Factors Affecting Our Results of Operations

We believe that the important measures for analyzing trends in our results of operations consist of the following:

o Ownership days. We define ownership days as the aggregate number of days in a period during which each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.

o Available days. We define available days as the number of our ownership days less the aggregate number of days that our vessels are off-hire due to scheduled repairs or repairs under guarantee, vessel upgrades or special surveys and the aggregate amount of time that we spend positioning our vessels. The shipping industry uses available days to measure the number of days in a period during which vessels should be capable of generating revenues.

o Operating days. We define operating days as the number of our available days in a period less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.

o Fleet utilization. We calculate fleet utilization by dividing the number of our operating days during a period by the number of our available days during the period. The shipping industry uses fleet utilization to measure a company's efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee, vessel upgrades, special surveys or vessel positioning.

o TCE rates. We define TCE rates as our voyage and time charter revenues less voyage expenses during a period divided by the number of our available days during the period, which is consistent with industry standards. TCE rate is a standard shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because charter hire rates for vessels on voyage charters are generally not expressed in per day amounts while charter hire rates for vessels on time charters generally are expressed in such amounts.

The following table reflects our ownership days, available days, operating days, fleet utilization and TCE rates for the periods indicated.

                                               As of and for the
                                          Year Ended December 31,
                                   -----------------------------------
                                     2002        2003        2004
                                   ----------  ----------  -----------
Ownership days                          1,460       1,852       2,319
Available days                          1,460       1,852       2,319
Operating days                          1,459       1,845       2,315
Fleet utilization                       99.9%       99.6%       99.8%
Time charter equivalent (TCE) rate     $7,532     $12,812     $25,661

Voyage and Time Charter Revenue

Our revenues are driven primarily by the number of vessels in our fleet, the number of days during which our vessels operate and the amount of daily charter hire rates that our vessels earn under charters, which, in turn, are affected by a number of factors, including:

o the duration of our charters;
o our decisions relating to vessel acquisitions and disposals;
o the amount of time that we spend positioning our vessels;
o the amount of time that our vessels spend in dry-dock undergoing repairs;
o maintenance and upgrade work; o the age, condition and specifications of our vessels;
o levels of supply and demand in the dry bulk shipping industry; and
o other factors affecting spot market charter rates for dry bulk carriers.

Our revenues have grown significantly in recent periods as a result of the enlargement of our fleet, which has increased our ownership, available and operating days, and increases in spot market charter hire rates, which, due to the close relationship between spot market charter rates and short-term time charter rates, have resulted in an increase of our daily charter hire rates. At the same time, we have maintained relatively high vessel utilization rates.

Voyage Expenses

We incur voyage expenses that include port and canal charges, bunker (fuel oil) expenses and commissions. Port and canal charges and bunker expenses primarily increase in periods during which vessels are employed on voyage charters because these expenses are for the account of the vessels. Port and canal charges and bunker expenses currently represent a relatively small portion of our vessels' overall expenses because all of our vessels are employed under time charters that require the charterer to bear all of those expenses.

As is common in the shipping industry, we pay (through our fleet manager) commissions ranging from 1.25% to 6.25% of the total daily charter hire rate of each charter to unaffiliated ship brokers and in-house brokers associated with the charterers, depending on the number of brokers involved with arranging the charter. In addition to commissions paid to third parties, we have historically paid our fleet manager a commission that is equal to 2% of our revenues in exchange for providing us with technical and commercial management services in connection with the employment of our fleet. This commission is in addition to the fixed management fees we pay to our fleet manager for the same services, as described below.

The following table presents a breakdown of the commissions paid during the periods indicated.

                                                   Year Ended December 31,
                                             -----------------------------------
                                              2002           2003           2004
                                             -----          -----          -----
                                                (in thousands of U.S. dollars)

Commissions paid to unaffiliated and
  in-house ship brokers                        599          1,172          3,019
Commissions paid to fleet manager              239            506          1,276
                                             -----          -----          -----

Total                                          838          1,678          4,295
                                             =====          =====          =====

We believe that the amounts and the structures of our commissions are consistent with industry practices.

We expect that the amount of our total commissions will continue to grow as a result of our increased revenues related to our recent acquisition of two new Panamax dry bulk carriers and one secondhand Capesize dry bulk carrier. We expect the 2% commissions that we pay our fleet manager are expected to be eliminated from our consolidated financial statements as intercompany transactions on our acquisition of our fleet manager. However, this reduction in costs will be offset by the costs of operating the fleet directly as a result of the acquisition of DSS.

Vessel Operating Expenses

Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. Our vessel operating expenses, which generally represent fixed costs, have historically increased as a result of the enlargement of our fleet. We expect these expenses to increase further during 2005 as a result of our acquisitions of two new Panamax dry bulk carriers and one secondhand Capesize dry bulk carrier. Other factors beyond our control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for insurance, may also cause these expenses to increase.

Depreciation

The cost of our vessels is depreciated on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, which we believe is common in the dry bulk shipping industry. Furthermore, we estimate the residual values of our vessels to be $150 per light-weight ton which we also believe is common in the dry bulk shipping industry. Our depreciation charges have increased in recent periods due to the enlargement of our fleet which has also led to an increase of ownership days. We expect that these charges will continue to grow as a result of our acquisition of two new Panamax dry bulk carriers and one secondhand Capesize dry bulk carrier during the first five months of 2005.

Management Fees

We have historically paid our fleet manager a fixed management fee of $12 thousand per month for each vessel in our operating fleet in exchange for providing us with strategic, technical and commercial management services in connection with the employment of our fleet. This fee is in addition to the 2% commission on revenues we pay to our fleet manager for the same services, as described above. We agreed with DSS, our current fleet manager, to increase the amount of the fixed management fee to $15 thousand per month for each vessel in our fleet with effect from November 12, 2004 in order to compensate DSS for increased management expenses that have resulted from the strengthening of the Euro relative to the U.S. dollar. The increase in management fees of $3 thousand per vessel per month will result in a $252 thousand annual increase of the management fees we pay for the vessels in our fleet as of November 12, 2004. Our management fees will increase further as a result of our acquisition of two new Panamax dry bulk carriers and one secondhand Capesize dry bulk carrier during the first five months of 2005 which will increase the number of vessels under management. However, these management fees are expected to be eliminated from our consolidated financial statements as intercompany transactions on our acquisition of DSS.

Executive Management Services and Rent

We recognize expenses relating to executive management services, as well as the value of the lease expense for the office space and the secretarial services that are provided to us at no additional charge by Diana Shipping Services S.A. The recognition of these expenses, for historical purposes, is based on our estimates of the value of the amounts that we would have incurred had our fleet manager not provided the related services and office space to us. The value of the services and rent was determined by reference to the amounts that we intend to compensate our executive officers and to the lease agreement between DSS and the future owner of the office space that is presently occupied by DSS.

General and Administrative Expenses

We incur general and administrative expenses which include our onshore vessel related expenses such as legal and professional expenses and other general vessel expenses. We expect general and administrative expenses to increase as a result of our initial public offering, the costs associated with running a public company and the enlargement of our fleet. Furthermore, we expect general and administrative expenses to increase in connection with our expected acquisition of our fleet manager, which will result in the recognition of additional expenses, including payroll expenses, relating to our fleet manager's operations.

Interest and Finance Costs

We have historically incurred interest expense and financing costs in connection with vessel specific debt of our subsidiaries. Although in March 2005, we used part of the proceeds of our initial public offering to repay all of our then outstanding debt, we incurred financing costs and we also expect to incur interest expenses under our credit facility in connection with debt incurred to finance future acquisitions. However, we intend to limit the amount of these expenses and costs by repaying our outstanding indebtedness from time to time with the net proceeds of future equity issuances.

Inflation

Inflation has only a moderate effect on our expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase our operating, voyage, administrative and financing costs.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application. For a description of all our significant accounting policies, see Note 2 to our consolidated financial statements included herein.

Depreciation

We record the value of our vessels at their cost (which includes acquisition costs directly attributable to the vessel and expenditures made to prepare the vessel for its initial voyage) less accumulated depreciation. We depreciate our dry bulk vessels on a straight-line basis over their estimated useful lives, estimated to be 25 years from the date of initial delivery from the shipyard. We believe that a 25 year depreciable life is consistent with that of other shipping companies. Depreciation is based on cost less the estimated residual scrap value. Furthermore, we estimate the residual values of our vessels to be $150 per light-weight ton which we believe is common in the dry bulk shipping industry. A decrease in the useful life of a dry bulk vessel or in its residual value would have the effect of increasing the annual depreciation charge. When regulations place limitations over the ability of a vessel to trade on a worldwide basis, the vessel's useful life is adjusted at the date such regulations become effective.

Deferred Drydock Cost

Our vessels are required to be drydocked approximately every 30 to 60 months for major repairs and maintenance that cannot be performed while the vessels are operating. We capitalize the costs associated with drydockings as they occur and amortize these costs on a straight-line basis over the period between drydockings. Costs capitalized as part of the drydocking include actual costs incurred at the drydock yard; cost of fuel consumed between the vessel's last discharge port prior to the drydocking and the time the vessel leaves the drydock yard; cost of hiring riding crews to effect repairs on a vessel and parts used in making such repairs that are reasonably made in anticipation of reducing the duration or cost of the drydocking; cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise; and the cost of hiring a third party to oversee a drydocking. We believe that these criteria are consistent with industry practice and that our policy of capitalization reflects the economics and market values of the vessels.

Impairment of Long-lived Assets

We evaluate the carrying amounts (primarily for vessels and related drydock costs) and periods over which long-lived assets are depreciated to determine if events have occurred which would require modification to their carrying values or useful lives. In evaluating useful lives and carrying values of long-lived assets, we review certain indicators of potential impairment, such as undiscounted projected operating cash flows, vessel sales and purchases, business plans and overall market conditions. We determine undiscounted projected net operating cash flow for each vessel and compare it to the vessel carrying value. If our estimate of undiscounted future cash flows for any vessel is lower than the vessel's carrying value plus any unamortized dry- docking costs, the carrying value is written down, by recording a charge to operations, to the fair market value if the fair market value is lower than the vessel's carrying value. We estimate fair market value primarily through the use of third party valuations performed on an individual vessel basis. As vessel values are volatile, the actual fair market value of a vessel may differ significantly from estimated fair market values within a short period of time.

Results of Operations

Year ended December 31, 2004 compared to the year ended December 31, 2003

Voyage and Time Charter Revenues. Voyage and time charter revenues increased by $38.5 million, or 152%, to $63.8 million for the year ended December 31, 2004, compared to $25.3 million for the same period in 2003. This increase was primarily attributable to an increase in the daily charter hire rates earned under our time charters and an increase in the number of operating days that we achieved. The increase in operating days during 2004 resulted primarily from the enlargement of our fleet following our acquisition of the Protefs in August 2004 and full operation of the Dione and the Danae acquired in May and July, 2003, respectively. In 2004, we had total operating days of 2,315 and fleet utilization of 99.8%, compared to 1,845 total operating days and a fleet utilization of 99.6% in 2003.

Voyage Expenses. Voyage expenses increased by $2.8 million, or 187%, to $4.3 million for the year ended December 31, 2004, compared to $1.5 million for the same period in 2003. This increase was attributable to increased commissions. Commissions paid during 2004 and 2003 to our fleet manager amounted to $1.3 million and $0.5 million, respectively, and commissions paid to the unaffiliated ship brokers and in-house ship brokers associated with charterers amounted to $3.0 million and $1.2 million, respectively. The increase in commissions was primarily the result of improved trading conditions and charter hire rates and the increase in operating days in 2004, which increased the amount of revenue we reported.

Vessel Operating Expenses. Vessel operating expenses increased by $3.2 million, or 51%, to $9.5 million for the year ended December 31, 2004 compared to $6.3 million for the same period in 2003. This increase was primarily the result of the increased number of ownership days during 2004, resulting from the delivery of the Protefs in August 2004 and full operation of the Dione and Danae delivered in May and July 2004, respectively. Daily vessel operating expenses per vessel increased by $719, or 21%, to $4,103 for 2004, compared to $3,384 for 2003. This increase was mainly attributable to increased crew wages, the exchange rates of Euro to US dollars and increased costs of spares and repairs and maintenance. The increase in crew wages also resulted from our acquisition of the Dione, acquired in May 2003 and the Danae, acquired in July 2003, which, due to their flying the Greek flag, are required to employ a comparatively greater number of Greek officers and crew members, who are paid relatively higher wages (denominated in Euro) than our non-Greek officers and crew members.

Depreciation. Depreciation charges increased by $1.1 million, or 28%, to $5.1 million for the year ended December 31, 2004, compared to $4.0 million for the same period in 2003. This increase was primarily the result of increased number of vessels and ownership days during the period following our acquisition of the Protefs in August 2004 and full operation in 2004 of the Dione and Danae acquired in May and July 2003, respectively.

Management Fees. Management fees increased by $0.2 million, or 29%, to $0.9 million for the year ended December 31, 2004, compared to $0.7 million for the same period in 2003. This increase was attributable to the increased average number of vessels under management following our acquisition of the Protefs in August 2004, the full operation of the Dione and the Danae acquired in May and July 2003, respectively, as well as the increase in the monthly management fee from $12 thousand to $15 thousand in November 2004.

Interest and Finance Cost. Interest and finance cost increased by $0.5 million, or 29%, to $2.2 million for the year ended December 31, 2004, compared to $1.7 million for the same period in 2003. The increase in interest and finance cost was mainly attributable to an increase in our interest expense, which increased by $0.3 million, or 18%, to $2.0 million in 2004, compared to $1.7 million in 2003. The increase in interest expense resulted from an increase in the interest rates payable on our outstanding debt during 2004 and a $9.4 million increase in our total debt during the period.

Year ended December 31, 2003 compared to the year ended December 31, 2002

Voyage and Time Charter Revenues. Voyage and time charter revenues increased by $13.4 million, or 113%, to $25.3 million for the year ended December 31, 2003, compared to $11.9 million for the same period in 2002. This increase was primarily attributable to an increase in the daily charter hire rates payable under our time charters and an increase in the number of operating days that we achieved. The increase in charter hire rates was due to an increase in spot market and short-term time charter rates that began in September 2003. The increase in operating days during 2003 resulted primarily from the enlargement of our fleet following our acquisitions of the Dione on May 8, 2003 and the Danae on July 30, 2003 and the success of measures that we have undertaken to maintain a relatively high fleet utilization rate. In 2003, we had total operating days of 1,845 and fleet utilization of 99.6%, compared to 1,459 total operating days and a fleet utilization of 99.9% in 2002.

Voyage Expenses. Voyage expenses increased by $0.6 million, or 67%, to $1.5 million for the year ended December 31, 2003, compared to $0.9 million for the same period in 2002. This increase was attributable to increased commissions. Commissions paid during 2002 and 2003 to our fleet manager amounted to $0.2 million and $0.5 million, respectively, and commissions paid to the unaffiliated ship brokers and in-house ship brokers associated with charterers amounted to $0.6 million and $1.2 million, respectively. The increase in commissions was primarily the result of improved trading conditions and charter hire rates and the increase in operating days in 2003, which increased the amount of revenue we reported. In addition, in 2003, we reported fuel savings of $0.2 million due to the variation in the prices of fuel at the time our vessels were delivered or re-delivered to charterers, compared to fuel expenses of $0.1 million in 2002.

Vessel Operating Expenses. Vessel operating expenses increased by $2.5 million, or 66%, to $6.3 million for the year ended December 31, 2003 compared to $3.8 million for the same period in 2002. This increase was primarily the result of the increased number of ownership days during 2003. To a lesser extent, the increase was due to our recognition of costs associated with the initial stocking of newly acquired vessels with spares and other consumable stores upon their delivery to us during the period. Daily vessel operating expenses per vessel increased by $774, or 30%, to $3,384 for 2003, compared to $2,610 for 2002. This increase was mainly attributable to increased Euro based expenses, including Greek officer and crew wages and other general rises in miscellaneous operating expenses. The increase in Greek officer and crew wages resulted from our acquisition of the Dione, acquired in May 2003 and the Danae, acquired in July 2003, which, due to their flying the Greek flag, are required to employ a comparatively greater number of Greek officers and crew members, who are paid relatively higher wages (denominated in Euro) than our non-Greek officers and crew members.

Depreciation. Depreciation charges increased by $1.0 million, or 33%, to $4.0 million for the year ended December 31, 2003, compared to $3.0 million for the same period in 2002. This increase was primarily the result of increased number of vessels and ownership days during the period following our acquisition of the Dione and the Danae in May and July 2003, respectively.

Management Fees. Management fees increased by $0.1 million, or 17%, to $0.7 million for the year ended December 31, 2003, compared to $0.6 million for the same period in 2002. This increase was attributable to the increased number of vessels under management following our acquisitions of the Dione and the Danae in May and July 2003, respectively.

Interest and Finance Cost. Interest and finance cost decreased by $0.3 million, or 15%, to $1.7 million for the year ended December 31, 2003, compared to $2.0 million for the same period in 2002. The decrease in interest and finance cost was mainly attributable to a reduction in our interest expense, which decreased by $0.2 million, or 11%, to $1.7 million in 2003, compared to $1.9 million in 2002. The decrease in interest expense resulted from a reduction in the interest rates payable on our outstanding debt during 2003, which more than offset the effects of a $29.1 million increase in our total debt during the period. During 2003, total long-term debt increased to $83.3 million compared with $54.2 million in 2002 due to our incurrence of additional debt under loan agreements entered into in March and July 2003 to partially finance the acquisition costs of the Dione and the Danae.