rate notes payable are secured by assets with the an aggregate net book value of $200,871,000 as of December 31, 2005, and by a security interest in certain operating contracts and receivables.

The aggregate principal payments required as of December 31, 2005, for each of the next five years are $10,275,000 in 2006, $62,739,000 in 2007, primarily due to the maturity of our 7 ¾% Senior Notes, $10,275,000 in 2008,  $10,275,000 in 2009, and $10,275,000 in 2010.  We are considering various options to refinance our 7¾% Senior Notes when they mature in 2007, including our available line of credit.

During 2005, we retired $18,500,000 of the 7¾% Notes of which $17,000,000 was at a discount and the remaining $1,500,000 was at a premium.  We also retired certain other outstanding debt prior to maturity.  In 2004, we retired $410,000 of the 7 ¾% Notes at a discount and retired certain other outstanding debt prior to maturity.  Additionally in 2003, we secured financing of $91,000,000, which was used to retire certain of our outstanding debt, including a loan on our Coal Carrier on which we incurred a make-whole premium upon retirement.  Upon these retirements of indebtedness, we recorded a net Loss on Early Extinguishment of Debt for the years ended December 31, 2005, 2004 and 2003, of approximately $68,000, $361,000 and $1,310,000, respectively.

As of December 31, 2005 and 2004, we had available a line of credit totaling $50,000,000.  As of December 31, 2005, we had no balance outstanding on our line of credit.  As of December 31, 2004, the balance outstanding on our line of credit was $20,000,000, which was repaid in January of 2005.  

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, 2005, 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 2006, although we can give no assurance to that effect.  

The most restrictive of our credit agreements prohibit the declaration or payment of dividends unless (1) the total of (a) all dividends paid, distributions on, or other payments made with respect to our capital stock during the period beginning January 1, 1999, and ending on the date of dividend declaration or other payment and (b) all investments other than our Qualified Investments (as defined) and certain designated subsidiaries do not exceed the sum of $10,000,000 plus 50% (or, in case of a loss, minus 100%) of our consolidated net income during the period described above plus the net cash proceeds received from our issuance of common stock during the above period, and (2) no default or event of default has occurred.

F-13

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 D – SELF-RETENTION INSURANCE

We are self-insured for Hull and Machinery claims between $150,000 and $1,150,000 and Loss of Hire claims in excess of 14 days, up to an aggregate stop loss amount of $2,000,000.  Once aggregate claims exceed $2,000,000, we have third party coverage for additional claims with deductible levels of $150,000 per incident for Hull and Machinery and 14 days for Loss of Hire.  We have third party coverage for individual Hull and Machinery claims exceeding $1,150,000.  The independent actuarial estimates of our self-insurance exposure are approximately $761,000 below the aggregate $2,000,000 stop loss amount for the policy year beginning June 27, 2005.   

The current portions of the liabilities for self-insurance exposure were $1,985,000 and $1,515,000 at December 31, 2005 and 2004, respectively, and the noncurrent portions of these liabilities were $2,057,000 and $1,435,000 at December 31, 2005 and 2004, respectively.

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 a deductible level of $25,000 per incident for all vessels.  

NOTE E – EMPLOYEE BENEFIT PLANS

Pension and Postretirement Benefits

Our defined benefit retirement plan covers all full-time employees of domestic subsidiaries who are not otherwise covered under union-sponsored plans.  The benefits are based on years of service and the employee’s highest sixty consecutive months of compensation.  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, 2005 was 39.5% in fixed income investments and 60.5% in equity investments.  The asset allocation on December 31, 2004 was 41% in fixed income investments and 59% 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, 2005, the plan has assets of $20,330,000 and a projected pension obligation of $23,323,000.

Our postretirement benefit plans currently provide medical, dental, and life insurance benefits to eligible retired employees and their eligible dependents.  The measurement date for both plans is December 31.  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,
	2005	2004	2005	2004
Change in Benefit Obligation
Benefit Obligation at Beginning of Year	$          22,461	$         20,266	$           9,638	$           9,687
Service Cost	668	548	90	77
Interest Cost	1,248	1,229	536	550
Actuarial (Gain) Loss	(31)	1,394	(551)	133
Benefits Paid and Expected Expenses	(1,023)	(976)	(549)	(555)
Impact of Plan Amendments	-	-	-	(254)
Benefit Obligation at End of Year	$          23,323	$         22,461	$            9,164	$            9,638

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All Amounts in Thousands)	Pension Plan		Postretirement Benefits
	Year Ended December 31,		Year Ended December 31,
	2005	2004	2005	2004
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year	$          19,119	$         17,828	$                 -	$                 -
Actual Return on Plan Assets	1,130	1,857	-	-
Employer Contribution	1,100	410	549	555
Benefits Paid and Actual Expenses	(1,019)	(976)	(549)	(555)
Fair Value of Plan Assets at End of Year	20,330	19,119	-	-
Funded Status	(2,994)	(3,342)	(9,164)	(9,638)
Unrecognized Net Actuarial Loss	3,998	3,935	1,576	2,257
Unrecognized Prior Service Cost	-	-	(210)	(232)
Prepaid Cost (Benefit Obligation) at End of Year	$            1,004	$              593	$         (7,798)	$         (7,613)
Key Assumptions
Discount Rate	5.75%	5.75%	5.75%	5.75%
Rate of Compensation Increase	5.00%	5.50%	N/A	N/A

The accumulated benefit obligation for the pension plan was $19,963,000 and $19,061,000 at December 31, 2005 and 2004, respectively.  

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,
	2005	2004	2003	2005	2004	2003
Components of Net Periodic Benefit Cost
Service Cost	$        668	$        548	$        469	$           90	$         77	$          67
Interest Cost	1,248	1,229	1,194	536	550	595
Expected Return on Plan Assets	(1,440)	(1,395)	(1,201)	-	-	-
Amortization of Prior Service Cost	-	8	8	(22)	(21)	-
Amortization of Net Actuarial Loss	212	86	188	131	73	67
Net Periodic Benefit Cost	$        688	$        476	$        658	$         735	$       679	$        729
Key Assumptions
Discount Rate	5.50%	6.25%	6.75%	5.50%	6.25%	6.75%
Expected Return on Plan Assets	7.75%	8.00%	8.00%	N/A	N/A	N/A
Rate of Compensation Increase	5.00%	5.50%	5.50%	N/A	N/A	N/A

For measurement purposes, the health and dental care cost trend rate was assumed to be 9% for 2005, decreasing steadily by .50 per year over the next eight years to a long-term rate of 5%.  The health and dental care cost trend rate for employees over 65 was assumed to be 11% decreasing steadily by .50% per year over the next twelve years 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, 2005	$                76	$             (62)
Change in postretirement benefit obligation as of December 31, 2005	1,121	(929)

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the expected future benefit payments as of December 31, 2005:

(All Amounts in Thousands)
Fiscal Year	Pension Plan	Postretirement Benefits
2006	$               1,102	$                   491
2007	1,124	520
2008	1,180	543
2009	1,215	566
2010	1,270	590
2011-2015	7,291	3,115

Crew members on our U.S. flag vessels belong to union-sponsored pension plans.  We contributed approximately $1,988,000, $1,499,000, and $1,472,000 to these plans for the years ended December 31, 2005, 2004, and 2003, 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.

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.

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.  In May of 2004, the FASB issued FASB Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvements, and Modernization Act of 2003,” that provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide drug benefits.  We have determined that our plan is actuarially equivalent and as such we qualify for this s pecial subsidy.  The effect of our future savings from this law reduced the December 31, 2005 estimate of our accumulated postretirement benefit obligation by approximately $2.3 million, which was recorded in the net actuarial gain for 2005.  The new law also resulted in a decrease in our annual net periodic benefit cost for periods beginning January 1, 2005.  For 2005, the decrease in our annual net periodic benefit cost was approximately $250,000.

401(k) Savings Plan

We provide a 401(k) tax-deferred savings plan to all full-time employees who have completed at least 1,000 hours of service.  We match 50% of the employee’s first $2,000 contributed to the plan annually.  We contributed $107,000, $102,000 and $87,000 to the plan for the years ended December 31, 2005, 2004 and 2003, respectively.

Stock Incentive Plan

In April of 1998, we established a stock-based compensation plan, the Stock Incentive Plan (the “Plan”). The purpose of the Plan is to increase shareholder value and to advance the interest of the Company by furnishing a variety of economic incentives designed to attract, retain, and motivate key employees and officers and to strengthen the mutuality of interests between such employees, officers, and our shareholders.  Incentives consist of opportunities to purchase or receive shares of common stock in the form of incentive stock options, non-qualified stock options, restricted stock, or other stock-based awards.  Under the Plan, we may grant 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 gran ted to certain qualified participants at an exercise price of $14.125 per share.  The stock options are due to expire on April 14, 2008.  All options vested immediately upon the grant date and were exercisable at December 31, 2005.  No options were granted or forfeited during 2005.  A total of 3,400 shares were exercised in 2005 and 25,800 shares were exercised in 2006 through February 22, 2006.  No options were granted, exercised or forfeited during 2004 or 2003.

We account for stock-based compensation in accordance with APB Opinion No. 25.  Accordingly, no compensation expense has been recognized for employee options granted under the Plan.  If we had determined compensation cost for the Plan based on the fair value at the grant dates for awards under the Plan consistent with the fair value method included in SFAS No. 123 “Accounting for Stock-Based Compensation,” our net income and earnings per

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

share for the years ended December 31, 2005, 2004, and 2003 would have agreed to the actual amounts reported since no stock options were granted for these years and all options outstanding vested in 1999.

Life Insurance

We have agreements with the former Chairman and current Chairman 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 amounted to $1,000,000 and hold an insurance policy, which covers any remaining liability.  The cash surrender value of the insurance policy was approximately $118,000 and $132,000 as of December 31, 2005 and 2004, respectively.

NOTE F - 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 Jobs Creation Act, which became effective for us on January 1, 2005, changed the United States tax treatment of our U.S. flag vessels in foreign operations and our foreign 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 a new “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. < /P>

We have recorded a reduction in our deferred tax provision of $350,000 in 2005 and $12,058,000 in 2004 relating to the write off of deferred tax assets and liabilities that will no longer reverse as a result of the election of the tonnage tax regime.

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 will be taxed at the highest corporate income tax rate.  The daily notional taxable income from the operation of a qualifying vessel will be 40 cents per 100 tons of the net tonnage of the vessel up to 25,000 net tons, and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons.  The taxable income of each qualifying vessel will be the product of its daily notional taxable income and the number of days during the taxable year that the vessel operates in United States foreign trade.  In 2005, we incurred $129,000 of U.S. income tax liability under the tonnage tax regime on income of $9,144,000 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 until repatriated.  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.  Foreign tax credits of $4,394,000 are available to offset future taxable income of the CFCs as that income is repatriated.

The Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005 have provided certain special tax incentives for companies like us located in the Hurricane Katrina core disaster area.  The Acts created a new tax credit, the Employee Retention Credit, to encourage employers to keep employees on their payroll.  The credit is equal to 40% of the first $6,000 in wages paid to each eligible employee after August 28, 2005, and before January 1, 2006, by employers in the core disaster area, for the period the business is rendered inoperable as a result of damage caused by Hurricane Katrina.  In 2005, we recorded a deferred tax benefit of $293,000 for the Employee Retention Credit.

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 earnings (losses) of foreign subsidiaries, which were $159,000 in 2005, $4,155,000 in 2004, and $553,000 in 2003, are also included in our Federal income tax returns.

Prior to 1987, deferred income taxes were not provided on undistributed foreign earnings of $6,689,000, all of which are expected to remain invested abroad indefinitely.  In accordance with the Tax Reform Act of 1986, commencing in

F-17

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1987, shipping income, as defined under the U.S. Subpart F income tax provisions, generated from profitable controlled foreign subsidiaries are subject to Federal income taxes.

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

	December 31,	December 31,
(All Amounts in Thousands)	2005	2004
Liabilities:
Fixed Assets	$       28,738	$       29,731
Deferred Charges	2,401	2,056
Unterminated Voyage Revenue/Expense	39	884
Other Liabilities	3,542	4,551
	34,720	37,222
Assets:
Insurance and Claims Reserve	301	(37)
Deferred Intercompany Transactions	-	(2,530)
Post-Retirement Benefits	(386)	(357)
Alternative Minimum Tax Credit	(4,577)	(4,577)
Net Operating Loss Carryforward/Unutilized Deficit	(15,355)	(13,954)
Valuation Allowance	3,594	4,330
Worker Retention Credit	(293)	-
Other Assets	(4,984)	(5,062)
Total Assets	(21,700)	(22,187)
Total Deferred Tax Liability, Net	$       13,020	$      15,035

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

                Year Ended December 31,

	2005	2004	2003
Statutory Rate	35.00%	35.00%	35.00%
State Income Taxes	1.14%	2.35%	0.49%
Effect of Tonnage Tax Rate Jobs Creation Act Adjustment	(152.40%)    (17.37%)	- (776.11%)	- -
Change in Valuation Allowance	21.67%	-	-
Employee Retention Credit Other, Primarily Non-deductible Expenditures	(14.54%)        4.57%	- 21.50%	- 0.55%
	(121.93%)	(717.26%)	36.04%

Foreign income taxes of $461,000, $410,000 and $563,000 are included in our consolidated statements of income in the Provision for Income Taxes for the years ended December 31, 2005, 2004, and 2003, respectively.  We pay foreign income taxes in Indonesia.

For U.S. federal income tax purposes, we have net operating loss carryforwards (“NOLs”) of approximately $8,892,000 that, if not used, will expire in 2022 through 2025.  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 $6,497,000 available to reduce future state taxable income.  These NOLs expire in varying amounts beginning in year 2010 through 2019.

We had total income from continuing operations before (benefit) provision for income taxes and equity in net income of unconsolidated entities of $2,016,000, $1,625,000 and $8,270,000 for 2005, 2004 and 2003, respectively.  Income (loss) from continuing U.S. operations was $3,778,000, $1,411,000 and $10,378,000, and income (loss) from continuing foreign operations was ($1,762,000), $214,000 and ($2,108,000) for 2005, 2004 and 2003, respectively.

NOTE G – TRANSACTIONS WITH RELATED PARTIES

We own a 26.1% interest in Belden Cement Holding, Inc. (“BCH”) (See Note L).  At December 31, 2004, we had long-term receivables of $2,385,000 from BCH and $150,000 from Echelon Shipping, Inc. (“Echelon”), a wholly-owned

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

subsidiary of BCH.  During 2005, these long-term receivables were paid in full.  Interest income on these receivables was earned at a rate of 6% per year.  These long-term receivables were included in Due from Related Parties.

We own a 50% interest in RTI Logistics L.L.C. (“RTI”) (See Note L).  At December 31, 2005, we had a note receivable of $2,000,000 due from RTI.  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 5% per year for seven years.  

A son of our Chairman of the Board serves as our Secretary and is a partner in the law firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre, which has represented us since our inception.  A son of one of our Directors serves as our Assistant Secretary and is a partner in the same law firm.  Fees paid to the firm for legal services rendered to us were approximately $1,633,000, $1,001,000 and $1,030,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  Amounts of $60,000 were due to the legal firm at December 31, 2005, which was included in Accounts Payable and Accrued Liabilities, and no amounts were due at December 31, 2004.

NOTE H - COMMITMENTS AND CONTINGENCIES

Commitments

As of December 31, 2005, 18 vessels that we own or operate were under various contracts extending beyond 2005 and expiring at various dates through 2019.  Certain of these agreements also contain options to extend the contracts beyond their minimum terms.

We maintain lines of credit totaling approximately $440,000 to cover standby letters of credit required on certain of our contracts.

Contingencies

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 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 $660,000.  We believe those estimates are reasonable and have established reserves accordingly.  Our reserves for these lawsuits as of December 31, 2005 and 2004 were approximately $660,000 and $800,000, 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 reasonab ly 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) 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.

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 D 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 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.

Our Rail-Ferry Service operates from a terminal in New Orleans, Louisiana.  Specifically, the terminal is located on the Mississippi River Gulf Outlet (“MR-GO”) which is a Federal waterway connecting to the U.S. Gulf of Mexico.    As a result of the devastating flooding caused by Hurricane Katrina, the Federal funding that the U.S. Army Corps of Engineers requires to dredge the MR-GO has been suspended.  While the current depth of the MR-GO is adequate to allow us to continue to operate, any further silting would prevent our long-term utilization of the MR-GO.  Therefore, as a result, we

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

must review all options available to us regarding the continued operation of our Rail-Ferry Service including relocating the U.S. operations out of the New Orleans area.  

The total cost to build our terminal on the MR-GO was approximately $31 million. The City of New Orleans and the State of Louisiana have contributed approximately $17 million towards that cost, leaving our investment at risk at approximately $14 million.  We have begun dialogue with the State of Louisiana to discuss our options regarding our terminal on the MR-GO.  While we can give no assurance of the ultimate outcome of those discussions, we are satisfied that we will agree upon a fair solution.  In any event, the maximum impairment loss associated with our investment at the facility resulting from a relocation from the MR-GO, if we received no compensation, would be approximately $14 million.  Our investment of approximately $14 million was funded with the proceeds from a financing agreement.  Relocation of the terminal from our current location could potentially place us in default on this debt requiring us to repay the unamortized balance.  Additionally, we could potentially be required to compensate the lender for their cost if they lost the ability to utilize certain federal tax credits available to them in relation to our financing agreement.

NOTE I - LEASES

Direct Financing Leases

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 foreign flag PCTC expiring in 2019.  The schedule of future minimum rentals to be received under these direct financing leases in effect at December 31, 2005, is as follows:

	Receivables Under Financing Leases
(All Amounts in Thousands)
Year Ended December 31,
2006	$   14,077
2007	14,077
2008	14,099
2009	13,498
2010	13,112
Thereafter Total Minimum Lease Payments Receivable	86,268
	155,131
Estimated Residual Value of Leased Property	8,052
Less Unearned Income	(84,618)
Total Net Investment in Direct Financing Leases	78,565
Current Portion	(3,923)
Long-Term Net Investment in Direct Financing Leases at December 31, 2005	$   74,642

The schedule of future minimum rentals to be received under the direct financing lease in effect at December 31, 2004, was as follows:

	Receivables Under
(All Amounts in Thousands)	Financing Lease
Year Ended December 31,
2005	$     8,432
2006	8,431
2007	8,431
2008	8,455
2009	7,853
Thereafter	67,021
Total Minimum Lease Payments Receivable	108,623
Estimated Residual Value of Leased Property	2,051
Less Unearned Income	(61,561)
Total Net Investment in Direct Financing Lease	49,113
Current Portion	(2,337)
Long-Term Net Investment in Direct Financing Lease at December 31, 2004	$    46,776

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INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Operating Leases

During 2001, we entered into two sale-leasebacks, covering one of our U.S. flag PCTCs and one of our foreign flag PCTCs for terms of 12 years and 15 years, respectively.  The gains on these sale-leasebacks are being deferred over the term lives of the leases.  We renegotiated a capital lease agreement for one of our U.S. flag PCTCs in December of 2001 and subsequently reclassified the lease to an operating lease with a term of 10 years.  This reclassification resulted in a gain of $5,309,000, which is being deferred over the remaining term life of the lease.  During 2002, we entered into a sale-leaseback for one of our LASH vessels, which was also classified as an operating lease with a term of 5 years.

Our operating lease agreements have a fair value renewal option and a fair value purchase option.  Most of these 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.  Under one of our operating lease agreements, a deposit was made into a bank reserve account to meet the requirements of the lease agreement.  The owner of the vessel has the ability to draw on this amount to cover operating lease payments if such payments become overdue.  The escrow amounts totaled $6,541,000 at December 31, 2005 and 2004, and are included in Restricted Cash.  The vessels under these leases, with the exception of the LASH vessel, are operated under fixed charter agreements covering the terms of the respective leases.  

We also conduct certain of our operations from leased office facilities under operating leases expiring at various dates through 2011.

Rent expense related to operating leases totaled approximately $27,063,000,  $28,623,000 and $30,079,000 for the years ended December 31, 2005, 2004 and 2003, 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, 2005:

	Payments Under Operating Leases
(All Amounts in Thousands)	U.S. Flag PCTCs	Foreign Flag PCTC	LASH Vessel	Other Leases	Total
Year Ended December 31,
2006	$   9,596	$    6,340	$   1,920	$   1,588	$ 19,444
2007	9,596	6,340	1,760	1,676	19,372
2008	9,596	6,340	-	1,395	17,331
2009	9,596	6,340	-	331	16,267
2010	26,147	6,340	-	331	32,818
Thereafter	11,185	35,399	-	28	46,612
Total Future Minimum Payments	$ 75,716	$  67,099	$   3,680	$   5,349	$151,844

NOTE J - 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)	2005	2004
Drydocking Costs	$ 11,711	$ 12,129
Financing Charges and Other	2,128	2,680
Acquired Contract Costs	6,185	7,640
	$ 20,024	$ 22,449

The Acquired Contract Costs represent the portion of the purchase price paid for Waterman Steamship Corporation applicable primarily 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, 2005 and 2004 was $1,455,000.  The estimated annual amortization expense is $1,455,000 for 2006, 2007, 2008 and 2009, and $364,000 for 2010.

F-21

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - SIGNIFICANT OPERATIONS

Major Customers

We have several medium- to long-term contracts related to the operations of various vessels (See Note H), from which revenues represent a significant amount of our total revenue.  Revenues from the contracts with the MSC were $29,157,000, $27,017,000 and $35,874,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  

We operate a U.S. flag LASH vessel in a liner service which participates in the MSP program (See Note A – “Maritime Security Program”).  Revenues, including MSP revenue, were $26,816,000, $30,008,000 and $26,790,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  

We have five U.S. flag PCTCs, also under the MSP, which carry automobiles from Japan to the United States for a Japanese charterer.  One of these U.S. flag PCTCs was purchased in September of 2005.  Revenues, including MSP revenue, were $39,756,000, $36,831,000 and $39,516,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

We provide space on our westbound foreign flag LASH liner service to several commercial shippers.  The westbound cargoes included steel and other metal products, high-grade paper and wood products, and other general cargo.  Revenues were $40,196,000, $38,823,000 and $26,002,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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, 2005 or 2004.

With only minor exceptions related to personnel aboard certain foreign flag vessels, most of our shipboard personnel are covered by collective bargaining agreements under multiple unions.  

Geographic Information

We have operations in several principal markets, including international service between the U.S. Gulf and East Coast ports and ports in the Middle East, Far East, and northern Europe, 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 the Time Charter Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are assigned to regions based on the location of the customer.  Revenues for the Liner Services are presented based on the location of the ports serviced by this segment.  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)		2005	2004		2003
United States		$       94,300	$         86,568		$       106,214
Asian Countries		62,191	59,309		56,473
Rail-Ferry Service Operating Between U.S. Gulf and Mexico		11,051	15,880		15,537
Liner Services Operating Between:
	U.S. Gulf / East Coast Ports and Ports in Middle East	26,816		30,008	26,790
	U.S. Gulf / East Coast Ports and Ports in Northern Europe	66,549		65,705	48,845
Other Countries		1,249		1,694	1,442
	Total Revenues	$     262,156		$       259,164	$       255,301

Operating Segments

Our operating segments are identified primarily based on the characteristics of the contracts or terms under which the fleet of vessels and barges 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.

Liner Services: In our liner services segment we operate four vessels, including one “dockship” that positions barges for pick-up and discharge, on established trade routes with regularly scheduled sailing dates.  We receive revenues for the carriage of cargo within the established trading areas and pay the operating and voyage expenses incurred. Our Liner Services include a U.S. flag service between U.S. Gulf and East Coast ports and ports in the Red Sea and in South Asia, and a foreign flag transatlantic service operating between U.S. Gulf and East Coast ports and ports in northern Europe.

F-22

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 seven 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 two container vessels.

Contracts 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 has a capacity for 60 standard size rail cars.  With departures every four days from Coatzacoalcos, Mexico and New Orleans, Louisiana 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 segment consists of operations that include more specialized services than the former four segments and subsidiaries that provide 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 sale 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.

	Liner	Time Charter		Rail-Ferry
(All Amounts in Thousands)	Services	Contracts	COA	Service	Other	Elim.	Total
2005
Revenues from External Customers	$   93,365	$   138,177	$  16,693	$   11,051	$    2,870	-	$   262,156
Intersegment Revenues	-	-	-	-	12,614	$(12,614)	-
Depreciation and Amortization	4,834	17,822	2,747	5,008	39	-	30,450
Gross Voyage (Loss) Profit	(1,492)	27,774	4,692	(6,684)	1,490	-	25,780
Interest Expense	631	6,162	1,148	1,651	34	-	9,626
Gain on Sale of Other Assets	584	-	-	-	-	-	584
Segment (Loss) Profit	(1,539)	21,612	3,544	(8,335)	1,456	-	16,738
Segment Assets	22,680	194,575	35,202	90,578	1,175	-	344,210
Expenditures for Segment Assets	3,590	1,038	-	35,035	380	-	40,043
2004
Revenues from External Customers	$   95,713	$   113,954	$  16,562	$   15,881	$  17,054	-	$   259,164
Intersegment Revenues	-	-	-	-	12,264	$(12,264)	-
Depreciation and Amortization	5,279	13,879	2,709	4,090	145	-	26,102
Gross Voyage (Loss) Profit	(1,563)	26,914	5,411	(4,304)	1,588	-	28,046
Interest Expense	749	6,515	1,430	1,853	38	-	10,585
Loss on Sale of Other Assets	-	-	-	-	(7)	-	(7)
Segment (Loss) Profit	(2,312)	20,399	3,981	(6,157)	1,543	-	17,454
Segment Assets	23,126	182,447	37,971	49,839	1,300	-	294,683
Expenditures for Segment Assets	988	29,946	6	232	202	-	31,374

F-23

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Liner	Time Charter		Rail-Ferry
(All Amounts in Thousands)	Services	Contracts	COA	Service	Other	Elim.	Total
2003
Revenues from External Customers	$   75,635	$   129,685	$   16,189	$   15,537	$  18,255	-	$   255,301
Intersegment Revenues	-	-	-	-	13,551	$  (13,551)	-
Depreciation and Amortization	5,108	15,144	2,799	4,101	172	-	27,324
Gross Voyage (Loss) Profit	(4,199)	33,048	5,495	(2,926)	1,722	-	33,140
Interest Expense	1,051	7,232	1,820	2,348	63	-	12,514
Gain on Sale of Other Assets	-	482	-	-	911	-	1,393
Segment (Loss) Profit	(5,250)	26,298	3,675	(5,274)	2,570	-	22,019
Segment Assets	27,196	167,803	40,637	53,519	1,490	-	290,645
Expenditures for Segment Assets	4,077	611	-	-	394	-	5,082

In 2005, we sold the assets associated with our over-the-road car transportation truck company.  The decision to sell these assets was primarily the result of a decrease during 2005 in the volume of business available to us due to the loss of market share by one of our customers and an industry-wide shortage of drivers that caused underutilization of the assets.  The over-the-road car transportation truck company was reported in the “Other” segment in previous periods.  Those periods have been restated to remove the effects of those operations from the “Other” 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:		2005	2004	2003
Total Profit for Reportable Segments		$       16,738	$      17,454	$      22,019
Unallocated Amounts:
	Administrative and General Expenses	(16,052)	(15,536)	(14,601)
	(Loss) Gain on Sale of Investment	287	(623)	-
	Investment Income	1,111	691	2,162
	Loss on Early Extinguishment of Debt	(68)	(361)	(1,310)
Income from Continuing Operations Before (Benefit) Provision for
Income Taxes and Equity in Net Income of Unconsolidated Entities		$         2,016	$        1,625	$        8,270

	December 31,	December 31,
Assets:	2005	2004
Total Assets for Reportable Segments	$  344,210	$     294,683
Unallocated Amounts:
Current Assets	73,818	57,315
Investment in Unconsolidated Entities	14,926	11,115
Restricted Cash	6,541	6,541
Due from Related Parties	1,600	2,535
Other Assets	8,412	8,864
Assets from Discontinued Operations	-	3,995
Total Assets	$  449,507	$     385,048

F-24

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L - UNCONSOLIDATED ENTITIES

Cement Carriers

Prior to December of 2004, we had a 30% interest in BCH, a Cement Carrier company which owns and operates Cement Carriers.  We purchased our shares from a former owner at a premium, which resulted in a difference of approximately $676,000 between our investment in BCH and the underlying equity in net assets of the subsidiary.  During December of 2004, one of the shareholders of BCH exercised its option to purchase additional shares of common stock, which upon exercise reduced our ownership to 26.1%.  The shareholder purchased these shares at a premium, which has reduced our original premium by $369,000.  Currently the difference between our investment in BCH and the underlying equity in net assets of the subsidiary is $307,000.   In 2005, we acquired a 26.1% interest in Belden Shipholding Pte Ltd. (“BSH”), another Cement Carrier company, for $78,000.  In December of 2005, BCH a nd BSH together own eleven Cement Carriers, including nine vessels, one barge and one tug boat.  The Cement Carriers operate in several principal markets, including the United States, Middle East, and Asia.  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.  Our portion of the combined earnings of this investment, net of taxes, was $1,850,000,  $827,000, and  $339,000 for the years ended December 31, 2005, 2004 and 2003, respectively.   We received dividends of $783,000 in 2005.  No distributions were made during 2004 and 2003.  The aggregate amount of consolidated retained earnings that represented undistributed earnings of this investment was approximately $3,000,000 and $1,900,000 for the years ended December 31, 2005 and 2004, respectively.  

The unaudited condensed financial position and results of operations of BCH and BSH are summarized below:

	December 31,	December 31,
(Amounts in Thousands)	2005	2004
Current Assets	$   14,988	$  13,178
Noncurrent Assets	$ 115,566	$  68,643
Current Liabilities	$   13,465	$  15,366
Noncurrent Liabilities	$   90,701	$  49,729
	Year Ended December 31,
(Amounts in Thousands)	2005	2004	2003
Operating Revenues	$   29,551	$  27,405	$  20,293
Operating Income	$   10,833	$  18,512	$  14,780
Net Income	$     9,481	$    5,006	$    1,739

Bulk Carriers

During 2000 and 2001, we acquired a 12.5% interest in Bulk Venture, Ltd. for $1,656,000, which owned two Cape-Size Bulk Carrier vessels. We received dividends of $475,000 in 2003.  During 2003, we sold our interest in Bulk Venture, Ltd. for $2,207,000, of which $1,906,000 was received in cash in 2003 and $42,000 was received in cash in 2004, resulting in a gain of approximately $292,000.  We also received $259,000 in 2004 representing dividends earned in 2003.  

During 2001 and 2002, we acquired a 12.5% interest in Bulk Africa, Ltd. for $1,444,000, which owned a Cape-Size Bulk Carrier vessel.  We received dividends of $388,000 in 2003.  During 2003, we sold our interest in Bulk Africa, Ltd. for $1,423,000, of which $1,191,000 was received in cash in 2003 and $232,000 was received in cash in 2004, resulting in a loss of approximately $21,000.  

During 2001 and 2002, we acquired a 12.5% interest in Bulk Australia, Ltd. for $1,477,000, which owned a Cape-Size Bulk Carrier vessel.  During 2003, we received a partial refund for additional funding of $128,000.  We received dividends of $300,000 in 2003.  During 2003, we sold our interest in Bulk Australia, Ltd. for $1,322,000, of which $1,111,000 was received in cash in 2003 and $211,000 was received in cash in 2004, resulting in a loss of approximately $27,000.  

The investments described above were accounted for under the cost method of accounting and accordingly income was recognized only upon distribution of dividends or sale of investment.    

In 2003, we acquired a 50% investment in Dry Bulk Cape Holding Inc. (“Dry Bulk’) for $3,479,000, which currently owns two Cape-Size Bulk Carriers and two Panamax-Size Bulk Carriers.  The two Panamax-Size Bulk Carriers were acquired by Dry Bulk during 2005.  The Bulk Carriers operate in several principal markets, including South America, Australia, South Africa, Europe, and the Far East.  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,

F-25

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2005, 2004 and 2003, our portions of earnings net of taxes were $1,953,000, $3,783,000 and $80,000, respectively.  We received dividends of $2,500,000 and $4,100,000 in 2005 and 2004, respectively.  No distributions were made during 2003.

In January of 2005, we were granted an option to purchase an additional 1% of Dry Bulk.  The other unaffiliated 50% owner of Dry Bulk was granted a similar option.

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

	December 31,	December 31,
(Amounts in Thousands)	2005	2004
Current Assets	$     2,584	$    1,766
Noncurrent Assets	$ 115,911	$  70,192
Current Liabilities	$     9,269	$    8,626
Noncurrent Liabilities	$   97,000	$  52,286
	Year Ended December 31,
(Amounts in Thousands)	2005	2004	2003
Operating Revenues	$  15,276	$  18,790	$   1,255
Operating Income	$    9,121	$  13,594	$      827
Net Income	$    5,177	$  10,303	$      306

Terminal Management Company

During 2000, we acquired a 50% interest in Terminales Transgolfo (“TTG”) for $100,000, which operates a port in Coatzacoalcos, Mexico, for our Rail-Ferry Service.  During 2001, we made an additional investment in TTG of approximately $128,000.  During 2005, the other unaffiliated 50% owner of TTG acquired 1% of our 50% interest in TTG.   As of December 31, 2005, we have a 49% interest in TTG.  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 during 2005, 2004 and 2003.

Transloading and Storage Facility Company

During 2005, we acquired a 50% interest in RTI Logistics L.L.C. (“RTI”), which owns a transloading and storage facility that is 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.  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, 2005, was immaterial.  No distributions were made during 2005.

NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION

	Year Ended December 31,
(All Amounts in Thousands)	2005	2004	2003
Cash Payments:
Interest Paid	$9,603	$10,370	$12,339
Taxes Paid	$470	$1,072	$482

During 2002, we entered into a sale-leaseback for one of our LASH vessels for $10,000,000 of which $5,000,000 was received in cash and $5,000,000 in the form of a five-year promissory note.  A portion of the note, approximately $2,000,000, is being repaid in twenty quarterly installments in addition to approximately $3,000,000 being repaid at the end of the lease.  Interest on the note was at 4.845% for the first two years and is 4.72% for each of the three years thereafter.

During 2003, we sold our coal transfer terminal facility and related land for $2,500,000 of which $500,000 was received in cash and $2,000,000 in the form of a five-year promissory note.  The note is being repaid in ten semi-annual installments of $200,000, in addition to interest at 6%.

F-26

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N - 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,
	2005		2004
	Carrying	Fair	Carrying	Fair
(All Amounts in Thousands)	Amount	Value	Amount	Value
Interest Rate Swap Agreements	$217	$217	-	-
Foreign Currency Contracts	$33	$33	($5)	($5)
Long-Term Debt	($171,995)	($172,972)	($178,090)	($181,433)

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 our 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.  During September of 2005, we entered into two interest rate swap agreements with two commercial banks to reduce the possible impact of higher interest rates in the long-term market by utilizing the fixed rate available with the swap.  The first contract amount totaled $15,667,000 at December 31, 2005 and will expire in September of 2015.  We are the fixed rate payor, and DnB NOR Bank is the floating rate payor.  The fixed rate was 4.41% and the floating rate was 4.51938% at December 31, 2005.  The second contract amount totaled $15,667,000 at December 31, 2005 and will expire in September of 2015.  We are the fixed rate payor, and Deutsche Schiffsbank is the floating rate payor.  The fixed rate was 4.41% and the floating rate was 4.51938% at December 31, 2005.  We have designated these interest rate swap agreements as effective hedges.  Settlements of these agreements are made quarterly and resulted in an increase to interest expense of $37,000 in 2005.  

During November of 2005, we entered into another interest rate swap agreement with a commercial bank to reduce the possible impact of higher interest rates in the long-term market by utilizing the fixed rate available with the swap.  The contract amount totaled $14,000,000 at December 31, 2005 and will expire in November of 2012.  We are the fixed rate payor, and Hibernia National Bank is the floating rate payor.  The fixed rate was 5.17% and the floating rate was 4.38875% at December 31, 2005.  We have designated this interest rate swap agreement as an effective hedge.  Settlements of this agreement are made monthly and resulted in an increase to interest expense of $11,000 in 2005.  

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.  Due to the immaterial nature of these contracts, we have not designated the foreign currency contracts as hedges.  Therefore, the changes in the fair market value of these hedges are recorded through earnings.  

During 2005, we entered into a forward purchase contract for Mexican Pesos for $630,000 U.S. Dollar equivalents beginning in January of 2006 that expires in September of 2006.  There were no forward purchase contracts as of December 31, 2005 and 2004.  As of December 31, 2004, we were a party to forward sales contracts in various currencies totaling $1,722,000 U.S. Dollar equivalents.  There were no forward sales contracts as of December 31, 2005.

Commodity Swap Contracts

We have historically entered into commodity swap contracts for portions of our estimated fuel purchases to manage the risk associated with changes in fuel prices.  We entered into hedging arrangements with respect to a portion of our 2003 fuel requirements and a small portion of our 2004 fuel requirements for our Liner Services and Rail-Ferry Service segments.  We recorded an increase to voyage expenses of $114,000 in 2004 and made a net positive adjustment to voyage expense of $2,190,000 in 2003.  As of December 31, 2005, there are no outstanding commodity swap contracts.  

Long-Term Debt

The fair value of our debt is estimated based on the quoted market price for the publicly listed Senior Notes and the current rates offered to us on other outstanding obligations.

F-27

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts Due from Related Parties

The carrying amount of these notes receivable approximated fair market value as of December 31, 2005 and 2004.  Fair market value takes into consideration the current rates at which similar notes would be made.

Restricted Cash

The carrying amount of these investments approximated fair market value as of December 31, 2005 and 2004, based upon current rates offered on similar instruments.

Marketable Securities

We have categorized all marketable securities as available-for-sale.  The following table shows the carrying amount, fair value and net gains or losses recorded to Accumulated Other Comprehensive Income, net of taxes, for each security type at December 31, 2005 and 2004.

(All Amounts in Thousands)	December 31, 2005
Security Type	Carrying Value	Fair Value	Net Gain (Loss) Net of Taxes
Equity Securities	$       3,487	$        4,288	$          521
Debt Securities Issued by U.S. Treasury	250	249	-
Corporate Debt Securities	2,127	2,077	(33)
	$       5,864	$       6,614	$          488
	December 31, 2004
Security Type	Carrying Value	Fair Value	Net Gain (Loss) Net of Taxes
Equity Securities	$       3,545	$        3,915	$          241
Debt Securities Issued by U.S. Treasury	250	248	(2)
Corporate Debt Securities	1,977	1,975	(2)
	$       5,772	$        6,138	$          237

NOTE O - 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)		2005		2004
Accrued Voyage Expenses	$	26,783	$	21,262
Accrued Leasehold Improvement Costs		7,527		-
Accrued Payroll Taxes		4,170		-
Trade Accounts Payable		3,585		2,820
Self-Insurance Liability		1,985		1,515
Lease Incentive Obligation		1,700		-
Accrued Interest Expense		942		1,218
Accrued Insurance Premiums		431		536
Accrued Customs Liability		166		1,737
Accrued Salaries and Benefits		97		1,109
Other Short-Term Liabilities		37		-
	$	47,423	$	30,197

F-28

INTERNATIONAL SHIPHOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE P – DISCONTINUED OPERATIONS

During 2005, we sold the assets associated with our over-the-road car transportation truck company.  The decision to sell these assets was primarily the result of a decrease during 2005 in the volume of business available to us due to the loss of market share by one of our customers and an industry-wide shortage of drivers that caused underutilization of the assets.  The sale of these assets was completed in July of 2005 and all proceeds were received and all associated costs were incurred before the end of the year.  The carrying value of those assets before the sale was approximately $3,600,000; costs associated with the sale were $269,000; and net proceeds were $3,100,000 resulting in a net loss before taxes of $769,000. The losses for the year ended December 31, 2005, include provisions for claims we expect to settle in the short term.  

The components of loss from discontinued over-the-road transportation operations as reported on the income statements for the periods presented are described below:

(All Amounts in Thousands)	Year Ended December 31,
	2005	2004	2003
Discontinued Operations:
Loss from Operations	$    (1,133)	$       (629)	$        (345)
Loss on Disposal of Assets	(769)	-	-
Tax Benefit	632	220	121
	$    (1,270)	$        (409)	$        (224)

Revenues associated with these operations for the years ended December 31, 2005, 2004 and 2003 were $2,534,000, $4,326,000 and $2,512,000, respectively.  The over-the-road car carrying truck company has been reported in the “Other” segment in previous periods.

NOTE Q - QUARTERLY FINANCIAL INFORMATION - (Unaudited)
	(All Amounts in Thousands Except Share Data)		Quarter Ended
			March 31		June 30		Sept. 30		Dec. 31
2005	Revenues	$	68,823	$	67,731	$	63,561	$	62,041
	Expenses		59,684		59,200		59,358		58,134
	Gross Voyage Profit		9,139		8,531		4,203		3,907
	Income (Loss) from Continuing Operations		4,423		4,169		(202)		(124)
	Loss from Discontinued Operations		(330)		(196)		(643)		(101)
	Net Income (Loss) Available to Common Stockholders		3,526		3,373		(1,445)		(825)
	Basic and Diluted Earnings (Loss) per Common Share:
	Net Income (Loss) Available to Common Stockholders - Basic		0.58		0.55		(0.24)		(0.14)
	Net Income (Loss) Available to Common Stockholders - Diluted		0.58		0.55		(0.24)		(0.13)
2004	Revenues	$	64,918	$	63,588	$	67,582	$	63,076
	Expenses		55,243		55,869		62,171		57,834
	Gross Voyage Profit		9,675		7,719		5,411		5,242
	Income from Continuing Operations		2,940		1,857		304		8,093
	Loss from Discontinued Operations		(43)		(29)		(84)		(253)
	Net Income Available to Common Stockholders		2,897		1,828		220		7,840	(1)
	Basic and Diluted Earnings per Common Share:
	Net Income Available to Common Stockholders		0.48		0.30		0.04		1.29	(1)
(1)	The net income and earnings per share in the fourth quarter of 2004 were significantly impacted by certain income tax
	adjustments relating to the Jobs Creation Act (See Note F - Income Taxes).

F-29

INDEX OF SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2

Schedule II – Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

S-3

S-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

International Shipholding Corporation

We have audited the consolidated financial statements of International Shipholding Corporation as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and have issued our report thereon dated February 22, 2006 (included elsewhere in this Form 10-K).  Our audits also included the financial statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of the Company's management.  Our responsibility is to express an opinion based on our audits.  

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

                     /s/   Ernst & Young LLP

New Orleans, Louisiana

February 22, 2006

S-2

INTERNATIONAL SHIPHOLDING CORPORATION

Schedule II - Valuation and Qualifying Accounts and Reserves

(Amounts in Thousands)

					Deductions
		Balance at	Additions		for purpose for	Balance at
		beginning of	Charged to	Charged to	which accounts	end of
		period	expense	Other accounts	were set up	period
December 31, 2003:
	Self-Retention Reserves	$          7,090	$         4,302	$                   -	$            7,050	$         4,342
	Non Self-Retention Reserves	879	4,092	-	4,162	809
	Postretirement Benefits	7,778	59	-	383	7,454
	Custom Reserves	3,908	1,264	-	1,685	3,487
	Other Reserves	1,576	980	-	804	1,752
Total		$        21,231	$       10,697	$                   -	$          14,084	$       17,844
December 31, 2004:
	Self-Retention Reserves	$          4,342	$         5,314	$                   -	$            6,708	$         2,948
	Non Self-Retention Reserves	809	567	-	698	678
	Postretirement Benefits	7,454	122	-	-	7,576
	Custom Reserves	3,487	1,457	-	3,206	1,738
	Other Reserves	1,752	641	-	767	1,626
Total		$        17,844	$         8,101	$                   -	$          11,379	$       14,566
December 31, 2005:
	Self-Retention Reserves	$          2,948	$         4,710	$                   -	$            3,618	$         4,040
	Non Self-Retention Reserves	678	156	-	332	502
	Postretirement Benefits	7,576	180	-	-	7,756
	Custom Reserves	1,738	929	-	2,501	166
	Other Reserves	1,626	604	-	666	1,564
Total		$        14,566	$         6,579	$                   -	$            7,117	$       14,028

S-3

EX-10.4

=================================================================

CREDIT AGREEMENT

dated as of

December 13, 2005

By and Among

CG RAILWAY, INC.

as Borrower,

INTERNATIONAL SHIPHOLDING CORPORATION

as Guarantor,

and

LIBERTY COMMUNITY VENTURES III, L.L.C.

as Lender

=================================================================

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (the "Agreement") is dated as of December 13, 2005, by and among CG RAILWAY, INC., a Delaware corporation (“Borrower”), INTERNATIONAL SHIPHOLDING CORPORATION, a Delaware corporation (“Guarantor”), and LIBERTY COMMUNITY VENTURES III, L.L.C.,  a Louisiana limited liability company (“Lender”).

R E C I T A L S:

1.

Borrower has applied to Lender for a term loan facility in a maximum amount not to exceed $14,000,000.00, the proceeds of which shall be used to fund the development and improvement of Borrower’s leased facilities located at the Port of New Orleans to accommodate Borrower’s rail and cargo activities associated with the relocation of its rail cargo “roll on/roll off” facility from Alabama’s Port of Mobile to the Port of New Orleans (the “Project”).

2.

Lender, subject to the terms and conditions of this Agreement, has agreed to extend such credit facility to Borrower.

NOW, THEREFORE, in consideration of the mutual covenants hereunder set forth, Borrower and Lender do hereby covenant, agree, and obligate themselves as follows:

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

Section 1.1.  Defined Terms.  As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated:

"Adjusted Base Rate" shall mean, at any time, the then current Base Rate adjusted by (a) (i) adding the amount by which the then current LIBOR Rate exceeds such Base Rate, or (ii) subtracting the amount by which the then current Base Rate exceeds the then current LIBOR Rate, and (b) subtracting one-half percent (0.50%).

"Affiliate" shall mean, with respect to the Borrower, any entity which, directly or indirectly, controls or is controlled by or is under common control with, the Borrower.

"Agreement" shall mean this Credit Agreement, as the same may from time to time be amended, modified, supplemented, or restated and in effect from time to time.

"Anti-Terrorism Laws" shall have the meaning assigned to such term in Section 9.18 hereof.

"Base Rate" shall mean the per annum rate of interest established from time to time by Citibank, NA as it prime or base lending rate (or in the absence of such an established prime rate by Citibank, NA, then the "Base Rate" shall be the rate published in The Wall Street Journal, as the "prime" lending rate on corporate loans posted by at least seventy-five percent (75%) of the nation’s thirty largest banks), which rate is not necessarily the lowest rate charged by Lender, such rate to be adjusted automatically on and as of the effective date of any change in such Base Rate.

"Base Rate Interest Period" shall mean, with respect to any Base Rate Loan, the period ending on the last day of each month, provided, however, that (i) if any Base Rate Interest Period would end on a day which is not a Business Day, such Base Rate Interest Period shall be extended to the next succeeding Business Day, and (ii) if any Base Rate Interest Period would otherwise end after the Maturity Date, such Base Rate Interest Period shall end on the Maturity Date.

1

"Base Rate Loans" shall mean any Loan or portion thereof which bears interest based upon the Base Rate during any period.

"Borrower" shall mean CG Railway, Inc., a Delaware corporation, together with its successors and assigns.  

"Business Day" means a day other than a Saturday, Sunday or legal holiday for commercial banks under the laws of the State of Louisiana or a day on which national banks are authorized to be closed in New Orleans, Louisiana and which is also a LIBOR Business Day.

"Closing Date" shall mean December 13, 2005.

"Collateral" shall mean any interest in any kind of property or assets pledged, mortgaged or otherwise subject to an Encumbrance in favor of Lender pursuant to the Collateral Documents.

"Collateral Documents" shall refer to the Mortgage and any and all other documents now or hereafter in which an Encumbrance is created on any property of Borrower to secure payment of the Indebtedness (or any part thereof) of Borrower to Lender under this Agreement and the Note.

"Commitment" shall mean the agreement by the Lender to the Borrower to make a Loan in accordance with the provisions of this Agreement.  

"Completion Date" shall mean December 13, 2006.

"Compliance Certificate"

shall mean a certificate certifying the compliance by each of Borrower and Guarantor with all of its covenants contained herein and showing the calculations thereof in reasonable detail, delivered by the chief financial officers of Borrower and Guarantor, respectively, to the Lender from time to time pursuant to Section 10.1 in the form set out in Exhibit "B" or in such other form as the Lender may agree;

"Consolidated EBITDA" shall mean, for any period, with respect to Guarantor and its Subsidiaries, the sum of (without duplication) (a) Consolidated Net Income; (b) all Interest Expenses of Guarantor and its Subsidiaries; (c) income taxes of Guarantor and its Subsidiaries; and (d) depreciation and amortization of Guarantor and its Subsidiaries determined on a consolidated basis in accordance with GAAP for such period; provided that if any Subsidiary is not wholly-owned by Guarantor, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (i) the amount of Consolidated Net Income attributable to such Subsidiary multiplied by (ii) the percentage ownership interest in the income of such Subsidiary not owned by Guarantor on the last day of such period.

"Consolidated Indebtedness" all Debt of Guarantor and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

"Consolidated Net Income" for any period shall mean the consolidated net income of Guarantor and its Subsidiaries for such period, as shown on the consolidated financial statements of Guarantor and its Subsidiaries delivered in accordance with Section 10.1.

"Consolidated Tangible Net Worth" shall mean, with respect to Guarantor and its Subsidiaries, at any date for which a determination is to be made (determined on a consolidated basis without duplication in accordance with GAAP) (a) the amount of capital stock; plus (b) the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, minus the amount of such deficit); plus (c) deferred charges to the extent amortized and acquired contract costs net of accumulated amortization as stated on the then most recent audited balance sheet of Guarantor; minus (d) the sum of (i) the cost of treasury shares and (ii) the book value of all assets that should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings)

2

but in any event including goodwill, minority interests, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all reserves and any write up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 1996.

"Continuing Guaranty" shall mean that certain Continuing Guaranty granted by Guarantor in favor of Lender dated of even date herewith, unconditionally guaranteeing payment and performance in full of all of Borrower’s present and future obligations of Borrower to Lender of every kind or nature whatsoever, as said agreement may be amended or modified from time to time.

"Cooperative Endeavor Agreement" shall mean, collectively, (i) that certain Cooperative Endeavor Agreement dated as of March 17, 2005, by and among the State of Louisiana, Borrower, the Louisiana Department of Economic Development and the Dock Board, as amended by Amendment No. 1 thereto dated as of June 21, 2005, and as it may be hereafter amended from time to time with the consent of Lender, and (ii) that certain Cooperative Endeavor Agreement dated as of May 1, 2005, by and among the State of Louisiana, Borrower, the Louisiana Department of Economic Development and the Dock Board, as it may be hereafter amended from time to time with the consent of Lender.

"Debt" shall mean, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery thereof or the completion of such services, except trade payables, (v) all obligations on account of principal of such Person as lessee under capitalized leases, (vi) all indebtedness of other Persons secured by a lien on any asset of such Person, whether or not such indebtedness is assumed by such Person; provided that the amount of such indebtedness shall be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such indebtedness, and (vii) all indebtedness of other Persons guaranteed by such Person to the extent guaranteed; the amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that the amount outstanding at any time of any indebtedness issued with original issue discount is the face amount of such indebtedness less the remaining unamortized portion of  the original issue discount of such indebtedness at such time as determined in conformity with GAAP; and provided further that Debt shall not include any liability for current or deferred federal, state, local or o ther taxes, or any trade payables;

"Default" shall mean an event which with the giving of notice or the lapse of time (or both) would constitute an Event of Default hereunder.

"Dock Board" shall mean the Board of Commissioners of the Port of New Orleans, a political subdivision of the State of Louisiana, or any successor landlord under the Lease.

"Dollars" and "$" shall mean lawful money of the United States of America.

"Embargoed Person" has the meaning assigned to that term in Section 11.8 of this Agreement.

"Encumbrance" shall mean any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on common law, statute or contract, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term “Encumbrance” shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property.  For the purpose of this Agreement, a Person shall be deemed to be the owner of any

3

property which it has acquired or holds subject to a conditional sale agreement or other arrangements pursuant to which title to the property has been retained by or vested in some other Person for security purposes; provided, however, that the term “Encumbrance” shall not include a trust or similar arrangement established for the purpose of defeasing any indebtedness pursuant to the terms evidencing or providing for the issuance of such indebtedness but only to the extent that such defeasance is permitted under this Agreement.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

"Event of Default" shall mean individually, collectively and interchangeably any of the Events of Default set forth below in Section 12.1. hereof.

"Executive Order" shall have the meaning assigned to such term in Section 9.18 hereof.

"GAAP" shall mean, at any time, accounting principles generally accepted in the United States as then in effect.

"Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

"Governmental Requirement" shall mean any applicable state, federal or local law, statute, ordinance, code, rule, regulation, order or decree.

"Guarantor" shall mean International Shipholding Corporation, a Delaware corporation, together with its successors and assigns.  

"Indebtedness" shall mean, at any time, the indebtedness of the Borrower evidenced by the Note executed by the Borrower pursuant to this Agreement, including principal, interest, costs, expenses and reasonable attorneys' fees and all other fees and charges, together with all commitment fees and other indebtedness and costs and expenses for which the Borrower is responsible under this Agreement or under any of the Related Documents.

"Interest Expense" shall mean, with respect to Guarantor and its Subsidiaries, on a consolidated basis, for any period (without duplication), interest expense, whether paid or accrued (including the interest component of capitalized leases), on all Debt of Guarantor and its Subsidiaries for such period, net of interest income, all determined in accordance with GAAP;

"Interest Payment Date" shall mean (i) for a Base Rate Loan, the last Business Day of each calendar month such Base Rate Loan is outstanding beginning December 31, 2005, and (ii) for a LIBOR Loan, the last LIBOR Business Day of each LIBOR Interest Period for such LIBOR Loan.  The Maturity Date shall also be an Interest Payment Date.

"Interest Period" shall mean any Base Rate Interest Period or LIBOR Interest Period.

"Lease" shall mean that certain Lease between Borrower and the Dock Board covering approximately 27.7 acres of land located in Orleans Parish, Louisiana, including 11,000 linear feet of rail trackage, located on the left descending bank of the Mississippi River Gulf Outlet near the Elaine Street Wharf, New Orleans, Louisiana, and also portions of the Elaine Street Wharf, the existing rail track, the Improvements (as defined in the Lease) and any improvements placed on the Leased Premises (as defined in the Lease) under Section 14(C) of the Lease, all as more fully described therein, executed by the Dock Board on June 21, 2005 and by the Borrower on June 22, 2005, Contract # 003810, an extract of lease pertaining thereto being

4

recorded on December 6, 2005 in Orleans Parish at Notarial Archives No. 05-47612 and Conveyance Instrument No. 315979, as said Lease may be amended from time to time with the consent of Lender.

"Lender" means Liberty Community Ventures III, L.L.C., a Louisiana limited liability company, together with its successors and assigns and any subsequent holder or holders of the Indebtedness.

"Liabilities" shall mean, as to any Person, all indebtedness, liabilities and obligations of such Person, whether matured or unmatured, liquidated or unliquidated, primary or secondary, direct or indirect, absolute, fixed or contingent, and whether or not required to be considered pursuant to GAAP.

"Liberty Bank" means Liberty Bank and Trust Company, together with its successors and assigns.

"LIBOR Business Day" shall mean any date other than Saturday, Sunday or a day on which banking institutions are generally authorized or obligated by law or executive order to close in the City of London, England.

"LIBOR Interest Period" shall mean, with respect to any LIBOR Loan initially, the period commencing on the date such LIBOR Loan is made and ending one (1) month thereafter, and thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one (1) month thereafter; provided, however, that the first LIBOR Interest Period hereunder shall run from the date hereof through and until December 31, 2005, with each subsequent LIBOR Interest Period to run from the beginning to the end of each calendar month during the term hereof;  provided further that (a) if any LIBOR Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless the result of such extension would be to extend such Interest Period into the next calendar month, in wh ich case such Interest Period shall end on the immediately preceding Business Day, (b) if any LIBOR Interest Period begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) such Interest Period shall end on the last Business Day of a calendar month, and (c) any LIBOR Interest Period which would otherwise expire after the Maturity Date shall end on such Maturity Date.

"LIBOR Loan" shall mean any Loan under the Commitment which bears interest based upon the LIBOR Rate.

"LIBOR Rate" shall mean the one month London Interbank Offered Rate ("LIBOR") as set and published by the British Banker's Association ("BBA") and in effect as of two (2) LIBOR Business Days prior to the first date of each LIBOR Interest Period as obtained by Lender from a wire that is sent through Bloomberg, L.P., which rate is based by BBA on an average of the Interbank Offered Rates for US dollar deposits in the London market based on quotes from designated banks in the London market. In the event that the one month LIBOR is no longer available from the BBA or Bloomberg, L.P., the Lender shall select a comparable service to determine such rate and shall provide notice thereof to the Borrower.

"Loan Documents" shall mean this Agreement, the Note, the Continuing Guaranty, the Collateral Documents and any other Related Documents.

"Loan" shall mean the term loan made by the Lender under the Note to the Borrower in accordance with and subject to the terms of the Commitment.

"Material Adverse Effect" shall mean, with respect to Borrower and Guarantor, an event or occurrence which causes a material adverse effect on the business, assets, operations or condition (financial or otherwise) of Borrower or Guarantor, as applicable.

"Maturity Date" shall mean the earlier to occur of (i) December 14, 2012, or (ii) the earlier date of acceleration of the Loan by Lender pursuant to Article XII hereof.

5

"Maximum Rate" shall mean, at any particular time in question, the maximum non-usurious rate of interest which under applicable law may then be charged on the Loan or any other obligations hereunder.  If such Maximum Rate changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time on the effective date of each change in such Maximum Rate.

"Mortgage" shall mean the Multiple Indebtedness Leasehold Mortgage, Assignment of Rents and Security Agreement executed by the Borrower, dated of even date herewith, securing the Note and affecting the Borrower’s leasehold property located at the Port of New Orleans more fully described therein, as said instrument may hereafter be amended, modified or supplemented and in effect from time to time.

"New Markets Tax Credit Program" means the program of the Internal Revenue Service and the Community Development Financial Institution Fund, a wholly-owned governmental corporation within the United States Department of Treasury related to the tax credits able to be claimed pursuant to Section 45D of the Internal Revenue Code of 1986, as amended (the "Code").

"Note" shall mean that certain promissory note made by Borrower payable to the order Lender dated of even date herewith in the maximum principal amount of $14,000,000.00, as said promissory note may be renewed or extended, together with all other promissory note or notes given in renewal, substitution, or as a refinancing of any part of the indebtedness evidenced thereby.

"Permitted Encumbrances" shall mean (i) liens for taxes, assessments or other governmental charges which are not yet due or which are being contested in good faith by appropriate proceedings and prior to any seizure or levy upon any of the Collateral, (ii) non-consensual liens imposed by operation of law (such as landlord liens for rent not yet due and payable and liens of vendors, materialmen, mechanics, warehousemen, carriers, employees, workmen and repairmen), so long as no Collateral is seized or levied upon in respect thereof, (iii) attachment or other liens in connection with litigation, provided that same are removed within 45 days and prior to any levy upon any of the Collateral, and (iv) liens securing appeal bonds, performance bonds, bids, tenders, worker’s compensation and other such matters arising in the ordinary course of Borrower’ ;s business, all to the extent that such liens do not jeopardize Lender’s interest in the Collateral.

"Person" shall mean an individual or a corporation, partnership, trust, joint venture, incorporated or unincorporated association, joint stock company, government, or an agency or political subdivision thereof, or other entity of any kind.

"Plans" shall mean those certain plans relating to the Project which have been delivered by Borrower to Lender.

"Property" shall mean the Borrower’s interests in the Lease and all property covered thereby and all improvements and fixtures located thereon.

"Project" shall have the meaning ascribed to such term in the recitals hereof, with said definition also being intended to have the same meaning ascribed to such term in the Cooperative Endeavor Agreement.

"Related Documents" shall mean and include individually, collectively, interchangeably and without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, collateral mortgages, deeds of trust, and all other instruments and documents, whether now or hereafter existing, executed by Borrower in connection with the Indebtedness.

"Solvent" shall mean, when used with respect to any Person on a particular day, that on such date (i) the fair value of the property of such Person is greater than the total amount of liabilities, including without limitation, contingent liabilities, of such person, (ii) the present fair salable value of the assets of such

6

person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the ordinary course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts and liabilities beyond such Person’s ability to pay as such debts and liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such person is engaged.  In computing the amount of contingent liabilities a t any time, it is intended that such liabilities will be computed at the amount which, in light of all of the facts and circumstances existing at such time, represents the amount that can be reasonably expected to become an actual or matured liability.

"Subsidiaries" shall mean at any date with respect to any Person all the corporations of which such Person at such date, directly or indirectly, owns 50% or more of the outstanding capital stock (excluding directors' qualifying shares), and "Subsidiary" means any one of the Subsidiaries.

Section 1.2.  Accounting Terms.  All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP.

ARTICLE II

TERM LOAN

Section 2.1.  The Loan.  Subject to the terms, conditions and provisions of this Agreement, the Lender agrees to make a term loan to the Borrower in the amount of $14,000,000.00 (the “Loan”).  Lender will make a single advance to Borrower on the Closing Date in the principal amount of the Loan.

Section 2.2.  The Note.  The Loan shall be evidenced by a Note in the maximum principal amount of $14,000,000.00, payable to the order of Lender.  

Section 2.3.  Payment of the Note.  Principal amounts outstanding under the Note shall be payable in quarterly installments in the amount of $35,000.00 each commencing March 31, 2006 and continuing on the last day of each June, September, December and March thereafter through September 30, 2011, and thereafter in quarterly installments in the amount $350,000.00 each commencing December 31, 2011 and continuing through September 30, 2012.  In addition, accrued and unpaid interest shall be due and payable on each Interest Payment Date.  A final payment of all outstanding principal and accrued interest shall be due and payable in full on the Maturity Date.

Section 2.4.  No Prepayments.  Borrower may not prepay the Loan in whole or in part.

Section 2.5.

Use of Proceeds.  Borrower shall use the proceeds of the Loan solely for the purposes described in the recitals to this Agreement, it being understood and agreed, however, that up to $2 million in proceeds of the Loan may be used by Borrower to construct improvements to certain property and related railcar facility owned by its affiliate, RTI Logistics, L.L.C. (hereinafter referred to as the "RTI Improvements"), in exchange for Borrower's use of such facility, pursuant to the terms of that certain Facility Use Agreement by and between Dupuy Storage and Forwarding, L.L.C. and Borrower, dated effective as of December 13, 2005.  Borrower shall, on demand by Lender, provide Lender with evidence of its use of the Loan proceeds in such detail as Lender may request.

7

ARTICLE III

INTEREST RATES

Section 3.1.  Rate Options.  The Loan shall be a LIBOR Loan at all times during the term hereof in the absence of one of the circumstances described in Article IV, and shall bear interest initially at the LIBOR Rate determined by Lender to be in effect as of the date the Loan is funded, minus one-half percent per annum. The rate shall be adjusted at the beginning of each subsequent LIBOR Interest Period thereafter to the then current LIBOR Rate minus one-half percent per annum and shall accrue at such rate during each such LIBOR Interest Period.  Past due principal, to the extent permitted by law, shall bear interest, payable upon demand, at the lesser of (i) the default rate specified in the Note, and (ii) the Maximum Rate.

Section 3.2.  Base Rate Loans.  On any Base Rate Loan, Borrower agrees to pay interest calculated on the basis of a year consisting of 365 or 366 days, as the case may be, with respect to the unpaid principal amount of such Base Rate Loan from the date the proceeds thereof are made available to Borrower until repayment or maturity (whether by acceleration or otherwise), at a varying rate per annum equal to the lesser of (i) the Adjusted Base Rate from time to time in effect, calculated and adjusted daily for each Base Rate Loan, and (ii) the Maximum Rate.  Past due principal, to the extent permitted by law, shall bear interest, payable upon demand, at the lesser of (i) the default rate specified in the Note, and (ii) the Maximum Rate.

Section 3.2.  LIBOR Loans.  On any LIBOR Loan, Borrower agrees to pay interest calculated on the basis of a year consisting of 360 days. Past due principal, to the extent permitted by law, shall bear interest, payable on demand, at the lesser of (i) the default rate specified in the Note, and (ii) the Maximum Rate.

Section 3.3.  Interest Rate Determination.  The Lender shall determine each interest rate applicable to any Base Rate Loan or LIBOR Loan and its determination shall be conclusive absent manifest error.  The Lender shall notify the Borrower of each interest rate determination within a reasonable time after each such determination.

ARTICLE IV

CHANGE OF CIRCUMSTANCES

Section 4.1.  Unavailability of Funds or Inadequacy of Pricing.  In the event that, in connection with any proposed LIBOR Loan, the Lender determines, which determination shall, absent manifest error, be final, conclusive and binding upon all parties, due to changes in circumstances since the date hereof, adequate and fair means do not exist for determining the LIBOR Rate or such rate will not accurately reflect the costs to the Lender of funding LIBOR Loans for such LIBOR Interest Period, the Lender shall give notice of such determination to the Borrower, whereupon, until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Lender to make, continue or convert Loans into LIBOR Loans shall be suspended, and all Loans to Borrower not previously priced as LIBOR Loans for an unexpired LIBOR Interest Period shall be Base Rate Loans duri ng the period of suspension.

Section 4.2.  Change in Laws.  If at any time after the date hereof any new law or any change in existing laws or in the interpretation by any governmental authority, central bank, or comparable agency charged with the administration or interpretation thereof, of any new or existing laws shall make it unlawful for Lender to make or continue to maintain or fund LIBOR Loans hereunder, then Lender shall promptly notify Borrower in writing.  Lender's obligation to make, continue or convert Loans into LIBOR Loans under this Agreement shall be suspended until it is no longer unlawful for Lender to make or maintain LIBOR Loans.  Upon receipt of such notice, Borrower shall either repay the outstanding LIBOR Loans owed to the Lender, without penalty, on the last day of the current Interest Periods (or, if Lender may not lawfully continue to maintain and fund such LIBOR Loans, immediately), or Borrower may convert such LIBOR Loans at such appropriate time to Base Rate Loans.

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Section 4.3.  Increased Cost or Reduced Return.

(i)

If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency:

(A)

shall subject Lender to any tax, duty, or other charge with respect to any LIBOR Loans, the Note, or its obligation to make LIBOR Loans, or change the basis of taxation of any amounts payable to Lender under this Agreement, or the Note, in respect of any LIBOR Loans (other than franchise taxes and taxes imposed on the overall net income of Lender);

(B)

shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than reserve requirements, if any, taken into account in the determination of the LIBOR Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, Lender, including the Commitment of Lender hereunder; or

(C)

shall impose on Lender or on the London interbank market any other condition affecting this Agreement or the Note or any of such extensions of credit or liabilities or commitments;

and the result of any of the foregoing is to increase the cost to Lender of making, converting into, continuing, or maintaining any LIBOR Loans or to reduce any sum received or receivable by Lender under this Agreement or the Note with respect to any LIBOR Loans, then Borrower shall pay to Lender on demand such amount or amounts as will compensate such Lender for such increased cost or reduction.  If Lender requests compensation by Borrower under this Section 4.3., Borrower may, by notice to Lender, suspend the obligation of Lender to make or continue LIBOR Loans, or to convert all or part of the Base Rate Loans owing to Lender to LIBOR Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 4.3. shall be applicable); provided that such suspension shall not affect the right of Lender to receive the compensation so requested.

(ii)

If, after the date hereof, Lender shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of Lender or any corporation controlling Lender as a consequence of Lender's obligations hereunder to a level below that which Lender or such corporation would have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrower shall pa y to Lender such additional amount or amounts as will compensate Lender for such reduction.

(iii)

Lender shall promptly notify Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section 4.3., and Lender will designate a separate lending office, if applicable, if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of Lender, be otherwise disadvantageous to it.  If Lender claims compensation under this Section 4.3., Lender shall furnish to Borrower a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error.  In determining such amount, Lender may use any reasonable averaging and attribution methods.

(iv)

If Lender gives notice to the Borrower pursuant to this Section 4.3., Lender shall give to the Borrower a statement signed by an officer of Lender setting forth in reasonable detail the basis for and the

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calculation of such additional cost, reduced payments or capital requirements, as the case may be, and the additional amounts required to compensate Lender therefor.

(v)

Within five (5) Business Days after receipt by the Borrower of any notice referred to in this Section 4.3., the Borrower shall pay to the Lender such additional amounts as are required to compensate Lender for the increased cost, reduced payments or increased capital requirements identified therein, as the case may be; provided, that the Borrower shall not be obligated to compensate Lender for any increased costs, reduced payments or increased capital requirements to the extent that Lender incurred the same prior to the date which is six (6) months before Lender gives the required notice.

Section 4.4.  Breakage Costs.   Without duplication under any other provision hereof, if Lender incurs any loss, cost or expense, including, without limitation, any loss of profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Lender to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to the Lender as a result of any of the following events other than any such occurrence as a result in the change of circumstances described in Sections 4.1. and 4.2.:

(i)

any payment, prepayment or conversion of a LIBOR Loan on a date other than the last day of its LIBOR Interest Period (whether by acceleration, prepayment or otherwise);

(ii)

any failure to make a principal payment of a LIBOR Loan on the due date thereof; or

(iii)

any failure by the Borrower to borrow, continue, or prepay a LIBOR Loan on the date specified in a notice given by the Borrower pursuant to this Agreement,

then the Borrower shall within 15 days after demand pay to Lender such amount as will reimburse Lender for such loss, cost or expense.  If Lender makes such a claim for compensation, it shall simultaneously furnish to Borrower a statement setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such statement shall be conclusive and binding absent manifest error

ARTICLE V

Intentionally omitted.

ARTICLE VI

CERTAIN GENERAL PROVISIONS

Section 6.1.  Payments to the Lender.  All payments of principal, interest, fees and any other amounts due and payable by the Borrower hereunder or under any of the other Related Documents shall be made payable to the Lender and delivered to Hibernia National Bank, 313 Carondelet Street, New Orleans, Louisiana  70130, Attention: Ross Wales, or at such other location that the Lender may from time to time designate in writing to the Borrower, in each case in immediately available funds.

Section 6.2.  No Offset, etc.  All payments by the Borrower hereunder and under any of the other Related Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrower is compelled by law to make such deduction or withholding.  If any such obligation is imposed upon the Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrower will pay to the Lender, on the date on which such amount is due and payable hereunder or under such other Related Document, such additional amount in Dollars as shall be necessary to enable

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the Lender to receive the same net amount which the Lender would have received on such due date had no such obligation been imposed upon the Borrower.  The Borrower will deliver promptly to the Lender certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Documents.

ARTICLE VII

SECURITY FOR THE INDEBTEDNESS

Section 7.1.

Security.  The Indebtedness of Borrower to Lender under this Agreement and the Note shall be secured by the following:

(a)

the Mortgage;   

(b)

the Continuing Guaranty; and

(c)

any additional Collateral covered by any Collateral Documents or any additional guaranties granted by any Person in favor of Lender as security for the Indebtedness of Borrower to Lender under this Agreement and the Note.

Borrower understands and agrees that Lender shall have no obligation to release any of the Collateral Documents until Lender’s Commitment to make the Loan has terminated and all outstanding Indebtedness is paid in full.  Upon satisfaction of such conditions, all Collateral and Collateral Documents shall be released, and Borrower shall be authorized to file termination statements in respect of any UCC-1 financing statements filed by Lender covering the Collateral.

ARTICLE VIII

CONDITIONS PRECEDENT

Section 8.1.

Conditions Precedent to Loan.  The obligation of Lender to make the Loan shall be subject to the satisfaction and the continued satisfaction of the following conditions precedent:

(a)

On or prior to the date hereof, Borrower shall have executed and delivered to Lender this Agreement, the Note, the Mortgage, and all other documents required by this Agreement, all in form and substance and in such number of counterparts as may be required by Lender;

(b)

The representations and warranties of Borrower as set forth in this Agreement, or in any Related Document furnished to Lender in connection herewith, shall be and remain true and correct in all material respects as of such date (except to the extent specifically limited to a specified date);

(c)

Lender shall have received a unanimous consent of all directors of Borrower, authorizing the execution of all documents and instruments to be delivered by Borrower contemplated by this Agreement;

(d)

Lender shall have received all fees, charges and expenses which are due and payable as specified in this Agreement and any Related Documents;

(e)

Borrower shall have provided Lender with all financial statements, reports and certificates required by this Agreement;

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(f)

On or prior to the date hereof, Lender shall have received copies of the certificate of incorporation and by-laws of Borrower, and Lender's counsel shall have reviewed the foregoing documents and been satisfied with the validity, due authorization and enforceability thereof and of all Related Documents;

(g)

On or prior to the date hereof, Lender shall have received evidence acceptable to Lender and its counsel that its Encumbrances affecting the Collateral shall have a first priority position, subject only to Permitted Encumbrances;

(h)

There shall have been no occurrence resulting in a Material Adverse Effect with respect to either Borrower or Guarantor since the date of the most recent financial statements delivered by Borrower to Lender hereunder;

(i)

Lender shall have received the Continuing Guaranty executed by the Guarantor;

(j)

Lender shall have received a unanimous consent of all directors of Guarantor, authorizing the execution and delivery of the Continuing Guaranty;

(k)

Lender shall have obtained a landlord estoppel certificate from the Dock Board confirming the current status and terms of the Lease, and Lender shall have reached an agreement with the Dock Board on terms acceptable to it whereby the Dock Board consents to the Mortgage, agrees that it will honor Lender or its designee as a substitute tenant under the Lease on the terms presently contemplated by the Lease should there occur an Event of Default resulting in the foreclosure of the Mortgage or a dation en paiement of the Property in lieu of a foreclosure, and as to such other matters contemplated by Section 39 of the Lease (but not necessarily on the same terms as set forth therein);

(l)

Borrower shall have provided Lender with the final Plans for the Project;

(m)

On or prior to the date hereof, there shall have been completed the satisfactory negotiation, closing and funding of a $14,000,000.00 Qualified Equity Investment (as such term is defined in Code Section 45D(b)(1)) into Lender, including agreed upon management fees, by and among Lender, Hibernia National Bank, Hibernia Southcoast Capital, Liberty Bank and Stonehenge Capital Company, LLC; and

(n)

Lender shall have received all information from the Borrower necessary for compliance with the requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed into law October 26, 2001).

ARTICLE IX

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to Lender as follows:

Section 9.1.

Organizational Authority of Borrower.  Borrower is a corporation duly created, validly existing, and in good standing under the laws of the State of Delaware, and is duly qualified and in good standing as a foreign corporation in all other jurisdictions where the failure to qualify would have an adverse effect upon its ability to perform its obligations under this Agreement and all Related Documents to which it is a party.  Borrower has the organizational authority to enter into this Agreement, execute the Note and Mortgage, and grant the liens and security interests in the Collateral in the manner and for the purpose contemplated by the Collateral Documents to which it is a party.  Borrower has the power to perform its obligations hereunder and under the Loan Documents and Related Documents.  The execution, delivery, and performance by Borrower of the Loan Documents a nd Related Documents have all been duly authorized by all necessary corporate action, and do not and will not result in any violation by Borrower of any provision of any law, rule, regulation, order, writ, judgment, decree, determination or award presently in effect having applicability to Borrower, or the certificate of incorporation and by-laws of Borrower.  The making and performance by Borrower of the Loan Documents and Related Documents do not and

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will not result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other material agreement or instrument to which Borrower is a party or by which it may be bound, or result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than as contemplated by the Related Documents) upon or with respect to any of the properties now owned or hereafter acquired by Borrower.  Each of the Loan Documents and Related Documents to which Borrower is a party constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditor’s rights generally or by equitable principles relating to enforceability.

Section 9.2.

Financial Statements.  The most recent financial statements of Borrower and Guarantor delivered to Lender fairly present in all material respects the financial condition of Borrower and Guarantor, respectively, as of the date or dates thereof.  Each of said financial statements were prepared in conformity with GAAP (subject to non-material audit adjustments and the absence of full footnote disclosures).  No Material Adverse Effect has occurred since said dates in the financial position or in the results of operations of Borrower or Guarantor.

Section 9.3.

Title to Property; Status of Lease.  Borrower has good and marketable title to its leasehold interest in the Property.  None of the Collateral is subject to any Encumbrances other than the Mortgage and Permitted Encumbrances.  No default exists under the Lease, which is in full force and effect as of the date hereof.  No occurrence has occurred resulting in a Material Adverse Effect has occurred since October 27, 2005 with respect to the Property.

Section 9.4.

Litigation.  Other than as has been disclosed to Lender in writing, there are no legal actions, suits or proceedings pending or, to the best knowledge of Borrower, threatened against or affecting Borrower or Guarantor, or any of its properties before any court or administrative agency (federal, state or local), which could reasonably be expected to constitute a Material Adverse Effect, and there are no judgments or decrees against Borrower which could reasonably be expected to constitute a Material Adverse Effect.  None of the Collateral is subject to judgments or decrees or pending or threatened litigation which is or could reasonably be expected to become an Encumbrance against such property (other than a Permitted Encumbrance).  

Section 9.5.

Approvals.  No authorization, consent, approval or formal exemption of, nor any filing or registration with, any governmental body or regulatory authority (federal, state or local), and no vote, consent or approval of the directors of Borrower (other than those previously obtained) is or will be required in connection with the execution and delivery by Borrower of the Related Documents or the performance by Borrower of its obligations hereunder and under the other Related Documents.

Section 9.6.

Required Insurance.  Borrower maintains insurance with insurance companies in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which Borrower operates.  Borrower shall maintain all coverages required by the Mortgage and shall provide evidence of same to Lender in accordance with the insurance requirements of the Mortgage.

Section 9.7.

Licenses.  Borrower possesses adequate franchises, licenses and permits to own its properties and to carry on its businesses as presently conducted, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.

Section 9.8.

Adverse Agreements.  Borrower is not a party to any agreement or instrument, nor subject to any charter or other restriction, materially and adversely affecting the business, properties, assets, or operations of Borrower or its condition (financial or otherwise), and Borrower is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default would constitute a Material Adverse Effect.

Section 9.9.

Default or Event of Default.  No Default or Event of Default hereunder has occurred and is continuing or will occur as a result of Lender’s funding of the Loan.

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Section 9.10.

 Employee Benefit Plans.  Each employee benefit plan as to which Borrower has any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event (as defined in ERISA) has occurred and is continuing with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) to Borrower’s knowledge, no steps have been taken to terminate any such plan.

Section 9.11.  Investment Company Act.  Borrower is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended.

Section 9.12.  Public Utility Holding Company Act.  Borrower is not a "holding company," or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended.

Section 9.13.  Regulations X, T and U.  Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations X, T and U of the Board of Governors of the Federal Reserve System), and none of the proceeds of the Loan will be used for the purpose of purchasing or carrying such margin stock.

Section 9.14.  Location of Offices and Records; Tax Identification and Organizational Numbers.  The chief place of business of Borrower is located at 650 Poydras Street, Suite 1700, New Orleans, Louisiana  70130, and the office where Borrower keeps all of its records concerning the Collateral is 650 Poydras Street, Suite 1700, New Orleans, Louisiana  70130.  Borrower’s federal tax identification number is 72-1471108.  The organizational number assigned to Borrower by the Delaware Secretary of State is 3151683.

Section 9.15.  Information.  All written information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading as of such date, taken as a whole.  

Section 9.16.  Solvency of Borrower.  Borrower is and after consummation of the transactions contemplated by this Agreement (including the making of the Loan), and after giving effect to all obligations incurred by Borrower in connection herewith, will be, Solvent.

Section 9.17.  Governmental Requirements. The Borrower is in material compliance with all current laws and governmental requirements affecting it and its business.

Section 9.18.  Anti-Terrorism Laws.  Neither Borrower nor any of its Affiliates is in violation of any law relating to terrorism or money laundering (“Anti-Terrorism Laws”), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “Executive Order”), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56.  Neither Borrower nor any of its Affiliates is any of the following:

(1)

a person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(2)

a person owned or controlled by, or acting for or on behalf of, any person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(3)

a person with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;

(4)

supports “terrorism” as defined in the Executive Order; or

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(5)

a person that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) at its official website or any replacement website or other replacement official publication of such list.

Neither Borrower nor any of its Affiliates (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in paragraph (b) above, (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading a person that commits, threatens or conspires to commit or of avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

Section 9.19.  Survival of Representations and Warranties.  Borrower understands and agrees that Lender is relying upon the above representations and warranties in making the Loan to Borrower.  Borrower further agrees that the foregoing representations and warranties shall be true and correct in all material respects as of the date(s) made or deemed made and shall remain in full force and effect until such time as the Indebtedness shall be paid in full, or until this Agreement shall be terminated, whichever is the last to occur.

ARTICLE X

AFFIRMATIVE COVENANTS

In addition to the covenants contained in the Collateral Documents, which covenants are hereby ratified and confirmed by Borrower, Borrower or Guarantor, as applicable, covenants and agrees as follows:

Section 10.1.

Financial Statements; Other Reporting Requirements.  

Borrower shall furnish or cause to be furnished to Lender:

(a)

as soon as available and in any event within ninety (90) days following the close of each fiscal year, audited annual financial statements of Guarantor (together with a Compliance Certificate), which have been prepared by a certified public accountant satisfactory to Lender, consisting of a balance sheet as at the end of such fiscal year and statement of income and statement of cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year;

(b)

as soon as available and in any event within ninety (90) days following the close of each fiscal year, internally prepared unaudited annual financial statements of Borrower (together with a Compliance Certificate) consisting of a balance sheet as at the end of such fiscal year and statement of income and statement of cash flow for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, certified as true and correct by the chief financial officer of Borrower as having been prepared in accordance with GAAP consistently applied (subject to non-material audit adjustments and the absence of full footnote disclosures);

(c)

as soon as available and in any event within forty-five (45) days following the close of each fiscal quarter, internally prepared unaudited quarterly financial statements of Guarantor (together with a Compliance Certificate) consisting of a balance sheet as at the end of such fiscal quarter and statement of income and statement of cash flow for such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the preceding fiscal quarter, certified as true and correct by the chief financial officer of Guarantor as having been prepared in accordance with GAAP consistently applied (subject to non-material audit adjustments and the absence of full footnote disclosures);

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(d)

as soon as available and in any event within forty-five (45) days following the close of each month, (i) internally prepared unaudited monthly financial statements of Borrower consisting of a balance sheet as at the end of such month and statement of income and statement of cash flow for such month, certified as true and correct by the chief financial officer of Borrower as having been prepared in accordance with GAAP consistently applied (subject to non-material audit adjustments and the absence of full footnote disclosures) and (ii) through the Completion Date, monthly and cumulative Project cost summaries;

(e)

semi-annual FTE employment data and any other data which may be required under the New Markets Tax Credit Program; and

(f)

such other financial information concerning Borrower and/or Guarantor as Lender may reasonably request from time to time.

Section 10.2.

Notice of Default; Litigation; ERISA Matters.  Borrower will give written notice to Lender as soon as reasonably possible and in no event more than five (5) Business Days of obtaining actual knowledge of (i) the occurrence of any Default or Event of Default hereunder of which it has knowledge, (ii) the filing of any actions, suits or proceedings against Borrower in any court or before any governmental authority or tribunal of which it has knowledge, which could reasonably be expected to cause a Material Adverse Effect with respect to Borrower and/or Guarantor, or (iii) the occurrence of a reportable event under, or the institution of steps by Borrower to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which Borrower may have liability, which could reasonably be expected to cause, or lead to, or result in, any Material Adverse Eff ect.

Section 10.3.  Maintenance of Existence, Properties and Liens.  Borrower will (i) continue to engage in the business which it presently conducts and other business activities reasonably related thereto; (ii) maintain its existence and good standing in each jurisdiction in which it is required to be qualified and the failure to do so could reasonably be expected to have a Material Adverse Effect; (iii) keep and maintain all franchises, licenses and properties necessary in the conduct of its business in good order and condition, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect; (iv) duly observe and conform to all material requirements of any governmental authorities relative to the conduct of its business or the operation of its properties or assets, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect; and (v) maintain in favor of Lender a first perfected lien and security interest in the Collateral (subject only to Permitted Encumbrances).

Section 10.4.  Taxes.  Borrower shall pay or cause to be paid when due, all taxes, local and special assessments, and governmental charges of every type and description, that may from time to time be imposed, assessed and levied against its properties.  Borrower further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges due by Borrower has been paid in full and in a timely manner, if such data is requested by Lender.  Notwithstanding the foregoing, Borrower may withhold any such payment or elect to contest any lien if Borrower is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.

Section 10.5.  Further Assurances.  Borrower will, at any time and from time to time, execute and deliver such further instruments and take such further action as may reasonably be requested by Lender, in order to cure any defects in the execution and delivery of, or to comply with or accomplish the covenants and agreements contained in this Agreement or the Collateral Documents.  Borrower agrees to deliver, whenever reasonably requested by Lender, such additional collateral documents in form and substance reasonably satisfactory to Lender for the purpose of granting, confirming, and perfecting first and prior liens or security interests in the Collateral as security for the Indebtedness.  

Section 10.6.  Operations.  Borrower shall conduct its business affairs in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including compliance with all minimum funding standards and other requirements of ERISA, and other

16

laws applicable to any employee benefit plans which Borrower may have, except to the extent the failure to do so could not reasonably be expected to cause a Material Adverse Effect.

Section 10.7.  Change of Location.  Borrower shall, within ten (10) Business Days prior to any such change, notify Lender in writing of any proposed change in the location of its chief executive office or the location of the records it maintains with respect to the Collateral.

Section 10.8.  QALICB Reporting.  Borrower shall report information to Lender on an ongoing basis, whenever reasonably requested by Lender to confirm that Borrower is located in a Low-Income Community and meets the requirements of a Qualified Active Low-Income Community Business (“QALICB”) under the New Markets Tax Credit Program, and shall deliver other documentation and reports as may be necessary, in Lender’s sole discretion, to fulfill New Markets Tax Credit Program regulatory and compliance requirements, including, but not limited to, Borrower’s business address, business activity, employment data and financial statements.

Section 10.9.  Additional Collateral.  In the event that Borrower shall cease to operate out of the proposed port site at the Property covered by the Lease at the Port of New Orleans or significantly reduce its utilization of such property in such a manner as to impair the value of such property as Collateral, in Lender’s sole discretion, Borrower and Guarantor shall on demand by Lender pledge or caused to be pledged to Lender such additional collateral which is satisfactory in type and value to Lender.

Section 10.10.  Financial Covenants.  From the date hereof and so long as any principal, interest or other moneys are owing in respect of this Agreement, the Note or  any of the Collateral Documents, Guarantor will:

(a)

Consolidated Indebtedness to Consolidated EBITDA Ratio.

Maintain, on a consolidated basis, a ratio of Consolidated Indebtedness to Consolidated EBITDA of not more than 4.75 to 1.00 from the closing date through June 30, 2006, 4.50 to 1.00 from July 1, 2006 through December 31, 2006, and 4.00 to 1.00 from January 1, 2007 through the Maturity Date, as measured at the end of each fiscal quarter based on the four most recent fiscal quarters for which financial information is available;

(b)

Working Capital.

Maintain on a consolidated basis a ratio of current assets to current liabilities of not less than 1.00 to 1.00, as measured at the end of each fiscal quarter;

(c)

Consolidated Tangible Net Worth.

Maintain a Consolidated Tangible Net Worth, as measured at the end of each fiscal quarter, in an amount of not less than the sum of One Hundred Ten Million Dollars ($110,000,000) and seventy-five percent (75%) of all net income of Guarantor (on a consolidated basis) earned after October 1, 2004; and

(d)

Consolidated EBITDA to Interest Expense.

Maintain a ratio of Consolidated EBITDA to Interest Expense of not less than 2.50 to 1.00, measured at the end of each fiscal quarter based on the four most recent fiscal quarters for which financial information is available.

Section 10.11.  Construction and Completion of Improvements. and Compliance with Cooperative Endeavor Agreement; No Obligation of Lender to Monitor Construction.  Borrower shall promptly commence its construction of the Project and shall continue such construction through completion with diligence and continuity, in a good and workmanlike manner, and in accordance with sound building and engineering practices, any restrictive covenants, all applicable governmental requirements and the Plans. Borrower shall not permit cessation of work

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prior to the completion of the Project for a period in excess of thirty (30) days without the prior written consent of Lender and shall complete construction of the Project on the Property on or before the Completion Date, free and clear of all liens other than Permitted Encumbrances.  Borrower shall thereafter upon demand of Lender provide Lender with (i) an as-built survey of the Property showing all improvements as constructed, (ii) a certificate of occupancy prior to commencement of its business upon the Property, and (iii) evidence that no liens have been filed against the property within the seventy-day period following the later to occur of (1) the actual date of completion of the Project and (2) the date of filing of a notice of termination of work or other appropriate filing evidencing completion of the work and acceptance of the Project by Borrower in the records of Orleans Parish , Louisiana.  In the event that the as-built survey of the Property shows any improvements located outside the Property covered by the Lease, Borrower shall, within sixty (60) days from demand of Lender, obtain an amendment to the Lease which adds to the Lease the additional properties on which the improvements are located, on such terms as are presently contemplated by the Lease, plus an amendment to the Mortgage to expand its coverage as to such additional leased property.  Lender shall have no liability, obligation, or responsibility whatsoever with respect to the construction of the Project. Lender shall not be obligated to inspect the Property or the construction of the Project, nor be liable for the performance or default of Borrower, or any other party, or for any failure to construct, complete, protect or insure the Project, or for the payment of costs of labor, materials, or services supplied for the construction of the Project, or for the performance of any obligation of Borrower to a pur chaser, or whatsoever. Nothing, including, without limitation, any loan made hereunder, acceptance of any document or instrument, or any findings, statements and opinions of Lender’s officers, employees or contractors, shall be construed as a representation or warranty, express or implied, to any party by Lender.  Borrower does hereby jointly and severally indemnify Lender against all costs and liabilities hereinabove specified.  

Section 10.12.  Inspection of the Property. Borrower shall permit Lender and its agents and representatives, to enter upon the Property and the RTI Improvements and any location where materials intended to be utilized in the construction of the Project or the RTI Improvements are stored for the purpose of inspection of the Property and the RTI Improvements and such materials at all reasonable times during Borrower’s normal business hours.

Section 10.13.  Payment of Claims. Borrower shall promptly pay or cause to be paid, when due, all costs and expenses incurred in connection with the Property and the construction of the Improvements, and Borrower shall keep the Property free and clear of any liens, charges, or claims other than the liens of the Mortgage, Permitted Encumbrances or other liens approved in writing by Lender.

Section 10.14.  Tax Receipts. Borrower shall furnish Lender with receipts or tax statements marked “Paid” to evidence the payment of all taxes and assessments levied on the Property on or before thirty (30) days prior to the date such taxes or assessments become delinquent.

ARTICLE XI

NEGATIVE COVENANTS

In addition to the negative covenants contained in the Collateral Documents, which covenants are hereby ratified and confirmed by Borrower, Borrower covenants and agrees that, without the prior written consent of Lender:

Section 11.1.  Limitations on Fundamental Changes.  Borrower shall not form any Subsidiary, nor shall Borrower consummate any transaction of merger or consolidation as described in Section 45D of the Code unless Borrower is the surviving entity and unless thereafter Borrower would continue to be a qualified active low income community business (a "QALICB"), or liquidate or dissolve Borrower (or suffer any liquidation or dissolution).   Borrower shall not allow any change in control of the ownership or executive management of Borrower or Guarantor without the prior written consent of Lender.

Section 11.2.  Disposition of Assets.  Borrower shall not convey, sell, lease, assign, transfer or otherwise dispose of, substantially all of its assets (whether now owned or hereafter acquired).

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Section 11.3.  Other Agreements.  Borrower will not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder, under the Bond Documents, under the Cooperative Endeavor Agreement or under any instrument or document delivered or to be delivered by Borrower to Lender in connection with this Agreement.  Other than as previously disclosed to Lender, the Borrower is not a party to any partnership, joint venture or similar arrangement and shall not enter into any such arrangement unless the Borrower shall provide to Lender an opinion of counsel, in form and substance acceptable to Lender, to the effect that the consummation of such arrangement would not cause the Borrower to fail to constitute a QALICB.

Section 11.4.  Transactions with Affiliates.  Borrower shall not sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates unless such transaction is on terms that are no less favorable to Borrower or such Affiliate, as the case may be, than those that could be obtained at the time of such transaction on an arm’s-length basis from a Person who is not an Affiliate.

Section 11.5.  Use of Loan Proceeds.  Borrower shall not use any Loan proceeds to finance investments in marketable securities or for purposes other than as set forth in the recitals to this Agreement.

Section 11.6.  Secondary Financing and Liens.  Borrower shall not (a) incur secondary financing with respect to the Property or (b) create, incur, assume or permit to exist any Encumbrance on the Property, except for the Mortgage and Permitted Encumbrances.  

Section 11.7.  Anti-Terrorism Law; Anti-Money Laundering.  Borrower shall not:

(a)

Directly or indirectly, (i) knowingly conduct any business or engage in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in Section 11.8, (ii) knowingly deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order or any other Anti-Terrorism Law, or (iii) knowingly engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

(b)

Cause or permit any of the funds that are used to repay the Loan to be derived from any unlawful activity with the result that the making of the Loan would be in violation of any Anti-Terrorism Law.

Section 11.8.  Embargoed Person.  Borrower shall not cause or permit (a) any of the funds or properties that are used to repay the Loan to constitute property of, or be beneficially owned directly or indirectly by, any person subject to sanctions or trade restrictions under United States law (“Embargoed Person” or “Embargoed Persons”) that is identified on the “List of Specially Designated Nationals and Blocked Persons” maintained by OFAC and/or on any other similar list maintained by OFAC pursuant to any authorizing statute including, but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Order or Requirement of Law promulgated thereunder, with the result that Loan made by the Lender would be in violation of an Anti-Terroris m Law, or (b) any Embargoed Person to have any direct or indirect interest, of any nature whatsoever in the Borrower, with the result that the investment in the Borrower (whether directly or indirectly) is prohibited by an Anti-Terriorism Law or the Loan is in violation of a Anti-Terrorism Law.

ARTICLE XII

EVENTS OF DEFAULT

Section 12.1.  Events of Default.  The occurrence of any one or more of the following shall constitute an Event of Default:

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1.

a failure by Borrower or Guarantor, as the case may be, to make any payment of principal or interest on the Note, or any other Indebtedness owing by such party to Lender, when due;

2.

a failure by Borrower to comply with any of the other terms or conditions specified herein, or in any other Collateral Document;

3.

a failure by Borrower or Guarantor to perform, observe or comply with any of the terms, covenants, conditions or provisions of this Agreement;

4.

a failure by Guarantor to perform, observe or comply with any of the terms, covenants, conditions or provisions of its Continuing Guaranty or a default by Guarantor under any other loan, extension of credit, security agreement, or other obligation in favor of the Lender or Hibernia National Bank which default is not cured in accordance with any applicable cure periods;

5.

a failure by Borrower to perform, observe or comply with any of the terms, covenants, conditions or provisions of the Lease;

6.

the incorrectness of any material representation or warranty made by Borrower or Guarantor to Lender in any of the Related Documents, or in any document furnished to Lender in connection with the Loan;

7.

the cessation of the construction of the Project on the Property for more than thirty (30) days without the prior written consent of Lender;

8.

any substantial damage to or destruction of the Project shall occur and insurance proceeds shall not, in the opinion of Lender, be sufficient to repair or restore the Improvements, or if such insurance proceeds shall not be paid within a reasonable period of time, unless Borrower shall have deposited with Lender the amount of any such deficiency;

9.

a reasonable determination by Lender that completion of all Improvements will not be completed on or before the Completion Date;

10.

the determination by counsel for Lender that the Mortgage does not constitute a perfected first and prior lien (subject only to the Permitted Encumbrances) on and security interest on the Property and Improvements;

11.

the appointment of a receiver, trustee, conservator, or liquidator of Borrower or Guarantor, over any of the Property, or any other property of Borrower or Guarantor;

12.

a filing by Borrower of a voluntary petition in bankruptcy, seeking reorganization or rearrangement or taking advantage of any Debtor Relief Laws, or an answer by Borrower or Guarantor admitting the material allegations of a petition filed against Borrower or Guarantor, as the case may be, in any bankruptcy, reorganization, insolvency, conservatorship, or similar proceeding, or an admission by Borrower or Guarantor in writing of an inability to pay its or their debts as they become due;

13.

the making by Borrower of a general assignment for the benefit of creditors;

14.

the entry of an order, judgment or decree by any court of competent jurisdiction adjudicating Borrower bankrupt or insolvent, or approving a petition seeking reorganization of Borrower or Guarantor or a rearrangement of their debts, that is not dismissed within forty-five (45) days after its occurrence;

15.

the commencement of any proceeding whereby the assets of Borrower or Guarantor may become subject to attachment, sequestration or similar proceeding, that is not released or dismissed within forty-five (45) days after its occurrence;

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16.

a survey showing that any improvement constructed on the Property is not entirely within the boundary lines of said property or encroaches upon any set-back line, easement, right-of-way, street or any adjoining property except as approved by Lender;

17.

the liquidation, termination or dissolution of Borrower or Guarantor;

18.

the commencement of proceedings to condemn all or part of the Improvements or Property by any governmental authority;

19.

Borrower fails to immediately notify Lender if it receives a lien claim notice in connection with the Property or if it receives any verbal or written notification that any party intends to deliver a lien claim notice or to otherwise assert a lien against the Property; or

20.

Borrower fails to pay any judgment rendered against it within five (5) days after entry thereof, unless an appeal that stays execution of the judgment is timely filed with an appropriate bond.

Notwithstanding the foregoing, in the event any of the foregoing shall occur, Borrower or a Guarantor, as the case may be, shall have a period of: (i) ten (10) days for a monetary default; and/or (ii) thirty (30) days for a nonmonetary default, after written notice of such failure or default to cure such failure or default prior to Lender exercising any of its remedies; provided however, Lender shall not be obligated to give more than two (2) such notices of default in any calendar year, and Lender shall not be required to give any notice of default for the items (an “Automatic Default”) listed in subsections 13, 14, 15, 16, 17, 18 or 19 above.

Upon the occurrence and during the continuance of an Event of Default, at the Lender's option, the Note and all Indebtedness of the Borrower will become immediately due and payable, upon written notice to the Borrower, except that in the case of an Automatic Default, such acceleration shall be automatic, without notice and not optional.  Upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any of the Lender to or for the credit or the account of Borrower against any and all of the indebtedness of Borrower under the Note and the Loan Documents, including this Agreement, irrespective of whether or n ot the Lender shall have made any demand under the Loan Documents, including this Agreement or the Note and although such indebtedness may be unmatured.  Any amount set-off by the Lender shall be applied against the Indebtedness owed the Lender by Borrower pursuant to this Agreement and the Note.  The Lender agrees promptly to notify Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application.  The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have.  Lender shall not have a right of setoff against deposits maintained by Affiliates of Borrower with Lender in the names of such Affiliates to satisfy the Indebtedness of Borrower.

Section 12.2.  Waivers.  Except as otherwise provided for in this Agreement and by applicable law, the Borrower waives to the extent permitted by applicable law (i) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by the Lender on which the Borrower may in any way be liable and hereby ratifies and confirms whatever the Lender may do in this regard, (ii) all rights to notice and a hearing prior to the Lender’s taking possession or control of, or to the Lender's replevy, attachment or levy upon, the Collateral or any bond or security which might be required by any court prior to allowing the Lender to exercise any of its remedies, and (iii) the benefit of all valuation, appraisal and exemption laws.  The Borrower acknowledges that it has been advised by counsel of its choice with respect to this Agreement, the other Collateral Documents, and the transactions evidenced by this Agreement and other Collateral Documents.

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ARTICLE XIII

MISCELLANEOUS

Section 13.1.  No Waiver; Modification in Writing.  No failure or delay on the part of Lender in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder.  No amendment, modification or waiver of any provision of this Agreement or of the Note, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing signed by or on behalf of Lender and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.  Unless otherwise required pursuant to this Agreement or any other Loan Documents, no notice to or demand on Borrower in any case shall entitle Bor rower to any other or further notice or demand in similar or other circumstances.

Section 13.2.  Addresses for Notices.  All notices and communications provided for hereunder shall be in writing and, shall be mailed, by certified mail, return receipt requested, sent by reputable overnight courier or delivered as set forth below unless any person named below shall notify the others in writing of another address, in which case notices and communications shall be mailed, by certified mail, return receipt requested, sent by reputable overnight courier or delivered to such other address:

If to Lender:

Liberty Community Ventures III, L.L.C.

6600 Plaza Dr., Suite 600

New Orleans, LA  70127

Attn:  Julius E. Kimbrough, Jr.

with a copy to:

Hibernia National Bank

313 Carondelet Street

New Orleans, LA  70130

Attn:  Ross S. Wales, Commercial Banking Department

If to Borrower:

CG Railway, Inc.

650 Poydras Street, Suite 1700

New Orleans, LA 70130

Attn:  Erik L. Johnsen

If to Guarantor:

International Shipholding Corporation

650 Poydras Street, Suite 1700

New Orleans, LA 70130

Attn:  Erik L. Johnsen

Section 13.3.  Fees and Expenses.  Borrower agrees to pay all reasonable out of pocket fees, costs and expenses of Lender in connection with the preparation, execution and delivery of this Agreement, and all Related Documents to be executed in connection herewith and subsequent modifications or amendments to any of the foregoing, including without limitation, the reasonable fees and disbursements of counsel to Lender, inspection fees, New Markets Tax Credit opinion fees, title insurance premiums, brokerage fees, appraisal fees and travel expenses (except for the legal fees of Kutak Rock LLP, counsel to Lender and Liberty Bank, which legal fees are being paid

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by Liberty Bank), and to pay all reasonable costs and expenses of Lender in connection with the enforcement of this Agreement, the Note or the other Related Documents, including reasonable legal fees and disbursements arising in connection therewith.  Borrower also agrees to pay, and to save Lender harmless from any delay in paying stamp and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of this Agreement, the Note, the other Related Documents, or any modification thereof.

Section 13.4.  Security Interest.  Borrower hereby grants Lender a continuing security interest in all funds which Borrower may maintain on deposit with Lender or with either of Lender’s members (Hibernia National Bank and Liberty Bank) (with the exception of funds deposited in Borrower's accounts in trust for third parties or funds deposited in pension accounts, IRA's, Keogh accounts and All Saver Certificates), and Lender shall have a lien upon and a security interest in all property of Borrower in Lender's possession or control which shall secure the Indebtedness of Borrower to Lender under this Agreement and the Note.  Such lien and security interest shall not extend to funds of Affiliates of Borrower maintained in their own name in accounts with Lender or with Lender’s members.

Section 13.5.  Waiver of Marshaling.  Borrower shall not at any time hereafter assert any right under any law pertaining to marshaling (whether of assets or liens) and Borrower expressly agrees that Lender may execute or foreclose upon the Collateral in such order and manner as Lender, in its sole discretion, deems appropriate.

Section 13.6.  Governing Law.  This Agreement, the Note and all Related Documents shall be deemed to be contracts made under the laws of the State of Louisiana and for all purposes shall be governed by and construed in accordance with the laws of said State.  

Section 13.7.  Consent to Loan Participation.  Subject to Borrower’s prior written consent, which consent may not be unreasonably withheld or delayed, Lender may sell or transfer, whether now or later, one or more participation interests in the Indebtedness of Borrower arising pursuant to this Agreement to one or more purchasers, whether related or unrelated to Lender.  Lender may provide, subject to the prospective participant’s written agreement to comply with the confidentiality requirements of Section 13.14, to any one or more purchasers, or potential purchasers, any information or knowledge such Lender may have about Borrower or about any other matter relating to such Indebtedness.  Borrower also agrees that the purchasers of any such participation interest will be considered as the absolute owners of such interests in such Indebtedness, provided t hat Borrower may continue to deal with Lender with respect to all matters relating to this Agreement and may rely upon any consents or waivers given by Lender in relation to this Agreement and the Loan Documents.

Section 13.8.  Consent to Syndication.  Subject to Borrower’s prior written consent, which consent may not be unreasonably withheld or delayed, Lender may syndicate the loans to one or more other lending institutions.  Borrower consents, subject to the recipient’s written agreement to comply with the confidentiality requirements of Section 13.14 below, to Lender’s distribution to interested lending institutions of all financial information and other data in Lender’s possession concerning Borrower, including data prepared by or for Borrower, so that the interested lending institution(s) may evaluate the loans and the Collateral.  Lender will provide notice to Borrower of the lending institutions that are distributed financial data concerning Borrower.  Borrower agrees to enter into an amendment or restatement of this Agreement and any of the Re lated Documents in order to facilitate such permitted syndication.  

Section 13.9.

  Indemnity.  

(a) Borrower agrees to indemnify and hold harmless Lender and its officers, employees, members, agents, attorneys and representatives (singularly, an "Indemnified Party", and collectively, the "Indemnified Parties") from and against any loss, cost, liability, damage or expense (including the reasonable fees and out-of-pocket expenses of counsel to Lender, including all local counsel hired by such counsel) ("Claim") incurred by Lender in investigating or preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law, federal or state environmental law, or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon any acts, pra ctices or omissions or alleged acts, practices or omissions of Borrower, or its agents or arises in connection with the duties, obligations or performance of the Indemnified Parties in negotiating, preparing, executing, accepting, keeping, completing,

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countersigning, issuing, selling, delivering, releasing, assigning, handling, certifying, processing or receiving or taking any other action with respect to the Loan Documents and all documents, items and materials contemplated thereby even if any of the foregoing arises out of an Indemnified Party's ordinary negligence.  The indemnity set forth herein shall be in addition to any other obligations or liabilities of Borrower to Lender hereunder or at common law or otherwise, and shall survive any termination of this Agreement, the expiration of the Commitment and the payment of all indebtedness of Borrower to Lender hereunder and under the Note, provided that Borrower shall have no obligation under this Section to the Indemnified Parties with respect to any of the foregoing arising out of the gross negligence or willful misconduct of any of the Indemnified Parties.  If any Claim is as serted against any Indemnified Party, the Indemnified Party shall endeavor to notify Borrower of such Claim (but failure to do so shall not affect the indemnification herein made except to the extent of the actual harm caused by such failure).  The Indemnified Party shall have the right to employ, at Borrower’s expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim.  Borrower may at its own expense also participate in the defense of any Claim.  Each Indemnified Party may employ separate counsel in connection with any Claim to the extent such Indemnified Party believes it reasonably prudent to protect such Indemnified Party.  The parties intend for the provisions of this Section to apply to and protect each Indemnified Party from the consequences of any liability including strict liability imposed or threatened to be imposed on Indemnified Party as well as from the consequences of its own negligence, whether or not that negligence is the sole, contributing, or concurring cause of any Claim.

(b)

No Indemnified Party may settle any Claim to be indemnified without the consent of the indemnitor, such consent not to be unreasonably withheld; provided, that the indemnitor may not reasonably withhold consent to any settlement that an Indemnified Party proposes, if the indemnitor does not have the financial ability to pay all its obligations outstanding and asserted against the indemnitor at that time, including, without limitation, the maximum potential claims pending or to the knowledge of the indemnitee threatened against the Indemnified Party to be indemnified pursuant to this Section 13.9.

Section 13.10.  Maximum Interest Rate.  Regardless of any provisions contained in this Agreement or in any other documents and instruments referred to herein, Lender shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Note any amount in excess of the Maximum Rate, and in the event Lender ever receives, collects or applies as interest any such excess, of if an acceleration of the maturity of the Note or if any prepayment by Borrower results in Borrower having paid any interest in excess of the Maximum Rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Note for which such excess was received, collected or applied, and, if the principal balance of the Note is paid in full, any remaining excess shall forthwith be paid to Borrower.  All sums paid or agreed to be paid to Lender for the use, forbearance or detention of the indebtedness evidenced by the Note and/or this Agreement shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the Maximum Rate.  In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate of interest permitted by law, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the total amount of interest contracted for, charged or received with the total amount of interest which could be contracted for, charged or received throughout the entire contemplated term of the Note at the Maxi mum Rate.

Section 13.11.  WAIVER OF JURY TRIAL; SUBMISSION TO JURISDICTION.

(a) BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH BORROWER AND LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (i) THE NOTE, (ii) THIS AGREEMENT, (iii) THE COLLATERAL DOCUMENTS OR (iv) THE COLLATERAL.  IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS AGREEMENT.  THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY BORROWER AND LENDER, AND BORROWER AND LENDER HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS

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WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  BORROWER AND LENDER EACH FURTHER REPRESENT THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT THEY HAVE HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

(b)

BORROWER HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE COURTS OF LOUISIANA AND THE FEDERAL COURTS IN LOUISIANA AND AGREES THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR BROUGHT TO ENFORCE THE PROVISIONS OF THE NOTE, THIS AGREEMENT AND/OR THE COLLATERAL DOCUMENTS MAY BE BROUGHT IN ANY COURT HAVING SUBJECT MATTER JURISDICTION.

Section 13.12.  Severability.  If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances.  If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable.

Section 13.13.  Headings.  Article and Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement.

Section 13.14.  Confidentiality.  For the purposes of this Section 13.14, “Confidential Information” means information delivered to Lender by or on behalf of Borrower, Guarantor or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement (including, without limitation, any information regarding the transactions contemplated hereby provided prior to the date of this Agreement), provided that such term does not include information that (a) was publicly known or otherwise known to Lender prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by Lender or any Person acting on its behalf, or (c) otherwise becomes known to Lender other than through disclosure by Borrower, Guarantor or any Subsidiary.  Lender will maintain the confidentiality of such Confidential Information in accordance with Lender’s standard procedures to protect confidential information of third parties delivered to Lender, provided that Lender may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys and affiliates, (ii) its financial advisors and other professional advisors who are made aware of the confidential nature of such information and have agreed in writing to comply with this Section 13.14, (iii) any other holder of the Note and have agreed in writing to comply with this Section 13.14, (iv) any Person to which Lender sells or offers to sell the Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 13.14), (v) any federal or state regulatory authority having jurisdiction over Lender, (vi) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio, or (vii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to Lender, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which Lender is a party, to the extent Lender may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or the protection of the rights and remedies under this Agreement and the other Loan Documents.  Each holder of the Note or an interest therein, by its acceptance of the Note or an interest therein, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 13.14 as though it were a party to this Agreement.

Section 13.15.  New Markets Addendum. Reference is hereby made to Exhibit "A" to this Agreement, which shall form a part of this Agreement.  All representations, warranties, covenants and agreements contained therein are hereby incorporated into this Agreement for all purposes.

Section 13.16.  Assignment or Outsourcing of Loan Servicing.  Borrower hereby acknowledges that Loan servicing may be assigned or outsourced by Lender to a third party and such party may receive servicing fees.

25

Section 13.17.  Full Agreement.  This Agreement and the Related Documents constitute the full, entire and complete agreement between the parties hereto as to the transactions contemplated hereby, and expressly supersede any prior agreements concerning the matters covered hereby.  There are no oral agreements between the parties.  This Agreement and the documents provided for herein may be amended and any right or remedy may be waived, but only by the express terms and provisions of a writing signed by the party sought to be bound by such amendment or waiver.

[Remainder of Page Intentionally Left Blank]

26

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

BORROWER:

CG RAILWAY, INC.,

a Delaware corporation

By:

Name:

Manuel G. Estrada

Title:

Vice President and Chief Financial Officer

LENDER:

LIBERTY COMMUNITY VENTURES III, L.L.C.,

a Louisiana limited liability company

By:

LIBERTY BANK AND TRUST COMPANY

Its:

Managing Member

By:­­­­­­­­

Name:

Alden J. McDonald, Jr.

Title:

President and Chief Executive Officer

GUARANTOR:

INTERNATIONAL SHIPHOLDING CORPORATION,

a Delaware corporation

By:

Name:

Manuel G. Estrada

Title:

Vice President and Chief Financial Officer

27

Exhibit "A"

NEW MARKETS ADDENDUM TO CREDIT AGREEMENT

A.  ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.  Borrower hereby represents, warrants and covenants to Lender, as of the date of the Credit Agreement to which this Addendum is attached (the “Agreement”), as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

1.

Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware.

2.

Borrower operates several trades or businesses, one of which (the “Separate Business”) involves (a) developing, constructing, improving, leasing (as lessee) and operating a rail cargo “roll on/roll off” facility in the Port of New Orleans, (b) constructing certain transload facility and rail installation improvements at a transloading facility (the “Facility”) located in New Orleans, Louisiana on part of the site of the former MacFrugal’s, and (c) using the Facility pursuant to a Facility Use Agreement with DuPuy Storage and Forwarding, L.L.C.

3.

Borrower shall operate the Separate Business so that the Separate Business shall qualify as a qualified active low-income community business (as defined in Section 45D(d)(2)(A) of the Internal Revenue Code of 1986 (as amended, the “Code”) and the related Federal Income Tax Regulations, including proposed, interim and temporary regulations (the “Regulations”)).

4.

Fifty percent (50%) or more of the total gross income of the Separate Business is and shall continue to be derived from the active conduct of a qualified business (as defined in Section 45D(d)(3) of the Code and the related Regulations) within a low-income community (as defined in Section 45D(e) of the Code and the Related Regulations) (a “Low-Income Community”).

5.

Forty percent (40%) or more of the use of the tangible property of the Separate Business (whether owned or leased) is and shall continue to be within a Low-Income Community.

6.

Forty percent (40%) or more of the use of the services performed for the Separate Business by its employees are and shall continue to be  performed in a Low-Income Community.  If the Separate Business has no employees, eighty-five percent (85%) or more of the use of the tangible property of the Separate Business (whether owned or leased) is and shall continue to be within a Low-Income Community.

7.

Less than five percent (5%) of the average of the aggregate unadjusted bases of the property of  the Separate Business is attributable to (i) works of art, (ii) rugs or antiques, (iii) metals or gems, (iv) stamps or coins, (v) alcoholic beverages, (vi) or any other tangible personal property specified by the Secretary of the United States Department of Treasury as a “collectible” (collectively, “Collectibles”).

8.

Less than five percent (5%) of the average of the aggregate unadjusted bases of the property of the Separate Business is attributable to debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts (including any interest rate swap, cap or similar agreement), annuities, and other similar property (“Nonqualified Financial Property”); provided, however, that Nonqualified Financial Property does not include: (i) reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of eighteen (18) months or less, and (ii) debt instruments described in Section 1221(a)(4) of the Code.

9.

The Separate Business does not conduct any trade or business (and shall continue to not so conduct any trade or business) consisting of (i) the development or holding of intangibles for sale or license, (ii) the operation of (A) a private or commercial golf course, (B) a country club, (C) a massage parlor, (D) a hot tub facility, (E) a suntan facility, (F) a racetrack or other facility used for gambling, or (G) any store the principal business of which is the sale of alcoholic beverages for consumption off premises, (iii) farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code and the related Regulations), and (iv) the operation or rental of residential real

1

property (“Residential Property”) as defined in Section 168(e)(2) of the Code (collectively, the “Borrower Prohibited Activities”).

10.

Borrower has no information or knowledge that the Separate Business does not or will not satisfy the definition of a qualified active low-income community business (as defined in Section 45D(d)(2)(A) of the Code and the related Regulations).

11.

Borrower has had no correspondence or any communication with, to or from the Community Development Financial Institutions Fund, an agency of the United States Department of the Treasury, concerning non-compliance with, or deficiencies in, reporting practices.

12.

If the Loan is being made with respect to a qualified low-income building under Section 42 of the Code (a “LIHTC Building”), no portion of the Loan and no Loan Proceeds will be used by Borrower or the Separate Business to finance such LIHTC Building’s eligible basis under Section 42(d) of the Code.

13.

All information concerning Borrower, the Separate Business and their property known to the Borrower or any of its affiliates, or which should have been known to any of them in the exercise of reasonable care, has been disclosed by Borrower to Lender and there are no facts or information known to the Borrower or any of its affiliates, or which should have been known to any of them in the exercise of reasonable care, which would make any of the facts or information submitted by Borrower to Lender with respect to Borrower, the Separate Business and their property inaccurate, incomplete or misleading in any material respect.

14.

All documents and information provided by Borrower to Lender are complete and accurate and accurately describe the entire business of Borrower and the Separate Business.

15.

The amount of reserves, receivables, assets and other items of working capital shown on the balance sheets of the Borrower and the Separate Business submitted to Lender is reasonable based upon Borrower’s reasonably anticipated costs of constructing and operating the Project and the RTI Improvements.

16.

The Separate Business does not own, nor will it own, any asset or property other than the Project, the RTI Improvements, and incidental personal property necessary for the ownership or operation of the Project and the RTI Improvements.

17.

The Board of Directors of Borrower has determined that no officer, director, principal, employee or owner of the Borrower are on the list of Specially Designated Nationals and Blocked Persons promulgated by the United States Department of the Treasury and located on the internet at http://www.treas.gov/offices/eotffc.; http://www.treas.gov/ofac/t11sdn.pdf.

B.  ADDITIONAL COVENANTS.  The Borrower hereby covenants and agrees with Lender that, so long as the Agreement remains in effect:

1.

Borrower shall provide such reporting information as Lender may reasonably require to have the Loan qualified and to retain its qualification for the New Market Tax Credit program.  Borrower shall use commercially reasonable efforts to provide, at no cost to Lender, such reporting information as Lender may reasonably require to have the Loan qualified and to retain its qualification for the New Market Tax Credit program.   Borrower shall provide Lender with such information as it has in its possession and provide Lender with access to the Project and the RTI Improvements and to tenants of the Project and the RTI Improvements subject to the terms of the Lease and any sublease(s), and shall use commercially reasonable efforts to assist Lender in obtaining information needed to maintain compliance with the New Market Tax Credit requirements and in addition will provide any information required to be provided to the Community Development Financial Institutions Fund, an agency of the United States Department of the Treasury.  Such assistance shall include providing reasonable estimates to Lender where necessary or otherwise assisting Lender in obtaining such information, including, without limitation, the following:  

(i)

the number of minority, woman or low income person-owned or controlled businesses at the Project and the RTI Improvements;

2

(ii)

the number of persons employed by businesses at the Project and the RTI Improvements;

(iii)

the total Project and RTI Improvements costs (provided in the first year of the Loan term only);

(iv)

the total Project and RTI Improvements costs funded by equity (provided in the first year of the Loan term only);

(v)

the total Project and RTI Improvements costs funded by public sources, if any (provided in the first year of the Loan term only); and

(vi)

the total number of construction jobs created at the Project and the RTI Improvements.

2.

Borrower shall not move or expand the existing operations and/or business of the Separate Business to a new address without the prior written consent of Lender.

3.

Borrower shall depreciate the Project and RTI Improvements over thirty-nine (39) years as nonresidential real property.

4.

Borrower shall furnish Lender with an executed copy of the Lease.  All renewals of the Lease and all proposed sub-leases shall provide for rental rates as provided in Section 4 of the Lease. All proposed sub-leases shall be subject to the prior approval of Lender, which approval shall not be unreasonably withheld, conditioned or delayed.  All sub-leases shall provide that they are subordinate to the Mortgage and that the sub-lessee agrees to attorn to Lender.  Borrower shall: (i) observe and perform all the obligations imposed upon the lessor (or the lessee, as the case may be) under the Lease or any sub-lease and shall not do or permit to be done anything to impair the value of the Lease or any sub-lease as security for the Loan; (ii) promptly send to Lender copies of all notices of default which Borrower shall send or receive thereunder; (iii) enforce all of the terms, covenants and conditions co ntained in the Lease or any sub-lease on the part of the lessee thereunder to be observed or performed, short of termination thereof; (iv) not collect any rents more than one month in advance; (v) not execute any other assignment of the lessor’s interest (or the lessee’s interest, as the case may be) in the leases or rents under the Lease; (vi) other than de minimis non-financial amendments, not alter, modify or change the terms of the Lease or any sub-lease without the prior written consent of Lender (which consent shall not be unreasonably withheld), or, except if a sub-lessee is in default, cancel or terminate the sub-lease or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of the Lease or any sub-lease of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of the sub-lessees thereunder; provided, however, that any sub-lease may be canceled if at the time o f the cancellation thereof a new sub-lease is entered into with a bona fide, independent third-party on substantially the same terms or more favorable terms as the canceled Lease; (vii) not alter, modify or change the terms of any guaranty of the leases or cancel or terminate such guaranty without the prior written consent of Lender; (viii) not consent to any assignment of or subletting under the Lease or any sub-lease not in accordance with their terms, without the prior written consent of Lender; and (ix) execute and deliver at the request of Lender all such further assurances, confirmations and assignments in connection with the Project and the RTI Improvements as Lender shall from time to time request.

5.

The Separate Business shall not acquire any Collectible to the extent that, after such acquisition, the aggregate bases of Collectibles owned by the Separate Business would equal or exceed five percent (5%) of the aggregate unadjusted bases of all property of the Borrower.  

6.

The Separate Business shall not conduct, or rent space to persons or entities that conduct, Borrower Prohibited Activities and all tenants shall be engaged in a Qualified Business (as such term is defined in Code Section 45D(d)(3) and the Related Regulations).

3

7.

On the first day of each calendar quarter, commencing January 1, 2006, Borrower shall execute and deliver to the Lender a certificate in such form and provide such evidence as may reasonably required by Lender that the aforementioned certifications are true and accurate.      

8.

If as a result of the breach of any term of the Credit Agreement or the Loan Documents by Borrower, any member of the Lender (a “Tax Credit Claimant”) is required to recapture (“Recapture”) all or any part of the tax credits (the “New Market Tax Credits” or “NMTCs”) previously claimed by such Tax Credit Claimant under Section 45D of the Internal Revenue Code of 1986 and the related Federal Income Tax Regulations, including proposed, interim and temporary regulations, Borrower  and Guarantor(s) agree, jointly and severally, to pay (the “Recapture Payment”) to Lender the sum of (a) the amount of the NMTCs recaptured, (b) interest and penalties payable by the Lender and/or a Tax Credit Claimant on such Recapture, and (c) any additional costs incurred by Lender and/or a Tax Credit Claimant as a result of such Recapture.  The Recapture Payment shall be made by the Borrower s within five (5) days after Lender’s written demand for the Recapture Payment, which demand shall be accompanied by an explanation of the Recapture Payment and a calculation in reasonable detail of the amount payable by Borrower as a Recapture Payment, which explanation and calculation shall be conclusive in the absence of manifest error.

9.

Borrower shall do all things necessary to observe organizational formalities and preserve its separate legal existence, and Borrower shall not amend, modify or otherwise change its articles of incorporation, bylaws or other organizational documents, as the case may be, without the written consent of Lender.

10.

Borrower shall maintain all of its books, records, financial statements and bank accounts separate from those of its Affiliates and any other Person.  Borrowers assets shall not be listed as assets on the financial statement of any other Person, and Borrower shall have its own separate financial statement;  provided, however, that Borrower’s assets may be included in a consolidated financial statement of its parent company if (i) inclusion on such a statement is required to comply with the requirements of GAAP, and (ii) such assets shall be listed on Borrower’s own separate balance sheet.  Any parent entity of Borrower shall include all income, gain, loss deduction and credits of Borrower in its Tax Returns.   Borrower shall maintain books and records for the Separate Business separate from the books and records of the remaining part of Borrower and from an y of Borrower’s Affiliates and any other Person.

11.

Borrower shall be, and at all times shall hold itself out to the public as, a legal entity separate and distinct from any other entity (including any Affiliate of Borrower), shall correct any known misunderstanding regarding its status as a separate entity, shall conduct business in its own name, and shall not identify itself or any of its Affiliates as a division or part of the other.

12.

The Separate Business shall maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations.

13.

 Borrower shall not dissolve, wind up, liquidate, consolidate or merge in whole or in part or sell or dispose of all or substantially all of its assets.

14.

Borrower shall maintain its funds and other assets separate from those of any other Person and shall not participate in a cash management system with any other Person unless any funds of Borrower which are maintained or deposited in such cash management system can at all times be identified as funds owned by Borrower.   

15.

Borrower shall not guarantee or become obligated for the debts of any other Person or pledge its assets for the benefit of any Person and does not and shall not hold itself out as being responsible for the debts or obligations of any other Person, except for Borrower's guarantee in favor of Whitney National Bank and certain other lenders (the "Whitney Guarantee") pursuant to that certain Credit Agreement dated as of December 6, 2004, by and among LCI Shipholdings, Inc., Central Gulf Lines, Inc., and Waterman Steamship Corporation, as borrowers, International Shipholding Corporation, Enterprise Ship Company, Inc., Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd., and Borrower, as guarantors, the banks and financial institutions listed on Schedule I thereto, as lenders, and Whitney National Bank, as administrative agent, as security trustee for the lenders and as arranger.

4

16.

Borrower shall allocate fairly and reasonably any overhead expenses that are shared with an Affiliate, including paying for office space and services performed by any employee of an Affiliate.

17.

Borrower shall maintain its assets in such a manner that it is not costly or difficult to segregate, identify or ascertain Borrower’s assets as separate from the assets of another Person and shall maintain its bank accounts separate from those of any other Person.

18.

Borrower shall hold regular meetings, as appropriate, to conduct the business of Borrower and observe all customary organizational and operational formalities.

19.

Borrower shall pay its own liabilities and expenses out of its own funds drawn on its own bank account.

20.

Borrower shall not acquire obligations or securities of its Affiliates.

21.

Borrower shall not hold out its credit as available to satisfy the obligations of any other Person, except for the Whitney Guarantee.

22.

Borrower shall not buy or hold evidence of indebtedness issued by any other Person (other than cash and investment-grade securities to the extent otherwise permitted under this Agreement).

23.

Borrower will treat the Lease as a lease for federal income tax purposes.

24.

The Separate Business will maintain such separate books and records (as described in Treasury Regulation Section 1.45D – 1(d)(4(iii)) as may be required to remain characterized as a qualified active low-income community business, as defined therein.

25.

Borrower shall not purchase, acquire or allow the build-up of Nonqualified Financial Property to the extent such purchase, acquisition or build-up would cause the aggregate basis of the Separate Business’ Nonqualified Financial Property to be five percent (5%) or more of the basis of Borrower’s Property.

26.

Borrower shall maintain all required qualifications to do business in the state in which the Collateral is located.

27.

Borrower shall only use the Loan proceeds in connection with the Project, the Separate Business and the RTI Improvements and shall not use the Loan proceeds in connection with any other property or business of Borrower.

28.

Borrower shall promptly apply the Loan proceeds as contemplated under the terms of the Credit Agreement and shall use its best efforts to complete construction of the Project within twelve months of the date of this Agreement.

29.

Borrower shall prepare all required federal, state or local income tax returns or reports in a manner consistent with its ownership of the entire Project and the RTI Improvements, including any portion of the Project leased by the Borrower to any other Person.

5

Exhibit "B"

FORM OF COMPLIANCE CERTIFICATE

The undersigned hereby certify that they are officers of CG Railway, Inc. (“Borrower”) and of International Shipholding Corporation (“Guarantor”), and are authorized to execute this certificate on behalf of the Borrower and Guarantor with reference to that certain Credit Agreement (the “Agreement”) dated as of December 13, 2005, by and among the Borrower, Guarantor and Liberty Community Ventures III, L.L.C. (“Lender”), and do hereby further certify, represent and warrant to Lender as follows (each capitalized term used herein having the same meaning given to it in the Agreement unless otherwise specified):

(a)

A review of the activities of the Borrower has been made under my supervision with a view to determine whether the Borrower has fulfilled its obligations under the Agreement.

(b)

The Borrower has fulfilled all of its obligations contained in the Agreement [, except for ___________].

(c)

The representations and warranties of the Borrower contained in the Agreement and otherwise made in writing by or on behalf of the Borrower pursuant to the Agreement or any other Collateral Documents to which it is a party continue to be true and correct in all material respects [, except for __________________], and are repeated at and as of the time of delivery hereof.

(d)

To the best of my and the Borrower’s knowledge, no material adverse changes have occurred, either in any case or in the aggregate, in the assets, liabilities, financial conditions, businesses, operations, affairs or circumstances of the Borrower, from those reflected in the financial statements or by the facts warranted or represented in the Agreement [, except for ________________].

(e)

To the best of my and the Borrower’s knowledge, no Event of Default exists, and, after giving effect to any Loans with respect to which this certificate is being delivered, no Event of Default will exist under the Agreement or any condition, event or act which constitutes, or with notice or lapse of time (or both) would constitute, an event of default under any loan agreement, note agreement, mortgage, trust indenture or other agreement to which the Borrower is a party [, except for ____________________].

(f)

As of the end of the fiscal quarter or fiscal year ended on ________, 200_:

(1)

Guarantor and its consolidated Subsidiaries had a ratio of Consolidated Indebtedness to  Consolidated EBITDA of  ___ to 1.0.

(2)

Guarantor and its consolidated Subsidiaries had a Consolidated Tangible Net Worth of $________.

(3)

Guarantor and its consolidated Subsidiaries had working capital of $_______________.

(4)

Guarantor and its consolidated Subsidiaries had a ratio of Consolidated EBITDA to Interest Expense of  ___ to 1.0.

1

Guarantor has complied with all financial covenants in the Agreement by virtue of the foregoing [, except for _____________].

WITNESS the signature of the undersigned this ____ day of _______________, ____.

CG RAILWAY, INC.

By:_________________________________

Title:________________________________

INTERNATIONAL SHIPHOLDING CORPORATION

By:_________________________________

Title:________________________________

596116v7

2

EX-10.5

Niels W. Johnsen

Consulting Agreement

This will confirm that International Shipholding Corporation has agreed to retain you as a consultant commencing January 1, 2006 through December 31, 2006, for a fee of $125,000, payable in 12 monthly installments of $10,416.67, plus reasonable out-of-pocket expenses.  At the end of the period, this Agreement is automatically extended on a month-by-month basis.  Either party on a 90-day notice may cancel this Agreement.  Please sign below to acknowledge your agreement to this consulting arrangement.

Sincerely,

/s/ E. F. Johnsen

______________________

E. F. Johnsen

Chairman of the Board

AGREED AND ACCEPTED:

/s/ N. W. Johnsen

______________________                                               

N. W. Johnsen

Date : 1/9/06

EX-10.6

EXHIBIT 10.6

Summary of Executive Officer Salaries

The salaries of the executive officers of International Shipholding Corporation for 2006 are described below:

Erik F. Johnsen, Chairman of the Board and Chief Executive Officer  

$353,600    

Niels M. Johnsen, President  

$332,800      

Erik L. Johnsen, Executive Vice President  

$312,000      

Manuel G. Estrada, Vice President and Chief Financial Officer  

$165,000     

EX-21.1

EXHIBIT 21

INTERNATIONAL SHIPHOLDING CORPORATION

SUBSIDIARIES OF THE REGISTRANT

AS OF DECEMBER 31, 2005

    Jurisdiction Under

    Which Organized

    ------------------------

International Shipholding Corporation (Registrant)

Delaware

Waterman Steamship Corporation

New York

Sulphur Carriers, Inc.

Delaware

Central Gulf Lines, Inc.

Delaware

Enterprise Ship Company, Inc.

Delaware

Material Transfer, Inc.

Delaware

CG Railway, Inc.

Delaware

RTI Logistics, L.L.C. (1)

Louisiana

Terminales Transgolfo, S.A. de C.V(2)

Mexico

Bay Insurance Company Limited

Bermuda

LCI Shipholdings, Inc.

Marshall Islands

Cape Holding, Ltd.

Cayman Islands

Dry Bulk  Cape Holding, Inc. (5)

Panama

       Dry Bulk Africa, LTD. (5)

British Virgin Islands

              Dry Bulk Australia, LTD. (5)

British Virgin Islands

Gulf South Shipping Pte. Ltd.

Singapore

Marco Shipping Co. Pte. Ltd.

Singapore

Marcoship Agencies SDN. BHD.

Malaysia

Belden Cement Holding Inc. (3)

Panama

Belden Shipping Pte Ltd (3)

Singapore

Belden Management Inc. (3)

Panama

Belden Shipholding Pte Ltd. (3)

Singapore

Belden Voss Pte Ltd. (3)

Singapore

Echelon Shipping Inc. (3)

Panama

Emblem Shipping Inc. (3)

Panama

Mattea Shipping, Inc. (3)

Panama

Yakumo Shipping Inc. (3)

Panama

N. W. Johnsen & Co., Inc.

New York

LMS Shipmanagement, Inc.

Louisiana

LMS Manning, Inc. (4)

Philippines

Lash Intermodal Terminal Co., LLC

Delaware

(1)

50% owned by CG Railway, Inc.

(2)

49% owned by CG Railway, Inc.

(3)

26.1% owned by LCI Shipholdings, Inc.

(4)

48% owned by LMS Shipmanagement, Inc.

(5)

50% owned by Cape Holding, Ltd.

All of the subsidiaries listed above are wholly-owned subsidiaries and are included in the consolidated financial statements incorporated by reference herein unless otherwise indicated.

EX-31.1

EXHIBIT  31.1

CERTIFICATION

I, Erik F. Johnsen, certify that:

1.

I have reviewed this annual report on Form 10-K of International Shipholding Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [omitted in accordance with Section III.E of SEC Release No. 34-47986] for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

[omitted in accordance with Section III.E of SEC Release No. 34-47986];

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 10, 2006

/s/ Erik F. Johnsen

______________________________
Erik F. Johnsen
Chairman of the Board of Directors and Chief Executive Officer

International Shipholding Corporation

EX-31.2

EXHIBIT  31.2

CERTIFICATION

I, Manuel G. Estrada, certify that:

1.

I have reviewed this annual report on Form 10-K of International Shipholding Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [omitted in accordance with Section III.E of SEC Release No. 34-47986] for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

[omitted in accordance with Section III.E of SEC Release No. 34-47986];

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 10, 2006

/s/ Manuel G. Estrada

______________________________
Manuel G. Estrada
Vice President and Chief Financial Officer

International Shipholding Corporation

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant to 18 U.S.C. Section 1350

(Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Annual Report on Form 10-K of International Shipholding Corporation (the “Company”) for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Erik F. Johnsen, as Chairman and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 10, 2006

/s/ Erik F. Johnsen

Erik F. Johnsen

Chairman of the Board and

Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant to 18 U.S.C. Section 1350

(Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Annual Report on Form 10-K of International Shipholding Corporation (the “Company”) for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Manuel G. Estrada, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 10, 2006

/s/ Manuel G. Estrada

Manuel G. Estrada

         Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.