Omega Protein Corp - Quarterly Report (10-Q)

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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 x No ¨ .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x .

Number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, on August 4, 2008: 18,565,205.


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheet as of June 30, 2008 and December 31, 2007	3
	Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months and six months ended June 30, 2008 and 2007	4
	Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2008 and 2007	5
	Unaudited Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2008	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Submission of Matters to a Vote of Security Holders	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

Signatures		54

2


	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	23,813		$	19,292
Receivables, net		21,239			16,051
Inventories		76,739			70,852
Prepaid expenses and other current assets		2,430			1,456

Total current assets		124,221			107,651
Other assets, net		3,989			3,344
Deferred tax assets, net		—			175
Property, plant and equipment, net		104,472			96,659

Total assets	$	232,682		$	207,829

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	6,983		$	6,283
Current portion of capital lease obligation		137			—
Accounts payable		3,558			2,459
Accrued liabilities		21,991			15,067
Deferred tax liabilities, net		1,423			381

Total current liabilities		34,092			24,190
Long-term debt, net of current maturities		55,092			58,976
Capital lease obligation, net of current portion		890			—
Interest rate swap liability, net of current portion		31			459
Pension liabilities, net		4,755			5,749

Total liabilities		94,860			89,374

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000,000 authorized shares; none issued		—			—
Common Stock, $0.01 par value; 80,000,000 authorized shares; 18,471,123 and 17,453,702 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		185			175
Capital in excess of par value		112,185			101,865
Retained earnings		32,057			23,435
Accumulated other comprehensive loss		(6,605	)		(7,020	)

Total stockholders’ equity		137,822			118,455

Total liabilities and stockholders’ equity	$	232,682		$	207,829

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues	$	47,128		$	37,094		$	83,237		$	68,223
Cost of sales		31,202			28,299			59,053			53,165

Gross profit		15,926			8,795			24,184			15,058

Selling, general, and administrative expense		3,988			3,342			7,663			8,179
Research and development expense		332			179			650			387
(Gain) loss on disposal of assets		(32	)		184			185			184

Operating income		11,638			5,090			15,686			6,308
Interest income		145			56			299			134

Interest expense		(986	)		(1,269	)		(2,197	)		(2,940	)
Loss resulting from debt refinancing		—			—			—			(3,024	)
Other income (expense), net		(68	)		(69	)		(124	)		(171	)

Income before income taxes		10,729			3,808			13,664			307

Provision for income taxes		4,019			1,293			5,042			104

Net income		6,710			2,515			8,622			203

Other comprehensive income:
Recognized actuarial net loss, net of tax benefit of $66, $142, $132 and $211, respectively		127			204			255			408

Interest rate swap adjustment, net of tax expense of $325, $36, $82 and $36, respectively		632			71			160			71
Foreign currency translation adjustment, net of $0, $4, $0 and $4, respectively		—			8			—			8

Comprehensive income	$	7,469		$	2,798		$	9,037		$	690

Basic earnings per share	$	0.37		$	0.15		$	0.48		$	0.01

Weighted average common shares outstanding		18,328			16,598			17,925			16,465

Diluted earnings per share	$	0.36		$	0.14		$	0.47		$	0.01

Weighted average common shares and potential common share equivalents outstanding		18,703			17,351			18,358			17,280

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4


	Six Months Ended June 30,
	2008			2007
Cash flow (used in) provided by operating activities:
Net income	$	8,622		$	203
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		6,439			6,832
Loss resulting from debt refinancing		—			2,151
Loss on disposal of assets, net		185			184
Provisions for losses on receivables		24			15
Share based compensation		141			164
Deferred income taxes		1,135			(1,218	)
Changes in assets and liabilities:
Receivables		(5,264	)		(9,453	)
Inventories		(5,887	)		(2,967	)
Prepaid expenses and other current assets		(974	)		(1,060	)
Other assets		(1,288	)		(684	)
Accounts payable		1,099			537
Accrued liabilities		6,738			5,737
Pension liability, net		(739	)		(680	)
Other, net		—			(33	)

Total adjustments		1,609			(475	)

Net cash provided by (used in) operating activities		10,231			(272	)

Cash flow (used in) provided by investing activities:
Proceeds from disposition of assets		94			—
Proceeds from insurance companies, hurricanes		—			6,549
Capital expenditures		(12,798	)		(4,770	)

Net cash (used in) provided by investing activities		(12,704	)		1,779

Cash flow provided by (used in) financing activities:
Principal payments of long-term debt		(3,184	)		(50,975	)
Principal payments of capital lease obligation		(11	)		—
Debt issuance costs		—			(723	)
Proceeds from borrowings		—			43,349
Proceeds from stock options exercised		8,248			1,465
Tax effect of stock options exercised		1,941			1,252

Net cash provided by (used in) financing activities		6,994			(5,632	)

Effect of exchange rate changes on cash and cash equivalents		—			8

Net increase (decrease) in cash and cash equivalents		4,521			(4,117	)
Cash and cash equivalents at beginning of year		19,292			7,993

Cash and cash equivalents at end of period	$	23,813		$	3,876

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5


				Capital				Accumulated Other			Total
	Common Stock			Excess of		Retained		Comprehensive			Stockholders’
	Shares	Amount		Par Value		Earnings		Loss			Equity
Balance at December 31, 2007	17,454	$	175	$	101,865	$	23,435	$	(7,020	)	$	118,455
Issuance of common stock	1,017		10		8,379		—		—			8,389
Tax benefit from exercise of stock options	—		—		1,941		—		—			1,941
Comprehensive income:
Net income	—		—		—		8,622		—			8,622
Other comprehensive income (loss):
Recognized actuarial net loss, net of tax benefit of $132	—		—		—		—		255			255
Interest rate swap adjustment, net of tax expense of $82	—		—		—		—		160			160

Total comprehensive income							8,622		415			9,037

Balance at June 30, 2008	18,471	$	185	$	112,185	$	32,057	$	(6,605	)	$	137,822

The accompanying notes are an integral part of the consolidated financial statements.

6

Omega Protein Corporation (“Omega” or the “Company”) produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products and dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

Basis of Presentation

These interim financial statements of Omega have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of June 30, 2008, and the results of its operations for the three and six month periods ended June 30, 2008 and its cash flows for the six month periods ended June 30, 2008 and 2007. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

Consolidation

The consolidated financial statements include the accounts of Omega and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Preparation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 Company’s financial statements and the accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual amounts, when available, could differ from those estimates and those differences could have a material affect on the financial statements.

7

On August 29, 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. On September 25, 2005, the Company’s Cameron, Louisiana and Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita. Each of these facilities was non-operational immediately after these weather events. Operations at the Moss Point fish processing facility, the Abbeville fish processing facility and the shipyard were re-established in mid-October, 2005, but at reduced processing capabilities. These two plants became fully operational prior to the start of the 2006 Gulf fishing season. Operations at the Cameron fish processing facility were re-established in June 2006, but at reduced processing capabilities. The Cameron facility became fully operational in September 2006.

The direct impact of the two hurricanes upon the Company was a loss of physical inventories and physical damage to the plants. The interruption of processing capabilities caused the Company to address the impact of abnormal downtime of its processing facilities, which resulted in the immediate recognition of costs which would ordinarily have been captured as inventory costs. See Note 12 for additional information pertaining to these losses.

The Company maintains insurance coverage for a variety of these damages, most notably property, inventory and vessel insurance. The nature and extent of the insurance coverage varies by line of policy and the Company has previously recorded insurance recoveries as long-term receivables within other assets based on estimates of probable recoveries.

In order to facilitate the insurance recovery process, on July 28, 2006, the Company filed a lawsuit against its property insurance carriers, Lexington Insurance Company and RSUI Indemnity Company, in the U.S. District Court for the Western District of Louisiana, alleging breach of contract and bad faith based on the insurance carriers’ failure to pay amounts due to the Company under its property insurance policies for damages sustained from Hurricanes Katrina and Rita in the third quarter of 2005. The Company settled its lawsuit with its primary property insurance carrier, Lexington Insurance Company, for a total of $19.8 million during the third quarter of 2007. Of the $19.8 million, $12.0 million was previously recorded as a receivable and was fully received as of September 30, 2007, $3.3 million was paid to outside legal counsel in connection with the settlement and $4.5 million was recognized during the third quarter of 2007 as insurance recoveries relating to natural disaster in the statement of operations and comprehensive income and was received as of December 31, 2007. In addition, the Company settled its lawsuit with its secondary property insurance carrier, RSUI Indemnity Company, for a total of $9.2 million during the fourth quarter of 2007. Of the $9.2 million, $0.7 million was advanced during the third quarter of 2007 and recognized as insurance recoveries relating to natural disaster in the statement of operations and comprehensive income, $3.0 million was paid to outside legal counsel in connection with the settlement during the fourth quarter of 2007 and $5.5 million was recognized and received during the fourth quarter of 2007 as insurance recoveries relating to natural disaster in the statement of operations and comprehensive income. The Company still has a pending lawsuit against its insurance broker alleging negligent procurement, negligent misrepresentation, breach of contract and violations of Texas Insurance and Consumer laws.

Revenue Recognition

The Company derives revenue principally from the sales of a variety of protein and oil products derived from menhaden. The Company recognizes revenue for the sale of its products when title and rewards of ownership to its products are transferred to the customer.

8

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer credit worthiness, past transaction history with the customer, and changes in customer payment terms. If the Company has no previous experience with the customer, the Company typically obtains reports from credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information, including financial statements or other documents (e.g., bank statements), or may obtain a letter of credit from the customer to ensure that the customer has the means of making payment. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

Inventories

Inventory is stated at the lower of cost or market. The Company’s fishing season runs from mid-April to the first of November in the Gulf of Mexico and from the beginning of May into December in the Atlantic. Government regulations generally preclude the Company from fishing during the off-seasons.

The Company’s inventory cost system considers all costs associated with an annual fish catch and its processing, both variable and fixed, including both costs incurred during the off-season and during the fishing season. The Company’s costing system allocates cost to inventory quantities on a per unit basis as calculated by a formula that considers total estimated inventoriable costs for a fishing season (including off-season costs) to total estimated fish catch and the relative fair market value of the individual products produced. The Company adjusts the cost of sales, off-season costs and inventory balances at the end of each quarter based on revised estimates of total inventoriable costs and fish catch. The Company’s lower-of-cost-or-market-value analyses at year-end and at interim periods compare the total estimated per unit production cost of the Company’s expected production to the projected per unit market prices of the products. The impairment analyses involve estimates of, among other things, future fish catches and related costs, and expected commodity prices for the fish products as well as projected purchase commitments from customers. These estimates, which management believes are reasonable and supportable, involve estimates of future activities and events which are inherently imprecise and from which actual results may differ materially.

Any costs incurred during abnormal downtime related to activity at the Company’s plants are charged to expense as incurred.

During the off-seasons, in connection with the upcoming fishing seasons, the Company incurs costs (i.e., plant and vessel related labor, utilities, rent, repairs, and depreciation) that are directly related to the Company’s infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of the Company’s products throughout the fishing season ratably based on the Company’s monthly fish catch and the expected total fish catch for the season.

Insurance

The Company carries insurance for certain losses relating to its vessels and Jones Act liabilities for employees aboard its vessels. The Company provides reserves for those portions of the annual aggregate deductible for which

9

the Company remains responsible by using an estimation process that considers Company-specific and industry data as well as management’s experience, assumptions and consultation with counsel, as these reserves include estimated settlement costs. Management’s current estimated range of liabilities related to such cases is based on claims for which management can estimate the amount and range of loss. For those claims where there may be a range of loss, the Company has recorded an estimated liability inside that range, based on management’s experience, assumptions and consultation with counsel. The process of estimating and establishing reserves for these claims is inherently uncertain and the actual ultimate net cost of a claim may vary materially from the estimated amount reserved. There is some degree of inherent variability in assessing the ultimate amount of losses associated with these claims due to the extended period of time that transpires between when the claim might occur and the full settlement of such claims. This variability is generally greater for Jones Act claims by vessel employees. The Company continually evaluates loss estimates associated with claims and losses as additional information becomes available and revises its estimates. Although management believes estimated reserves related to these claims are adequately recorded, it is possible that actual results could significantly differ from the recorded reserves, which could materially impact the Company’s results of operations, financial position and cash flow.

The Company is primarily self-insured for health insurance. The Company purchases individual stop loss coverage with a large deductible. As a result, the Company is primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims estimates are based on health care trend rates and historical claims data; actual claims may differ from those estimates. The Company evaluates its claims experience related to this coverage with information obtained from its risk management consultants.

Assumptions used in preparing these insurance estimates are based on factors such as claims settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to both analyze and adjust the Company’s insurance loss reserves.

Advertising Costs

The costs of advertising are expensed as incurred in accordance with Statement of Position 93-7 “Reporting on Advertising Costs.”

Research and Development

Costs incurred in research and development activities are expensed as incurred.

Call Options

The Company does not enter into financial instruments for trading or speculative purposes. The Company purchased natural gas call options in March 2008 for $67,000 to manage its exposure to rising natural gas prices. The call options gave the Company the right to purchase natural gas at a price of $10.50 per MMBTU between April 1, 2008 and June 30, 2008.

For the three and six month periods ended June 30, 2008, the Company recorded gains in the unallocated inventory cost pool of $59,000 and $29,000, respectively, related to the settlement of natural gas call options above the $10.50 option price.

10

The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate swap agreements to manage its cash flow exposure to interest rate changes with notional amounts as indicated below that are scheduled to mature in March 2012. The swaps effectively convert all the Company’s variable rate debt under the Term Loan (as defined below) to a fixed rate, without exchanging the notional principal amounts.


Date of Contract	Original Notional Amount		Contracted Interest Rate		Total Asset (Liability) as of June 30, 2008			Total Deferred Tax Asset (Liability) as of June 30, 2008			Notional Amount as of June 30, 2008
April 4, 2007	$	19,950,000	5.16	%	$	(630,800	)	$	214,500		$	18,453,800
February 7, 2008		10,237,500	3.36	%		111,000			(37,700	)		9,712,500
March 19, 2008		4,436,250	2.96	%		90,700			(30,800	)		4,208,700

As of June 30, 2008, the Company has recorded a long-term liability of $31,000, net of the current portion of $398,000, to recognize the fair value of interest rate derivatives, and has also recorded a deferred tax asset of $146,000 associated therewith. The change in fair value from inception to June 30, 2008 is recorded in “other comprehensive income” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the interest rate swap agreements.


	(in thousands)
Balance at January 1, 2008	$	(442	)
Net gain/(loss), net of tax, reclassified into earnings		(85	)
Net change associated with current period swap transactions, net of tax		245

Balance at June 30, 2008	$	(282	)

The $282,000 reported in accumulated other comprehensive loss as of June 30, 2008 will be reclassified to earnings on a quarterly basis through 2012, when the interest rate swaps expire. The amount to be reclassified to earnings during the next 12 months is expected to be approximately $398,000.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the interest rate swaps or underlying debt agreements, the fair value of the portion of the interest rate swaps determined to be ineffective will be recognized as gain or loss in “interest expense” in the statement of operations for the applicable period.

Accounting for the Impairment of Long-Lived Assets

The Company evaluates at each balance sheet date the continued appropriateness of the carrying value of its long-lived assets, including its long-term receivables and property, plant and equipment, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposals of Long-Lived Assets.” The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of any such assets or grouping of assets may not be recoverable. The Company has grouped certain assets together (primarily marine vessels) for impairment testing on a fleet basis. If indicators of impairment are present, management evaluates the undiscounted cash flows estimated to be generated by those assets or grouping of assets compared to the carrying amount of those items. The net carrying value of assets or grouping of assets not recoverable is reduced to fair value. The Company considers continued operating losses, or significant and long-term changes in business conditions, to be its primary indicators of potential impairment.

11

The Company utilizes the liability method to account for income taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities, and operating loss and tax credits carryforwards for tax purposes. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred tax assets recorded as of June 30, 2008 are realizable through future reversals of existing taxable temporary differences and future taxable income. If the Company were to subsequently determine that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would increase earnings for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. Any changes to the estimated valuation allowance could be material to the consolidated financial condition and results of operations.

Property, Equipment and Depreciation

Property and equipment additions are recorded at cost. Depreciation of property and equipment is computed by the straight-line method at rates expected to amortize the cost of property and equipment, net of salvage value, over their estimated useful lives. Estimated useful lives, determined at the date of acquisition, of new assets acquired are based primarily on the review of existing property and equipment. Estimated useful lives are as follows:


		Useful Lives (years)
Fishing vessels and fish processing plants		15-20
Machinery, equipment, furniture and fixtures and other		3-10

Replacements and major improvements are capitalized and amortized over a period of 5 to 15 years, and maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts. Any resulting gains or losses are included in the statement of operations. The Company capitalizes interest as part of the acquisition cost of a qualifying asset.

Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three and six month periods ended June 30, 2008 and 2007, the Company capitalized interest of approximately $74,200, $20,200, $128,200 and $39,800, respectively.

Pension Plans

As of December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. This statement requires the recognition of the overfunded or underfunded status of defined benefit pension and postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The statement also changes financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Company’s policy is to

12

In 2002, the Board of Directors authorized a plan to freeze the Company’s pension plan in accordance with ERISA rules and regulations so that new employees, hired after July 31, 2002, will not be eligible to participate in the pension plan and further benefits will no longer accrue for existing participants. The freezing of the pension plan had the effect of vesting all existing participants in their pension benefits in the plan.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments, changes in the value of derivative contracts and pension benefits adjustments, including recognition of actuarial losses. The Company presents comprehensive income (loss) in its consolidated statements of operations and comprehensive income and of stockholders’ equity.

Accumulated Comprehensive Loss

The components of accumulated other comprehensive loss included in shareholder’s equity are as follows:


	June 30, 2008			December 31, 2007
	(in thousands)
Cumulative Translation Adjustments, net of tax benefit of $13 as of June 30, 2008 and December 31, 2007	$	(25	)	$	(25	)
Pension Benefits Adjustments, net of tax benefit of $3,245 as of June 30, 2008 and $3,377 as of December 31, 2007		(6,298	)		(6,553	)
Fair Value of Interest Rate Swap, net of tax benefit of $146 as of June 30, 2008 and $228 as of December 31, 2007		(282	)		(442	)

Accumulated Other Comprehensive Loss	$	(6,605	)	$	(7,020	)

Foreign Currency Translation

The Company’s Mexican operations use the local currency as the functional currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are deferred in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company’s customer base generally remains consistent from year to year. The Company performs ongoing credit evaluations of its customers and generally does not require material collateral. The Company maintains reserves for potential credit losses and such losses have historically been within management’s expectations.

13

At June 30, 2008 and December 31, 2007, the Company had cash deposits concentrated primarily in one major bank. In addition, the Company had certificates of deposit and commercial quality grade investments A2P2 rated or better with companies and financial institutions. The Company believes that credit risk in such investments is minimal.

Earnings per Share

Basic earnings per common share (EPS) were computed by dividing net earnings by the weighted average number of common shares outstanding during the reporting period. Diluted EPS reflects the dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted earnings per common share was computed by dividing net earnings by the sum of the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s employee stock options) had been issued during each period as discussed in Note 10.

Purchase and Retirement of Common Stock

The Company accounts for the retirement of treasury shares under the par value method. Under this method, the excess of the cost of treasury stock over its par value is charged to retained earnings.

Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, FSP 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” removed leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157. FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2), deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.

The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on the Company’s consolidated financial position and results of operations. The Company is currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This statement permits entities to choose to measure many financial assets and liabilities and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Management decided not to apply the fair value option to any of the Company’s existing financial assets and/or liabilities effective January 1, 2008. As such, the statement had no impact on the Company’s consolidated financial position and results of operations.

14

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (SFAS 141(R)).” SFAS 141(R) states that all business combinations, whether full, partial, or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. SFAS 141(R) applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 141(R) will have on its consolidated results of operations, financial position and related disclosures.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51 (SFAS 160).” SFAS 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 160 will have on its consolidated results of operations, financial position and related disclosures.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities (SFAS 161).” SFAS 161 is a clarification of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” which did not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. Accordingly, SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, the adoption of SFAS 161 will have on its disclosures.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. SFAS No. 162 moves the hierarchy of GAAP sources for non-governmental entities from the auditing literature to the accounting literature. This statement will become effective 60 days following approval by the Securities and Exchange Commission (“SEC”) of amendments made by the Public Company Accounting Oversight Board to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Any effect of applying SFAS No. 162 should be reported as a change in accounting principle. The Company does not expect this statement to have any impact on its consolidated financial statements.

Stock-Based Compensation

The Company has a stock-based compensation plan, which is described in more detail in Note 11 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2007. Net income (loss) for the three and six months ended June 30, 2008 and 2007 includes $160,000, $101,000, $214,000 and $164,000 ($106,000, $67,000, $141,000 and $108,000 after-tax), respectively, of share-based compensation costs which are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income. As of June 30, 2008, there was $729,000 ($481,000 after-tax) of total unrecognized compensation costs related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 1.8 years, of which $341,000 ($225,000 after-tax) of total share-based compensation is expected to be recognized during the remainder of fiscal year 2008.

15

Inventory at June 30, 2008 and December 31, 2007 is stated at the lower of cost or market. The elements of unallocated inventory cost pool include plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the remainder of the 2008 fishing season.

Note 4. Other Assets

Other assets as of June 30, 2008 and December 31, 2007 are summarized as follows:


	June 30, 2008		December 31, 2007
	(in thousands)
Fish nets, net of accumulated amortization of $3,067 and $2,008	$	1,667	$	1,093
Insurance receivable, net of allowance for doubtful accounts		1,311		1,082
Title XI loan origination fee		345		374
Other debt issuance costs		606		736
Deposits and other		60		59

Total other assets, net	$	3,989	$	3,344

16

The Company carries insurance for certain losses relating to its vessels and Jones Act liability for employees aboard its vessels (collectively, “Vessel Claims Insurance”). The typical Vessel Claims Insurance policy contains an annual aggregate deductible (“AAD”) for which the Company remains responsible, while the insurance carrier is responsible for all applicable amounts which exceed the AAD. It is the Company’s policy to accrue current amounts due and record amounts paid out on each claim. Once payments exceed the AAD, the Company records an insurance receivable for a given policy year, net of allowance for doubtful accounts. As of June 30, 2008 and December 31, 2007 the allowance for doubtful insurance receivable accounts was $2.0 million.

Note 5. Property and Equipment

Property and equipment at June 30, 2008 and December 31, 2007 are summarized as follows:


	June 30, 2008			December 31, 2007
	(in thousands)
Land	$	7,690		$	7,690
Plant assets		102,880			101,171
Fishing vessels and marine equipment		95,609			95,193
Furniture and fixtures		5,079			5,049
Construction in progress		14,285			4,166

Total property and equipment		225,543			213,269
Less: accumulated depreciation and impairment		(121,071	)		(116,610	)

Property, plant and equipment, net	$	104,472		$	96,659

Depreciation expense for the three and six months ended June 30, 2008 and 2007 was $2.9 million, $3.1 million, $5.8 million and $6.3 million, respectively.

Note 6. Notes Payable and Long-Term Debt

At June 30, 2008 and December 31, 2007, the Company’s long-term debt consisted of the following:


	June 30, 2008			December 31, 2007
	(in thousands)
U.S. government guaranteed obligations (Title XI loans) collateralized by a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2016, interest from 6.49% to 7.6%	$	29,444		$	30,858
Amounts due in installments through 2014, interest at Eurodollar rates plus 0.45% (3.15% and 5.68% at June 30, 2008 and December 31, 2007, respectively)		256			276
Bank of America term loan, quarterly principal payments as defined, interest payable quarterly based on LIBOR plus an applicable rate (4.80% and 7.45% as of June 30, 2008 and December 31, 2007, respectively) maturing March 2012		32,375			34,125

Total debt		62,075			65,259
Less current maturities		(6,983	)		(6,283	)

Long-term debt	$	55,092		$	58,976

17

In September 2004, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved the Company’s financing application in an amount not to exceed $14 million (the “Approval Letter”). Borrowings under the Approval Letter are to be used to finance and/or refinance approximately 73% of the actual depreciable cost of the Company’s future fishing vessel refurbishments and capital expenditures relating to shore-side fishing assets for a term not to exceed 15 years from inception at interest rates determined by the U.S. Treasury. Final approval for all such future projects requires individual approval through the Secretary of Commerce, National Oceanic and Atmospheric Administration, and National Marine Fisheries Service (“National Marine Fisheries Service”). Borrowings under the FFP are required to be evidenced by security agreements, undertakings, and other documents deemed in the sole discretion of the National Marine Fisheries Service as necessary to accomplish the intent and purpose of the Approval Letter. The Company is required to comply with customary National Marine Fisheries Service covenants as well as certain special covenants. In December 2004, the Company submitted a $4.9 million financing request against the $14 million approval, and subsequently amended that request to include the entire $14 million. The Company closed on the $14 million FFP loan on October 17, 2005.

On December 1, 2005, pursuant to the Title XI program, the FFP approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. As of June 30, 2008, the Company was in compliance with all of the covenants contained therein.

On March 26, 2007 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, lender, swing line lender and letter of credit issuer, Regions Bank, Compass Bank and Farm Credit Bank of Texas (collectively, the “Lenders”). The Credit Agreement provides the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility (the “Revolving Credit Facility”) of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million. The Senior Credit Facility replaced the Company’s prior credit facility, under which, as of the Closing Date, $28.7 million in principal was outstanding under a term loan and $6.5 million in principal was outstanding under revolving loans, and approximately $3.3 million in letters of credit were issued, primarily in support of worker’s compensation insurance programs. On the Closing Date, the Company drew down $35 million under the Term Loan and approximately $2.0 million under the Revolving Credit Facility, and had approximately $3.1 million issued in standby letters of credit, primarily in support of worker’s compensation insurance programs. The Senior Credit Facility is secured by a first priority lien on all of the Company’s assets, other than vessels, real estate and other assets pledged to secure loans made to the Company under the FFP.

During the six month period ended June 30, 2007, as a result of the above mentioned refinancing, the Company expensed approximately $2.2 million in deferred debt issuance costs and $0.8 million as a prepayment penalty related to the prior credit facility.

As of June 30, 2008, the Company had $32.4 million outstanding under the Term Loan and $2.8 million in letters of credit issued primarily in support of worker’s compensation insurance programs. As of June 30, 2008, the Company had $13.1 million available under the Revolving Credit Facility and the Company was in compliance with all of the covenants under the Senior Credit Facility. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

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	June 30, 2008		December 31, 2007
	(in thousands)
Salary and benefits	$	6,768	$	3,959
Insurance		4,737		4,611
Taxes, other than income tax		901		33
Trade creditors		8,218		5,106
Fair market value of interest rate swap, current portion		398		211
FIN 48 liability		159		—
Income tax payable		346		—
Other		464		1,147

Total accrued liabilities	$	21,991	$	15,067

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The Company is defending various claims and litigation arising from its operations which arise in the ordinary course of the Company’s business. In the opinion of management, and based on advice of legal counsel, it is believed that any existing litigation involving the Company will not materially affect its financial condition, cash flows or future results of operations.

Insurance

The Company carries insurance with coverages and coverage limits that it believes to be appropriate for the business. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations. Should the Company’s insurers become insolvent, the Company is responsible for payment of all outstanding claims associated with the insurer’s policies.

Environmental Matters

The Company is subject to various possible claims and lawsuits regarding environmental matters. Management believes that costs, if any, related to these matters will not have a material adverse effect on the results of operations, cash flows or financial position of the Company.

Indemnification

The Company’s Articles of Incorporation and By-Laws limit the liability of the Company’s officers and directors to the fullest extent permitted by Nevada law. Nevada provides that directors of Nevada corporations may be relieved of monetary liabilities for breach of their fiduciary duties as directors, except under certain circumstances, including (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) the willful or grossly negligent payment of unlawful distributions.

The Company’s Articles of Incorporation and By-Laws generally require the Company to indemnify its directors and officers to the fullest extent permitted by Nevada law. The Company’s Articles of Incorporation and By-Laws also require the Company to advance expenses to its directors and its officers to the fullest extent permitted by Nevada law upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it should be ultimately determined that they are not entitled to indemnification by the Company. The Company also has entered into indemnification agreements with all of its directors and certain of its officers which provides for the indemnification and advancement of expenses by the Company. The Company also maintains director and officer liability insurance with respect to liabilities arising out of certain matters, including matters arising under the securities laws. This insurance is subject to limitations, conditions and deductibles set forth in the respective insurance policy.

Note 10. Reconciliation of Basic and Diluted Per Share Data (in thousands except per share data)


	Earnings (Numerator)		Shares (Denominator)	Per Share Data
Three Months Ended June 30, 2008
Net earnings	$	6,710	—

Basic earnings per common share:
Earnings available to common shareholders	$	6,710	18,328	$	0.37

Effect of dilutive securities:
Stock options assumed exercised		—	375

Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	6,710	18,703	$	0.36

20


	Earnings (Numerator)		Shares (Denominator)	Per Share Data
Three Months Ended June 30, 2007
Net earnings	$	2,515	—

Basic earnings per common share:
Earnings available to common shareholders	$	2,515	16,598	$	0.15

Effect of dilutive securities:
Stock options assumed exercised		—	753

Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	2,515	17,351	$	0.14


	Earnings (Numerator)		Shares (Denominator)	Per Share Data
Six Months Ended June 30, 2008
Net earnings	$	8,622	—

Basic earnings per common share:
Earnings available to common shareholders	$	8,622	17,925	$	0.48

Effect of dilutive securities:
Stock options assumed exercised		—	433

Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	8,622	18,358	$	0.47


	Earnings (Numerator)		Shares (Denominator)	Per Share Data
Six Months Ended June 30, 2007
Net earnings	$	203	—

Basic earnings per common share:
Earnings available to common shareholders	$	203	16,465	$	0.01

Effect of dilutive securities:
Stock options assumed exercised		—	815

Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	203	17,280	$	0.01

21

Options to purchase 123,400 and 1,192,600 shares of common stock at exercise prices ranging from $13.41 to $17.25 per share and $12.38 to $17.25 per share were outstanding during the three and six months ended June 30, 2008, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the shares during that period.

Options to purchase 2,575,000 and 2,664,200 shares of common stock at exercise prices ranging from $7.25 to $17.25 per share were outstanding during the three and six months ended June 30, 2007, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the shares during that period.

Note 11. Components of Net Periodic Benefit Cost


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Service cost	$	—		$	—		$	—		$	—
Interest cost		376			376			752			752
Expected return on plan assets		(401	)		(405	)		(802	)		(810	)
Amortization of prior service costs		—			—			—			—
Amortization of net loss		194			204			388			408

Net periodic pension cost	$	169		$	175		$	338		$	350

For the six months ended June 30, 2008, the Company made approximately $0.9 million in contributions to the Company’s pension plan. The Company expects to make contributions of $0.5 million to the pension plan during the remainder of 2008. For the six months ended June 30, 2007, the Company had made $1.0 million in contributions to the pension plan.

Note 12. Hurricane Losses and Insurance Recoveries

On August 29, 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. On September 24, 2005, the Company’s Cameron, Louisiana and the Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita. Each of these facilities was non-operational immediately after these weather related events. For the three and six month periods ended June 30, 2008 and 2007, no hurricane losses or insurance recoveries were recognized in the Company’s statement of operations. See Note 12 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for additional information.

Note 13. Fair Value Disclosures

Effective January 1, 2008, the Company adopted SFAS 157 as discussed in Note 1, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value.

The standard defines fair value, provides a consistent framework for measuring fair value under accounting principles generally accepted in the United States and expands fair value financial statement disclosure requirements. SFAS 157 does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments (SFAS 123R Share Based Payment) and to lease accounting (SFAS 13).

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The following table sets forth by level within the fair value hierarchy the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of June 30, 2008. As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	June 30, 2008
	Fair Value Measurements Using							Liabilities at Fair Value
	Level 1		Level 2		Level 3			Liabilities at Fair Value
Liabilities (in thousands)
Interest rate swap liability	$	—	$	—	$	(429	)	$	(429	)

The determination of the fair values above incorporates various factors required under SFAS 157. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), but also the impact of the Company’s nonperformance risk on its liabilities.

The fair value of the interest rate swap liability is determined using an income valuation model based on the present value of expected future cash flows as determined by comparing the Company’s rate to the Euro-dollar futures curve. This model includes inputs or significant value drivers which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in level 3.

The fair value of the natural gas call options was derived from the underlying market price, strike price, volatility, interest rate, and time to expiration. The interest rate and underlying market price are based upon a Eurodollar curve and NYMEX natural gas curve published by the CME and NYMEX, respectively. The interest rates utilized are extrapolated through a model and volatility is based on historical 20-day volatility as calculated using the NYMEX underlying prices. This model includes inputs or significant value drivers which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in level 3.

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	Fair value Measurements Using Significant Unobservable Inputs (Level 3 Inputs)
	Three Months Ended June 30, 2008			Six Months Ended June 30, 2008
Beginning Balance	$	(1,415	)	$	(670	)
Net gain reclassified into earnings related to natural gas call options		59			29
Net change associated with current period natural gas call options activity		(29	)		(29	)
Net loss reclassified into earnings related to swap transactions		(138	)		(129	)
Net change associated with current period swap transactions		1,094			370

Ending Balance	$	(429	)	$	(429	)

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Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission”), the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the risks set forth under the caption “Risk Factors and Significant Factors that May Affect Forward-Looking Statements” appearing in Item 1A. “Risk Factors.” The Company believes that forward-looking statements made by it are based on reasonable expectations; however, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include the words “estimate,” “project,” “anticipate,” “expect,” “predict,” “assume,” “believe,” “could,” “would,” “hope,” “may,” and similar expressions.

General

Omega Protein Corporation is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. As used herein, the term “Omega” or the “Company” refers to Omega Protein Corporation or to Omega Protein Corporation and its consolidated subsidiaries, as applicable. The Company’s principal executive offices are located at 2105 City West Boulevard, Suite 500, Houston, Texas 77042-2838 (Telephone: (713) 623-0060).

The Company produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or genetically enhanced. The Company processes several grades of fish meal, as well as fish oil and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

The Company operates four menhaden processing plants: two in Louisiana, one in Mississippi and one in Virginia. The Company also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day fish oil processing capacity for the Company’s food, industrial and feed grade oils. In January 2007, the Company opened its new technical center in Houston, Texas – The OmegaPure Technology and Innovation Center. The technical center has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

In late 2005, the Company sustained damage to property, plant and equipment at each of its Gulf of Mexico facilities due to Hurricanes Katrina and Rita. The Moss Point and Abbeville facilities were fully operational at the start of the 2006 season and the Cameron facility became fully operational towards the end of the 2006 season. Total processing capacity, post-hurricanes, was reduced from 950,000 tons to 850,000 tons. The decrease in annual processing capacity will have no effect on the Company’s ability to process in the future because the Company has historically operated at levels substantially below maximum capacity.

All of the Company’s products contain healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because the human and animal bodies do not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to the “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

25

Under its production process, the Company produces OmegaPure ^® , a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3’s directly affirmed by the U.S. Food and Drug Administration (“FDA”) as a food ingredient that is Generally Recognized as Safe (“GRAS”). See “Company Overview—Products – Refined Fish Oil – Food Grade Oils.”

The Company operates through two primary subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. Omega Protein, Inc. is the Company’s principal operating subsidiary for its menhaden processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which is used to provide shoreside maintenance for the Company’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Revenues from shipyard work for third-party vessels for the six months ended June 30, 2008 and 2007 were not material. The Company also has a number of other immaterial direct and indirect subsidiaries.

Until April 1998, the Company, including its predecessors, was a wholly-owned subsidiary of Zapata Corporation (“Zapata”). In April 1998, the Company completed an initial public offering of its common stock. Immediately following the initial public offering, Zapata owned approximately 60% of the Company’s outstanding common stock. On December 8, 2005, Zapata announced that its Board of Directors had authorized Zapata’s management to seek a buyer for its then 58% equity ownership interest in the Company.

On November 28, 2006, the Company purchased 9,268,292 shares of the Company’s common stock from Zapata at a purchase price of $5.125 per share, or an aggregate purchase price of $47.5 million. The Company financed the purchase of the shares from Zapata with a senior secured financing facility from Ableco Finance LLC, an affiliate of Cerberus Capital Management, L.P. Concurrent with the purchase, Zapata’s two representatives, Avram A. Glazer and Leonard DiSalvo, resigned from Omega’s Board of Directors. Immediately following the purchase by the Company, Zapata owned approximately 33% of the Company’s outstanding common stock. For a more detailed description of the terms of the purchase by the Company, see the Company’s Current Reports on Form 8-K filed with the SEC on September 12, 2006 and December 1, 2006.

On December 4, 2006, Zapata sold the remaining 5,232,708 shares of the Company’s common stock held by Zapata to certain purchasers in a private transaction. As a result of the sale by Zapata, Zapata no longer owns any shares of the Company’s common stock. For a more detailed description of the terms of the sale by Zapata, see the Company’s Current Report on Form 8-K filed with the SEC on December 5, 2006.

Company Overview

Business . Omega is the largest U.S. producer of protein-rich meal and oil derived from marine sources. The Company’s products are produced from menhaden (a herring-like fish found in commercial quantities), and includes regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles.

Fishing . During the second quarter of 2008, the Company owned a fleet of 58 fishing vessels and 32 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2008 fishing season in the Gulf of Mexico, which runs from mid-April through October, the Company is operating 31 fishing and carry vessels and 30 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast begins in early May and usually extends into December. During the 2008 season, the Company is operating 10 fishing vessels and 8 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and

26

Menhaden usually school in large, tight clusters and are commonly found in warm, shallow waters. Spotter aircraft locate the schools and direct the fishing vessels to them. The principal fishing vessels transport two 40-foot purse boats, each carrying several fishermen and one end of a 1,500-foot net. The purse boats encircle the school and capture the fish in the net. The fish are then pumped from the net into refrigerated holds of the fishing vessel or onto a carry vessel, and then are unloaded at the Company’s processing plants. “Carry vessels” do not engage in active fishing but instead carry fish from the Company’s offshore fishing vessels to its plants. Utilization of carry vessels increases the amount of time that certain of the Company’s fishing vessels remain offshore fishing productive waters and therefore increases the Company’s fish catch per vessel employed. The carry vessels have reduced crews and crew expenses and incur less maintenance cost than the actual fishing vessels.

The Company’s principal raw material is menhaden, a species of fish that inhabits coastal and inland tidal waters in the United States. Certain state agencies, as well as interstate compacts, impose resource depletion restrictions on menhaden pursuant to fisheries management legislation or regulations and may impose additional legislation or regulations in the future. For example, in February 2007, the Commonwealth of Virginia established an annual cap for a five year period beginning in 2006 on the Company’s menhaden landings from the Chesapeake Bay in an amount equal to the Company’s average annual landings over a five year period from 2001 to 2005 (approximately 109,020 metric tons). The Virginia restrictions also allow the Company a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. In April 2008, the State of Texas enacted regulations which limited the annual menhaden catch to a five year average of 31.5 million pounds. The regulation also allows a 10% underage or overage in each year which is credited or deducted, as applicable, to the total allowable catch in the following year. This regulation is expected to be effective commencing with the 2009 fishing season. In addition, two bills have been introduced in the U.S. House of Representatives, which the Company believes have very little chance of passage, but which would ban menhaden fishing in Atlantic waters. To date, the Company has not experienced any material adverse impact on its fish catch or results of operations as a result of these restrictions.

Meal and Oil Processing Plants . The Company operates four meal and oil processing plants, two in Louisiana, one in Mississippi and one in Virginia, where the menhaden are processed into three general product types: fish meal, fish oil and fish solubles. The Company’s processing plants are located in coastal areas near the Company’s fishing fleet. Annual volume processed varies depending upon menhaden catch. Each plant maintains a dedicated dock to unload fish, fish processing equipment and storage facilities. The fish are unloaded from the fishing vessels into storage boxes and then conveyed into steam cookers. The fish are then passed through presses to remove most of the oil and water. The solid portions of the fish are dried and ground into fish meal. The liquid that is produced in the cooking and pressing operations contains oil, water, dissolved protein and some fish solids. This liquid is decanted to remove the solids and is put through a centrifugal oil and water separation process. The separated fish oil is a finished product called crude oil. The separated water and protein mixture is further processed through evaporators to recover the soluble protein, which can be sold as a finished product or added to the solid portions of the fish for processing into fish meal.

Shipyard. The Company owns a 49.4 acre shipyard facility in Moss Point, Mississippi which includes two dry docks, each with a capacity of 1,300 tons. The shipyard is used for routine maintenance and vessel refurbishment on the Company’s fishing vessels and occasionally for shoreside maintenance services to third-party vessels if excess capacity exists.

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Health and Science Center . In October 2004, the Company completed construction and commenced operation of a Health and Science Center that provides 100-metric tons per day fish oil processing capacity. The center is located adjacent to the Company’s Reedville, Virginia processing plant. The food-grade facility includes state-of-the-art processing equipment and controls that allows the Company to refine, bleach, fractionate and deodorize its menhaden fish oil and has more than tripled the Company’s previous refined fish oil production capacity for food, industrial and feed grade oils. The facility also provides the Company with automated packaging and on-site frozen storage capacity and has a lipids analytical laboratory to enhance the development of Omega-3 oils and food products.

OmegaPure Technology and Innovation Center. In January 2007, the Company opened its new OmegaPure Technology and Innovation Center located in Houston, Texas to further develop its OmegaPure ^® food grade Omega-3 product line. The new facility has food science application labs, as well as analytical, sensory and pilot plant capabilities. The new facility also has a lipids research lab where the Company plans to continue to develop new Omega-3 products that have improved functionality and technical characteristics.

Hurricane Damages . In August 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. In September 2005, the Company’s Cameron, Louisiana and Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita. Each of these facilities was non-operational immediately after these weather events. The Moss Point, Abbeville and Cameron facilities accounted for approximately 16%, 31% and 22%, respectively, of the Company’s full year 2004 production tonnage, so as an immediate result of the two hurricanes, approximately 70% of the Company’s operating capacity was impaired and the Company’s business, results of operations and financial condition were materially adversely affected.

Operations at the Moss Point and Abbeville fish processing facilities and the shipyard were re-established in mid-October 2005, but at reduced processing capabilities. These two facilities were returned to full operational status prior to the beginning of the Gulf fishing season in April 2006. Operations at the Cameron fish processing facility were re-established in June 2006, but at reduced processing capabilities. The Cameron plant became fully operational in September 2006.

The Company maintains insurance coverage for a variety of these damages, most notably property, inventory and vessel insurance. The nature and extent of the insurance coverage varies by line of policy and the Company has recorded insurance recoveries as an account receivable based on the preliminary discussions with insurers and adjusters.

The direct impact of the two hurricanes upon the Company was a loss of physical inventories and physical damage to the plants. As of June 30, 2008, the Company estimated its cumulative hurricane damages at approximately $29.3 million, of which $12.0 million was recorded as a receivable under insurance policies as of September 30, 2005 and was fully received as of September 30, 2007. In addition to the $12.0 million receivable recorded as of September 30, 2005, the Company realized additional insurance recoveries of $5.2 million and $5.5 million during the third and fourth quarters of 2007, respectively. The Company has recognized a cumulative $6.6 million net loss through June 30, 2008 due to estimated damages in excess of recognized insurance recoveries.

In order to facilitate the insurance recovery process, on July 28, 2006, the Company filed a lawsuit against its property insurance carriers, Lexington Insurance Company and RSUI Indemnity Company, in the U.S. District Court for the Western District of Louisiana, alleging breach of contract and bad faith based on the insurance carriers’ failure to pay amounts due to the Company under its property insurance policies for damages sustained from Hurricanes Katrina and Rita in the third quarter of 2005. The Company settled its lawsuit with its primary property insurance carrier, Lexington Insurance Company, for a total of $19.8 million during the third quarter of

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2007. Of the $19.8 million, $12.0 million was previously recorded as a receivable and was fully received as of September 30, 2007, $3.3 million was paid to outside legal counsel in connection with the settlement and $4.5 million was recognized during the third quarter of 2007 as insurance recoveries relating to natural disaster and was received as of December 31, 2007. In addition, the Company settled its lawsuit with its secondary property insurance carrier, RSUI Indemnity Company, for a total of $9.2 million during the fourth quarter of 2007. Of the $9.2 million, $0.7 million was advanced during the third quarter of 2007 and recognized as insurance recoveries relating to natural disaster, $3.0 million was paid to outside legal counsel in connection with the settlement during the fourth quarter of 2007 and $5.5 million was recognized and received during the fourth quarter of 2007 as insurance recoveries relating to natural disaster. The Company still has a pending lawsuit against its insurance broker alleging negligent procurement, negligent misrepresentation, breach of contract and violations of Texas Insurance and Consumer laws. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, “Part I, Item 3. Legal Proceedings” for additional information.

As of December 31, 2005, the Company’s four active processing plants, assuming that no hurricane damages had occurred, would have had an aggregate annual capacity to process approximately 950,000 tons of fish . The previously described hurricane damages reduced the annual aggregate processing capacity to approximately 850,000 tons as of June 30, 2008. The Company anticipates that the decrease in annual processing capacity will have no effect on the Company’s ability to process in the future because the Company has historically operated at processing levels substantially below maximum capacity. Operations at the Cameron fish processing facility were re-established in June 2006, but at reduced processing capabilities. The Cameron facility became fully operational in September 2006.

Because of the damages to the Company’s Cameron, Louisiana facility caused by Hurricane Rita, the Company began its 2006 fishing season by operating its full contingent of 30 Gulf of Mexico fishing and carry vessels out of its two operating facilities in Abbeville, Louisiana and Moss Point, Mississippi. These activities substantially increased the number of vessels at the Abbeville and Moss Point plants to a level that the Company had not operated previously. Although these two facilities had adequate processing capacity, the Company’s fishing efforts were diminished because increased unloading time due to additional vessels reduced the number of vessels on the fishing grounds during the most optimal fishing times. During June 2006, 10 vessels were shifted to the Cameron facility when it became operational.

Distribution System . The Company’s distribution system of warehouses, tank storage facilities, vessel loading facilities, trucks, barges and railcars allows the Company to service customers throughout the United States and also foreign locations. The Company owns and leases warehouses and tank storage space for storage of its products, generally at terminals along the Mississippi River. The Company generally contracts with third-party trucking, vessel, barge and railcar companies to transport its products to and from warehouses and tank storage facilities and directly to its customers.

Historically, approximately 35% to 40% of Omega’s FAQ grade fish meal was sold on a two-to-twelve-month forward contract basis. The balance of FAQ grade fish meal and other products was substantially sold on a spot basis through purchase orders. In 2002, the Company began a similar forward sales program for its specialty grade meals and crude fish oil due to increasing demand for these products. During 2005, 2006 and 2007 approximately 70%, 70% and 50%, respectively, of the Company’s specialty meals and crude fish oil had been sold on a forward contract basis. Prior to the beginning of the Company’s 2008 fishing season, approximately 68% and 56% of the Company’s 2008 forecasted fish meal and crude fish oil, respectively, had either been sold or sold forward on a contract basis. The percentage of fish meal and crude fish oil sold on a forward contract basis will fluctuate from year to year based upon perceived market availability.

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The Company’s annual revenues are highly dependent on annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. The Company determines the level of inventory to be carried over based on prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter to quarter. The Company’s fish meal products have a useable life of approximately one year from date of production. Practically, however, the Company attempts to empty its warehouses of the previous season’s products by the second or third month of the new fishing season. The Company’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.

The following table sets forth the Company’s revenues by product (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:


	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	Revenues		Percent		Revenues		Percent		Revenues		Percent		Revenues		Percent
Regular Grade	$	5.5	11.7	%	$	4.6	12.3	%	$	11.3	13.5	%	$	8.7	12.7	%
Special Select		14.3	30.4			22.4	60.4			30.5	36.7			37.4	54.8
Sea-Lac		3.5	7.4			1.4	3.8			7.1	8.5			3.0	4.4
Crude Oil		17.8	37.8			4.3	11.6			21.8	26.2			11.3	16.6
Refined Oil		4.8	10.2			3.4	9.2			10.2	12.3			6.2	9.1
Fish Solubles		1.2	2.5			0.8	2.2			2.3	2.8			1.4	2.1
Other		—	—			0.2	0.5			—	—			0.2	0.3

Total	$	47.1	100.0	%	$	37.1	100.0	%	$	83.2	100.0	%	$	68.2	100.0	%

Customers and Marketing. Most of the Company’s marine protein products are sold directly to approximately 600 customers by the Company’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Product inventory was $39.6 million as of June 30, 2008 versus $58.0 million as of December 31, 2007.

The Company’s fish meal is sold primarily to domestic feed producers for utilization as a high-protein ingredient for the swine, aquaculture, dairy and pet food industries. Crude fish oil sales primarily involve export markets where the fish oil is used for aquaculture feeds. Over the past decade, increasing percentages of the Company’s fish meal and oil products have been sold into the aquaculture industry. The growth of the worldwide aquaculture industry has resulted in increasing demand for fish oils and meals to improve feed efficiency, nutritional value and health of farm-raised fish species.

The Company’s products are sold both in the U.S. and internationally. International sales consist mainly of fish oil sales to Norway, Canada, Chile and Japan. The Company’s sales in these foreign markets are denominated in U.S. dollars and are not directly affected by currency fluctuations. Such sales could be adversely affected by changes in demand resulting from fluctuations in currency exchange rates.

A number of countries in which the Company currently sells products impose various tariffs and duties, none of which have a significant impact on the Company’s foreign sales. Certain of these duties have been reduced in recent years for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, the Company’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on the Company’s products sold into these markets.

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During the off season, the Company fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal purchased from other suppliers. Prices for the Company’s products tend to be lower during the fishing season when product is more abundant than in the off season. Throughout the entire year, prices are often significantly influenced by supply and demand in world markets for competing products, primarily other global sources of fish meal and oil, and also soybean meal for its fish meal products, and vegetable oils for its fish oil products when used as an alternative.

Quality Control . The Company believes that maintaining high standards of quality in all aspects of its manufacturing operations play an important part in its ability to attract and retain customers and maintain its competitive position. To that end, the Company has adopted strict quality control systems and procedures designed to test the quality aspects of its products, such as protein content and digestibility. The Company regularly reviews, updates and modifies these systems and procedures as appropriate.

Purchases and Sales of Third-Party Meal and Oils . Omega has from time to time purchased fish meal and fish oil from other domestic and international manufacturers. These purchase and resale transactions have to date been ancillary to the Company’s base manufacturing and sales business.

During 2005 and 2006, the Company’s fish catch and resultant product inventories were reduced, primarily due to adverse weather conditions, and the Company further expanded its purchase and resale of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden oil). Although operating margins from these activities are less than the margins typically generated from the Company’s base domestic production, these operations provide the Company with a source of fish meal and oil to sell into other markets, some of which, the Company has not historically had a presence. During 2005, the Company purchased products totaling approximately 16,600 tons, or approximately 8% of total volume 2005 sales. During 2006, the Company purchased products totaling approximately 14,600 tons, or approximately 7% of total volume 2006 sales. During 2007, the Company purchased fish oil totaling approximately 5,500 tons, or approximately 9.1% of fish oil sales volumes for 2007. The Company has not purchased any fish meal or fish oil during the six months ended June 30, 2008.

Insurance. The Company maintains insurance against physical loss and damage to its assets, coverage against liabilities to third parties it may incur in the course of its operations, as well as workers’ compensation, United States Longshoremen’s and Harbor Workers’ Compensation Act and Jones Act coverage. Assets are insured at replacement cost, market value or assessed earning power. The Company’s limits for liability coverage are statutory or $50 million. The $50 million limit is comprised of several excess liability policies, which are subject to deductibles, underlying limits, annual aggregates and exclusions. The Company believes its insurance coverage to be in such form, against such risks, for such amounts and subject to such deductibles and self-retentions as are prudent and normal for its operations. Over recent years, the Company has elected to increase its deductibles and self-retentions in order to achieve lower insurance premium costs. These higher deductibles and self-retentions have resulted in greater costs to the Company in the cases of Hurricanes Katrina and Rita and will expose the Company to greater risk of loss if additional future claims occur. In addition, the Company’s cost of insurance for property damage has increased materially and may further increase materially in future years as insurers recoup losses paid and to be paid out in connection with Hurricanes Katrina and Rita by charging higher premiums.

Competition. The Company competes with a smaller domestic privately-owned menhaden fishing company and with international marine protein and oil producers, including Mexican sardine processors and South American anchovy and mackerel processors. In addition, but to a lesser extent, the Company’s marine protein and oil business is also subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than those of the Company.

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Omega competes on price, quality and performance characteristics of its products, such as protein level and amino acid profile in the case of fish meal. The principal competition for the Company’s fish meal and fish solubles is from other global production of marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. The Company believes, however, that these other non-marine sources are not complete substitutes because fish meal offers nutritional values not contained in such other sources. Other globally produced fish oils provide the primary market competition for the Company’s fish oil, as well as soybean and rapeseed oil, from time to time.

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable fats and oils, such as rapeseed, soybean and palm oils. Thus, the prices for the Company’s products are established by worldwide supply and demand relationships over which the Company has no control and tend to fluctuate significantly over the course of a year and from year to year. For example, during 2007, the Company experienced fish oil price increases of approximately 18% when compared to 2006, whereas palm oil and soy oil prices rose 53% and 66%, respectively. During January 2008, and subsequent thereto, the spot price for fish oil increased 95% above the Company’s average price received during 2007.

Price List. The Company posts its latest internally generated price list for its various products on its Company website, omegaproteininc.com. The Company expects to post updates to the price list as they become available, which may occur as frequently as weekly. The Company may elect to discontinue this disclosure at any time without prior notice. Pricing and product availability information disclosed in the price list are subject to change without prior notice, and the Company undertakes no obligation to update such information. Information on the Company’s website is not incorporated by reference into this report and does not constitute part of this report.

Regulation. The Company’s operations are subject to federal, state and local laws and regulations relating to the locations and periods in which fishing may be conducted as well as environmental and safety matters. At the state and local level, certain state and local government agencies have enacted legislation or regulations which prohibit, restrict or regulate menhaden fishing within their jurisdictional waters.

The Company’s menhaden fishing operations are also subject to regulation by two interstate compact commissions created by federal law: the Atlantic States Marine Fisheries Commission (“ASMFC”) which consists of 15 states along the Atlantic Coast, and the Gulf States Marine Fisheries Commission which consists of 5 states along the Gulf of Mexico. In 2005, the ASMFC recommended precautionary restrictions on the Chesapeake Bay menhaden harvest, despite its finding that menhaden are not overfished and that overfishing is not occurring on a coast wide basis, in order to determine whether localized depletion was occurring in Chesapeake Bay.

In February 2007 the Commonwealth of Virginia declined to adopt an ASMFC recommended plan but instead adopted its own restrictions whereby the Company’s Chesapeake Bay menhaden harvest was capped for a five year period at a recent five-year average (2001 to 2005) of 109,020 metric tons per year. The Virginia restrictions also allow for a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. The Company supported Virginia’s proposal and voluntarily complied with its limitations in 2006. This compliance had no effect on the Company’s Chesapeake Bay harvest in 2007 and is not expected to have any material adverse effect on its Chesapeake Bay harvest in 2008. As a result of the underharvest in 2007, the 2008 Chesapeake Bay catch limit will be 122,740 metric tons.

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On March 27, 2008, the Texas Parks and Wildlife Commission adopted regulations related to the menhaden reduction fishery in Texas waters which limits the Total Allowable Catch (“TAC”) to 31.5 million pounds annually (the five year average menhaden catch for reduction purposes in Texas waters from 2002 through 2006). The regulations also allow for a 10% underage or overage in each year which is credited or deducted, as applicable, to the TAC in the following year.

The Company’s menhaden fish catch in Texas in 2007 is tentatively and preliminarily estimated by the National Marine Fisheries Service to be 35.3 million pounds (approximately 16,000 metric tons), or approximately 2.5% of the Company’s total 2007 fish catch. Based on the Company’s understanding of the rule as adopted, the limitation is not expected to have a material adverse effect on the Company’s business, results of operation or financial condition. The regulations are expected to be effective as of the 2009 fishing season.

In October 2007, two bills were introduced in the U.S. House of Representatives (H.R. 3840 and H.R. 3841) by two congressmen representing portions of New Jersey and Maryland, areas where the Company has no operations. The New Jersey congressman has announced his intention not to seek re-election to Congress in November 2008 and the Maryland congressman lost the Republican Party primary election for his Congressional district in February 2008, and therefore will not be the Republican nominee for that district in November 2008. The bills, if enacted, would effectively prohibit commercial fishing for Atlantic menhaden for reduction purposes in inland, state and federal waters along the Atlantic coast. The Company believes that the bills are premised on inaccurate assumptions and depictions of facts about the menhaden resource which the National Marine Fisheries Service continues to classify as healthy and not overfished. The bills would also supplant decades of fisheries management previously undertaken by the Atlantic States Marine Fisheries Commission and the National Marine Fisheries Service. The Company believes that the passage of these bills is highly unlikely; however the enactment of either of the bills, or any restrictions similar to those described in the bills, would have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company, through its operation of fishing vessels, is subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board and the U.S. Customs Service. The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards. The U.S. Customs Service is authorized to inspect vessels at will.

The Company’s operations are subject to federal, state and local laws and regulations relating to the protection of the environment, including the federal Clean Water Act, which imposes strict controls against the discharge of pollutants in reportable quantities, and along with the Oil Pollution Act, imposes substantial liability for the costs of oil removal, remediation and damages. The Company’s operations also are subject to the federal Clean Air Act, as amended; the federal Comprehensive Environmental Response, Compensation, and Liability Act, which imposes liability, without regard to fault, on certain classes of persons that contributed to the release of any “hazardous substances” into the environment; and the federal Occupational Safety and Health Act (“OSHA”). The implementation of continuing safety and environmental regulations from these authorities could result in additional requirements and procedures for the Company, and it is possible that the costs of these requirements and procedures could be material.

The OSHA hazard communications standard, the Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. Numerous other environmental laws and regulations, along with similar state laws, also apply to the operations of the Company, and all such laws and regulations are subject to change.

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The Company has made, and anticipates that it will make in the future, expenditures in the ordinary course of its business in connection with environmental matters. Such expenditures have not been material in the past, and while they are expected to increase in the future, such increases are not expected to be material to the Company’s overall business. However, there is no assurance that environmental laws and regulations enacted in the future will not require material expenditures or otherwise adversely affect the Company’s operations.

The Company continually monitors regulations which affect fish meal and fish oil in the United States and in those foreign jurisdictions where it sells its products. In some cases, particularly in Europe, regulators have mandated various environmental contaminant levels which, on occasion, certain of the Company’s products do not meet. In those instances, the Company has either negotiated a lower price with the customer for that product lot or has sold the product lot in another market where the regulatory standards are met. To date, such regulations have not had a material adverse effect on the Company’s business, but it is possible they may do so in the future.

The Company’s harvesting operations are subject to the Shipping Act of 1916 and the regulations promulgated thereunder by the Department of Transportation, Maritime Administration which require, among other things, that the Company be incorporated under the laws of the U.S. or a state, the Company’s chief executive officer be a U.S. citizen, no more of the Company’s directors be non-citizens than a minority of the number necessary to constitute a quorum and at least 75% of the Company’s outstanding capital stock (including a majority of the Company’s voting capital stock) be owned by U.S. citizens. If the Company fails to observe any of these requirements, it will not be eligible to conduct its harvesting activities in U.S. jurisdictional waters. Such a loss of eligibility would have a material adverse effect on the Company’s business, results of operations and financial condition.

To protect against such loss of eligibility, the Company’s Articles of Incorporation (i) contain provisions limiting the aggregate percentage ownership by non-citizens of each class of the Company’s capital stock to no more than 25% of the outstanding shares of each such class (the “Permitted Percentage”) so that any purported transfer to non-citizens of shares in excess of the Permitted Percentage will be ineffective as against the Company for all purposes (including for purposes of voting, dividends and any other distribution, upon liquidation or otherwise), (ii) provide for a dual stock certificate system to determine such ownership pursuant to which certificates representing shares of Company Common Stock bear legends that designate such certificates as either “citizen” or “non-citizen” depending on the citizenship of the owner, and (iii) permit the Company’s Board of Directors to make such determinations as may reasonably be necessary to ascertain such ownership and implement restrictive limitations on those shares that exceed the Permitted Percentage (the “Excess Shares”). For example, the Company’s Board is authorized, among other things, to redeem for cash (upon written notice) any Excess Shares in order to reduce the aggregate ownership by non-citizens to the Permitted Percentage.

Available Information

The Company files annual, quarterly and current reports and other information with the SEC. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed under the Securities and Exchange Act of 1934 (“Exchange Act”), as well as Section 16 filings by officers and directors, are available free of charge at the Company’s website at www.omegaproteininc.com or at the SEC’s website at www.sec.gov and are posted as soon as reasonably practicable after they are filed with the SEC. The Company will provide a copy of these documents to stockholders upon request. Information on the Company’s website or any other website is not incorporated by reference into this report and does not constitute part of this report.

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In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov .

The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Financial Professionals, as well as the Charters for the Board’s Audit Committee, Compensation Committee, Corporate Governance Committee and Scientific Committee, are available at the Company’s website. These Guidelines, Codes and Charters are not incorporated by reference into this report and do not constitute part of this report. The Company will provide a copy of these documents to stockholders upon request.

Critical Accounting Policies and Estimates

As expected, the adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated results of operation and financial position.

For information on critical accounting policies and estimates, see Note 1 to the unaudited condensed consolidated financial statements included in Item 1 – Financial Statements.

Results of Operations

The following table sets forth as a percentage of revenues certain items of the Company’s operations for each of the indicated periods.


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	66.2		76.3		70.9		77.9

Gross profit	33.8		23.7		29.1		22.1
Selling, general and administrative expense	8.5		9.0		9.3		12.0
Research and development expense	0.7		0.5		0.8		0.6
(Gain) loss on disposal of assets	(0.1	)	0.5		0.2		0.3

Operating income	24.7		13.7		18.8		9.2
Interest income	0.3		0.2		0.4		0.2
Interest expense	(2.1	)	(3.4	)	(2.7	)	(4.3	)
Loss resulting from debt refinancing	—		—		—		(4.4	)
Other income (expense), net	(0.1	)	(0.2	)	(0.1	)	(0.3	)

Income before income taxes	22.8		10.3		16.4		0.4
Provision for income taxes	8.6		3.5		6.0		0.1

Net income	14.2	%	6.8	%	10.4	%	0.3	%

Interim Results for the Second Quarters ended June 30, 2008 and June 30, 2007

Revenues . Revenues increased $10.0 million, or 27.1%, from $37.1 million for the three months ended June 30, 2007 to $47.1 million for the three months ended June 30, 2008. The increase in revenues was due to higher sales prices of 1.1% and 62.8% for the Company’s fish meal and fish oil, respectively, and higher sales volumes of 81.5% for the Company’s fish oil, which was partially offset by lower sales volumes of 18.8% for the Company’s fish meal. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $7.4 million increase in revenues due to increased sales prices and a $2.6 million increase in revenue caused by increased sales volumes, when comparing the three months ended June 30, 2008 to the three months ended June 30, 2007.

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Cost of Sales . Cost of sales, including depreciation and amortization, for the quarter ended June 30, 2008 was $31.2 million, a $2.9 million increase, or 10.3%, as compared to the quarter ended June 30, 2007. Cost of sales as a percentage of revenues was 66.2% for the quarter ended June 30, 2008 as compared to 76.3% for the quarter ended June 30, 2007. The decrease in cost of sales as percentage of revenue was primarily due to increased fish oil sales prices, partially offset by increased per unit production costs due to increased labor and repair costs.

Gross Profit . Gross profit increased $7.1 million, or 81.1%, from $8.8 million for the quarter ended June 30, 2007 to $15.9 million for the quarter ended June 30, 2008. Gross profit as a percentage of revenues was 33.8% for the quarter ended June 30, 2008 as compared to 23.7% for the quarter ended June 30, 2007. The increase in gross profit was primarily due to increased fish oil sales prices partially offset by increased per unit production costs as discussed above.

Selling, general and administrative expenses . Selling, general and administrative expenses increased $0.7 million, or 19.3%, from $3.3 million for the quarter ended June 30, 2007 to $4.0 million for the quarter ended June 30, 2008. The increase was primarily due to increased employee bonuses and government relations activities incurred during the quarter ended June 30, 2008 when compared to those incurred during the quarter ended June 30, 2007.

Research and development expenses . Research and development expenses increased $0.1 million from approximately $0.2 million for the three months ended June 30, 2007 to approximately $0.3 million for the three months ended June 30, 2008. The increase is due to the increase in equipment and employees for the OmegaPure Technology and Innovation Center, which commenced operations in January 2007 but was not fully staffed until the latter part of 2007.

(Gain) loss on disposal of assets . Gain on disposal of assets was $32,000 for the three months ended June 30, 2008 as compared to a loss on disposal of assets of $184,000 for the three months ended June 30, 2007. The (gain) loss were the result of disposals of miscellaneous assets in the ordinary course of business.

Operating income . As a result of the factors discussed above, the Company’s operating income increased $6.5 million from $5.1 million for the quarter ended June 30, 2007 to $11.6 million for the quarter ended June 30, 2008. As a percentage of revenues, operating income increased from 13.7% for the quarter ended June 30, 2007 to 24.7% for the quarter ended June 30, 2008.

Interest income . Interest income increased by $89,000 from $56,000 for the three months ended June 30, 2007 to $145,000 for the three months ended June 30, 2008. The increase was primarily due to increased average cash balances on which interest income is generated partially offset by a decrease in interest rates.

Interest expense . Interest expense decreased $0.3 million, or 22.3%, from $1.3 million for the quarter ended June 30, 2007 to $1.0 million for the quarter ended June 30, 2008. The decrease in interest expense is primarily due to decreased debt balances and interest rates during the quarter ended June 30, 2008 as compared to the quarter ended June 30, 2007.

Other income (expense), net . Other income (expense), net decreased by $1,000 from $69,000 for the quarter ended June 30, 2007 to $68,000 for the quarter ended June 30, 2008. The decrease was primarily due to a decrease in fees paid to the Company’s bank and related lenders.

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Provision for income taxes . The Company recorded a $4.0 million provision for income taxes for the quarter ended June 30, 2008 representing an effective tax rate of 37.5% for income taxes compared to 34.0% for the quarter ended June 30, 2007. The increase in the effective tax rate is the result of the Company’s expected taxable income and related statutory tax bracket. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 35% and 34% for U.S. federal taxes was in effect for the three month periods ended June 30, 2008 and 2007, respectively.

Interim Results for the Six Months ended June 30, 2008 and June 30, 2007

Revenues . Revenues increased $15.0 million, or 22.0%, from $68.2 million for the six month period ended June 30, 2007 to $83.2 million for the six month period ended June 30, 2008. The increase in revenues was due to higher sales prices of 3.6% and 56.2% for the Company’s fish meal and fish oil, respectively, and higher sales volumes of 16.9% for the Company’s fish oil, which was partially offset by lower sales volumes of 3.9% for the Company’s fish meal. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $13.3 million increase in revenues due to increased sales prices and a $1.7 million increase in revenue caused by increased sales volumes, when comparing the six month period ended June 30, 2008 to the six month period ended June 30, 2007.

Cost of Sales . Cost of sales, including depreciation and amortization, for the six month period ended June 30, 2008 was $59.1 million, a $5.9 million increase, or 11.1%, as compared to the six month period ended June 30, 2007. Cost of sales as a percentage of revenues was 70.9% for the six month period ended June 30, 2008 as compared to 77.9% for the six month period ended June 30, 2007. The decrease in cost of sales as percentage of revenue was primarily due to increased fish oil sales prices, partially offset by increased per unit production costs due to increased labor and repair costs.

Gross Profit . Gross profit increased $9.1 million, or 60.6%, from $15.1 million for the six month period ended June 30, 2007 to $24.2 million for the six month period ended June 30, 2008. Gross profit as a percentage of revenues was 29.1% for the six month period ended June 30, 2008 as compared to 22.1% for the six month period ended June 30, 2007. The increase in gross profit was primarily due to increased fish oil sales prices partially offset by increased per unit production costs as discussed above.

Selling, general and administrative expenses . Selling, general and administrative expenses decreased $0.5 million, or 6.3%, from $8.2 million for the six month period ended June 30, 2007 to $7.7 million for the six month period ended June 30, 2008. The decrease was primarily due to decreased employee bonuses, partially offset by increased government relations activities during the six month period ended June 30, 2008, as compared to the six month period ended June 30, 2007.

Research and development expenses . Research and development expenses increased $0.3 million from approximately $0.4 million for the six month period ended June 30, 2007 to approximately $0.7 million for the six month period ended June 30, 2008. The increase is due to the increase in equipment and employees for the OmegaPure Technology and Innovation Center, which commenced operations in January 2007 but wasn’t fully staffed until latter part of 2007.

(Gain) loss on disposal of assets . Loss on disposal of assets was $0.2 million for the six month period ended June 30, 2008 and 2007. The losses were the result of disposals of miscellaneous assets in the ordinary course of business.

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Operating income . As a result of the factors discussed above, the Company’s operating income increased $9.4 million from $6.3 million for the six month period ended June 30, 2007 to $15.7 million for the six month period ended June 30, 2008. As a percentage of revenues, operating income increased from 9.2% for the six month period ended June 30, 2007 to 18.8% for the six month period ended June 30, 2008.

Interest income . Interest income increased by $0.2 million from $0.1 million for the six month period ended June 30, 2007 to $0.3 million for the six month period ended June 30, 2008. The increase was primarily due to increased average cash balances on which interest income is generated partially offset by a decrease in interest rates.

Interest expense . Interest expense decreased $0.7 million, or 25.3%, from $2.9 million for the six month period ended June 30, 2007 to $2.2 million for the six month period ended June 30, 2008. The decrease in interest expense is primarily due to decreased debt balances and interest rates during the six month period ended June 30, 2008 as compared to the six month period ended June 30, 2007.

Loss resulting from debt refinancing . Loss resulting from debt refinancing was $3.0 million for the six month period ended June 30, 2007. The expenses relate to previously deferred debt issuance cost and other costs that became immediately recognized when the Company refinanced its prior credit facility on March 26, 2007. No such loss was incurred during the six month period ended June 30, 2008.

Other income (expense), net . Other income (expense), net decreased by $0.1 million from $0.2 million for the six month period ended June 30, 2007 to $0.1 million for the six month period ended June 30, 2008. The decrease was primarily due to a decrease in fees paid to the Company’s bank and related lenders.

Provision for income taxes . The Company recorded a $5.0 million provision for income taxes for the six month period ended June 30, 2008 representing an effective tax rate of 36.9% for income taxes compared to 33.9% for the six month period ended June 30, 2007. The increase in the effective tax rate is the result of the Company’s expected taxable income and related statutory tax bracket. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 35% and 34% for U.S. federal taxes was in effect for the six month periods ended June 30, 2008 and 2007, respectively.

Seasonal and Quarterly Results

The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. Additionally, due to the sharp increase in fish oil prices during 2008 and the resultant increase in gross profit margins for those products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company defers sales of inventory based on worldwide prices for competing products that affect prices for the Company’s products which may affect comparable period comparisons.

Liquidity and Capital Resources

Historically, the Company’s primary sources of liquidity and capital resources have been cash flows from operations, bank credit facilities and term loans from various lenders provided pursuant to the U.S. Maritime Administration’s Fisheries Finance Program (“FFP”), which is offered through National Marine Fisheries Services

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At June 30, 2008, the Company had an unrestricted cash balance of $23.8 million, up $4.5 million from December 31, 2007. This increase was primarily due to increased revenue and proceeds received from stock options exercised for the six months ended June 30, 2008, offset by capital expenditures and costs incurred related to the preparation for the 2008 fishing season. The Company’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. While the Company’s fish catch and selling prices for its products increased in 2007 and 2006 over 2005, those increases were offset by very poor fish oil yields during 2006, which resulted in significantly higher per unit inventory costs and fewer volumes of fish oil available for future sale. These higher costs and lower volumes of fish oil available for sale adversely impacted the financial results in the first and second quarters of 2007. There was no similar impact in the third and fourth quarters of 2007 and first and second quarters of 2008.

The aggregate amount of the Company’s outstanding indebtedness at June 30, 2008 was approximately $62.1 million compared to approximately $65.3 million at December 31, 2007. The Company has a moderately leveraged financial structure, which could limit its financial flexibility in certain circumstances. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Risk Factors - The Company has a substantial amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt.”

Source of Capital: Operations

Net cash flow (used in) provided by operating activities increased from approximately ($0.3) million for the six month period ended June 30, 2007 to $10.2 million for the six month period ended June 30, 2008. The increase in operating cash flow is primarily attributable to net income and changes in accounts receivable, inventory, accrued liabilities and accounts payable. Additionally, the Company incurred an early payment penalty of $0.9 million during the six month period ended June 30, 2007 related to the Company refinancing its prior credit facility.

Source of Capital: Debt

Net financing activities provided (used) cash of $7.0 million and ($5.6) million during the six month periods ended June 30, 2008 and 2007, respectively. The six month period ended June 30, 2008 included $3.2 million in debt principal payments and $10.2 million in proceeds and tax effects received from stock options exercised. The six month period ended June 30, 2007 included approximately $43.4 million in total borrowings, $51.0 million in principal payments with respect to the Company’s prior credit facility and other debt obligations, $0.7 million in debt issuance costs associated with the new Senior Credit Facility and $2.7 million in proceeds and tax effects received from stock options exercised.

Under Title XI, as administered under the FFP, the Company has secured loans through lenders with terms generally ranging between 12 and 20 years at interest rates between 6% and 8% per annum which are enhanced with a government guaranty to the lender for up to 80% of the financing. The Company’s current Title XI borrowings are secured by liens on certain fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville, Louisiana plants. In 1996, Title XI borrowing was modified to permit use of proceeds from borrowings obtained through this program for shore-side construction.

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In September 2004, the FFP approved the Company’s financing application in an amount not to exceed $14.0 million (the “Approval Letter”). Borrowings under the Approval Letter are required to be used to finance and/or refinance approximately 73% of the actual depreciable cost of the Company’s future fishing vessel refurbishments and capital expenditures relating to shore-side fishing assets, for a term not to exceed 15 years from inception at interest rates determined by the U.S. Treasury. Final approval for all such future projects requires individual approval through the Secretary of Commerce, National Oceanic and Atmospheric Administration, and NMFS. Borrowings under the FFP are required to be evidenced by security agreements, undertakings, and other documents deemed in the sole discretion of the NMFS as necessary to accomplish the intent and purpose of the Approval Letter. The Company is required to comply with customary NMFS covenants as well as certain special covenants. The Company closed on a $14.0 million FFP loan on October 17, 2005.

On December 1, 2005, pursuant to the Title XI program, the FFP approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 financing in the first quarter of 2007. As of June 30, 2008, the Company had approximately $29.7 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

On March 26, 2007 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, lender, swing line lender and letter of credit issuer, Regions Bank, Compass Bank and Farm Credit Bank of Texas (collectively, the “Lenders”). The Credit Agreement provides the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility (the “Revolving Credit Facility”) of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million. The Senior Credit Facility replaced the Company’s prior credit facility, under which, as of the Closing Date, $28.7 million in principal was outstanding under a term loan and $6.5 million in principal was outstanding under revolving loans, and approximately $3.3 million in letters of credit were issued, primarily in support of worker’s compensation insurance programs. On the Closing Date, the Company drew down $35 million under the Term Loan and approximately $2.0 million under the Revolving Credit Facility, and had approximately $3.1 million issued in standby letters of credit, primarily in support of worker’s compensation insurance programs. The Senior Credit Facility is secured by a first priority lien on all of the Company’s assets, other than vessels, real estate and other assets pledged to secure loans made to the Company under the FFP.

Aggregate amounts outstanding under the Revolving Credit Facility (including standby letters of credit and swing line loans) are limited to an amount not to exceed the lesser of (i) $20 million and (ii) an amount equal to the sum of (a) 80% of Eligible Accounts Receivable (as defined in the Credit Agreement) plus (b) 50% of net book value of Eligible Inventory (as defined in the Credit Agreement), provided that Eligible Inventory shall not comprise more than 50% of the total of (a) and (b). Standby letters of credit will be issued by, and swing line loans will be made available by, Bank of America, N.A. and each Lender will purchase an irrevocable and unconditional participation in each standby letters of credit and swing line loan, subject to certain conditions. Swing line loans will be made available on a same day basis in minimum amounts of $100,000, subject to certain conditions.

Any loan (other than swing line loans) under the Senior Credit Facility bears interest at a rate equal to the Applicable Margin, as determined in accordance with the pricing grid set forth below, plus one of the following indexes: (i) Eurodollar and (ii) the Base Rate (defined as the higher of (a) the Federal Funds Rate plus 0.50% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate”). Each swing line loan bears interest at the Base Rate plus the Applicable Margin for Base Rate loans.

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Consolidated Leverage Ratio of the Company and its Subsidiaries	Applicable Commitment Fee		Letters of Credit Fee		Applicable Margin for Eurodollar Loans		Applicable Margin for Base Rate Loans
Less than 2.0x	0.40	%	2.00	%	2.00	%	0.50	%
Less than 2.50x but greater than or equal to 2.0x	0.40	%	2.25	%	2.25	%	0.75	%
Less than 3.0x but greater than or equal to 2.5x	0.40	%	2.38	%	2.38	%	1.00	%
Less than 3.5x but greater than or equal to 3.0x	0.40	%	2.50	%	2.50	%	1.25	%
Greater than or equal to 3.5x	0.50	%	2.75	%	2.75	%	1.50	%

All borrowings made on the Closing Date were made as Base Rate loans. These Base Rate loans were converted to Eurodollar loans three days after the Closing Date.

The Company entered into interest rate swap agreements with a notional amount as indicated below that are scheduled to mature in March 2012. Under these agreements, the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate as indicated below on the various notional amounts.


Date of Contract	Original Notional Amount		Contracted Interest Rate		Total Asset (Liability) as of June 30, 2008			Total Deferred Tax Asset (Liability) as of June 30, 2008			Notional Amount as of June 30, 2008
April 4, 2007	$	19,950,000	5.16	%	$	(630,800	)	$	214,500		$	18,453,800
February 7, 2008		10,237,500	3.36	%		111,000			(37,700	)		9,712,500
March 19, 2008		4,436,250	2.96	%		90,700			(30,800	)		4,208,700

The Credit Agreement requires the Company comply with various affirmative and negative covenants affecting its business and operations. In addition, the Company is required to comply with the following financial covenants:

•

The Company is required to maintain Consolidated Net Worth (as defined in the Credit Agreement) of at least $85,000,000, which is increased on a cumulative basis as of the end of each fiscal quarter (commencing June 30, 2007) by an amount equal to 75% of Consolidated Net Income (as defined in the Credit Agreement) (to the extent positive) for the fiscal quarter then ended plus 100% of the amount of certain equity issuances after the Closing Date that increase consolidated shareholders’ equity.

•

The Company is required to maintain, as of the end of each fiscal quarter (commenced March 31, 2007), a Consolidated Leverage Ratio (as defined in the Credit Agreement) of 4.0 to 1.0, which will be reduced to (i) 3.75 to 1.0 on September 30, 2007, (ii) 3.25 to 1.0 on December 31, 2007, (iii) 3.0 to 1.0 on December 31, 2008, (iv) 2.75 to 1.0 on December 31, 2009 and (iv) 2.5 to 1.0 on December 31, 2010 for thereafter.

•

The Company is required to maintain, as of the end of each fiscal quarter (commenced March 31, 2007), a Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.1 to 1.0.

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The Senior Credit Facility will terminate on March 26, 2012 (the “Maturity Date”). All loans and all other obligations outstanding under the Senior Credit Facility shall be payable in full on the Maturity Date. For a more detailed description of the terms and conditions of the Credit Agreement, see the Company’s Current Report on Form 8-K filed with the SEC on March 30, 2007.

As of June 30, 2008, the Company had $32.4 million outstanding under the Term Loan and approximately $2.8 million in letters of credit issued primarily in support of worker’s compensation insurance programs. As of June 30, 2008, the Company had $13.1 million available under the Revolving Credit Facility and the Company was in compliance with all of the covenants under the Senior Credit Facility. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

Use of Capital: Operations

Net investing activities (used) provided cash of ($12.7) million and $1.8 million for the six month periods ended June 30, 2008 and 2007, respectively. The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, and fish oil refining processes. The Company made capital expenditures of approximately $12.8 million and $4.8 million, for the six month periods ended June 30, 2008 and 2007, respectively. The Company anticipates making an additional $3.3 million in capital expenditures during the remainder of 2008 primarily for the refurbishment of vessels and plant assets and for the repair of certain equipment. Investing activities also includes the receipt of $0.1 million related to proceeds from disposition of assets for the six month period ended June 30, 2008, and $6.5 million from insurance companies relating to Hurricanes Katrina and Rita for the six month period ended June 30, 2007.

The Company believes that the existing cash, cash equivalents, short-term investments, cash flow from operations and funds available through the Senior Credit Facility and/or Title XI indebtedness described above will be sufficient to meet its working capital and capital expenditure requirements through at least the next twelve months.

Use of Capital: Acquisitions

The Company from time to time considers potential transactions including, but not limited to, enhancement of physical facilities to improve production capabilities and the acquisition of other businesses. Certain of the potential transactions reviewed by the Company would, if completed, result in its entering new lines of business (generally including certain businesses to which the Company sells its products such as pet food manufacturers, aquaculture feed manufacturers, fertilizer companies and organic foods manufacturers and distributors), although historically, reviewed opportunities have been generally related in some manner to the Company’s existing operations or which would have added new protein products to the Company’s product lines. Although the Company does not explicitly budget for acquisitions and, as of the date hereof, does not have any commitment with respect to a material acquisition, it could enter into such agreement in the future. Depending on the size of the acquisition, the Company would expect to finance the transaction using internally generated cash flows and its Senior Credit Facility, or, if necessary, equity or debt financings. The Company cannot assure that such financings will be available on acceptable terms, if at all.

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	Payments Due by Period
Contractual Cash Obligations	Total		Less than 1 year		1 to 3 years		4 to 5 years		After 5 years
Long term debt	$	62,075	$	6,983	$	17,937	$	20,032	$	17,123
Capital lease obligation		1,027		137		374		516		—
Interest on long term debt and capital lease obligation		18,870		4,128		6,681		3,671		4,390
Operating lease obligations		7,136		1,925		2,127		1,456		1,628
Pension funding		3,386		497		1,505		1,314		70
Standby letters of credit ⁽¹⁾		2,815		2,815		—		—		—

Total Contractual Cash Obligations	$	95,309	$	16,485	$	28,624	$	26,989	$	23,211

(1)	As of June 30, 2008, the Company had $2.8 million in standby letters of credit under the Senior Credit Facility.

Subsequent to June 30, 2008, the Company committed to purchase portions of its expected natural gas usage totaling $1.7 million which will be utilized during the remainder of the 2008 fishing season and $1.2 million which will be utilized during the 2009 fishing season.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on the Company’s borrowings. To further mitigate this minimal risk, the Company has entered into interest rate swap agreements to effectively lock-in the LIBOR component of certain debt instruments. A one percent increase or decrease in the levels of interest rates on variable rate debt would not result in a material change to the Company’s results of operations.

The Company is also exposed to market risk associated with natural gas and diesel prices. Partially mitigating this risk, the Company purchased natural gas call options which gave the Company the right to purchase natural gas at a price of $10.50 per MMBTU between April 1, 2008 and June 30, 2008. The Company is currently exposed to market risk associated with increases in natural gas prices. No similar transactions have been obtained for diesel.

Although the Company sells products in foreign countries, all of the Company’s revenues are billed and paid for in US dollars. As a result, management does not believe that the Company is exposed to any significant foreign country currency exchange risk, and the Company does not utilize market risk sensitive instruments to manage its exposure to this risk.

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As of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of its “disclosure controls and procedures,” as that phrase is defined in Rule 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 management, including the Company’s Chief Executive Office (“CEO”) and Chief Financial Officer (“CFO”).

Based on and as of the date of that evaluation, the Company’s CEO and CFO have concluded that (i) the Company’s disclosure controls and procedures are designed to ensure that information required to be included by the Company in the reports that the Company files or submits to the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (ii) that the Company’s disclosure controls and procedures are effective.

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

(b) Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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The Company is defending various claims and litigation arising from operations which arise in the ordinary course of the Company’s business. In the opinion of management, any losses resulting from these matters will not have a material adverse affect on the Company’s results of operations, cash flows or financial position.

Item 1A.

Risk Factors

Risk Factors and Significant Factors That May Affect Forward-Looking Statements

The Company cautions investors that the following risk factors, and those factors described elsewhere in this Report, other filings by the Company with the SEC from time to time and press releases issued by the Company, could affect the Company’s actual results which could differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

The risks described below are not the only ones facing the Company. The Company’s business is also subject to other risks and uncertainties that affect many other companies, such as competition, technological obsolescence, labor relations (including risks of strikes), general economic conditions and geopolitical events. Additional risks not currently known to the Company or risks that the Company currently believes are immaterial may also impair the Company’s business, results of operations and financial results.

Risks Relating to the Company’s Business and Industry:

The Company is dependent on a single natural resource and may not be able to catch the amount of menhaden that it requires to operate profitably. The Company’s primary raw material is menhaden. The Company’s business is totally dependent on its annual menhaden harvest in ocean waters along the U.S. Atlantic and Gulf coasts. The Company’s ability to meet its raw material requirements through its annual menhaden harvest fluctuates from year to year and month to month, due to natural conditions over which the Company has no control. These natural conditions, which include varying fish population, adverse weather conditions and fish disease, may prevent the Company from catching the amount of menhaden required to operate profitably.

The Company’s operations are geographically concentrated in the Gulf of Mexico where they are susceptible to regional adverse weather patterns such as hurricanes. Three of the Company’s four operating plants are located in the Gulf of Mexico (two in Louisiana and one in Mississippi), a region which has historically been subject to a late summer/early fall hurricane season. The Company’s Virginia facility has in the past also at times been adversely affected by hurricanes. All three of the Company’s Gulf of Mexico plants were severely damaged within a one-month span by Hurricanes Katrina and Rita in August and September 2005. Immediately after the second hurricane, approximately 70% of the Company’s 2004 production capacity was impaired and the Company’s business, results of operations and financial condition were materially adversely affected. Additional future weather related disruptions could, if they occur, also have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, the Company’s costs of insurance for property damage have increased as insurers recoup losses paid and to be paid out in connection with the Katrina and Rita hurricanes by charging higher premiums.

The costs of energy may materially impact the Company’s business. The Company has experienced

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substantially higher costs for energy in recent years. The Company’s business is materially dependent on diesel fuel for its vessels and natural gas for its operating facilities. The costs of these commodities, which are beyond the Company’s control, may have an adverse material impact on the Company’s business, results of operations and financial condition.

Fluctuation in “oil yields” derived from the Company’s fish catch could impact the Company’s ability to operate profitably. The “oil yield,” or the percentage of oil derived from the menhaden fish, while it is relatively high compared to many species of fish, has fluctuated over the years and from month to month due to natural conditions relating to fish biology over which the Company has no control. The oil yield has at times materially impacted the amount of fish oil that the Company has been able to produce from its available fish catch and it is possible that oil yields in the future could also adversely impact the Company’s ability to operate profitably.

The Company’s fish oil yields can vary. For example, the Company’s oil yields for the 2006 fishing season were lower by 28% compared to those in the 2005 fishing season and were lower by 24% compared to the Company’s 10 year oil yield average. The Company believes that the causes of lower fish oil yields relate to fish diet, weather and water temperature but such causes are not generally well understood. Poor oil yields result in significantly higher per unit inventory costs and fewer volumes available for future sale.

Laws or regulations that restrict or prohibit menhaden or purse seine fishing operations could adversely affect the Company’s ability to operate. The adoption of new laws or regulations at federal, regional, state or local levels that restrict or prohibit menhaden or purse seine fishing operations, or stricter interpretations of existing laws or regulations, could materially adversely affect the Company’s business, results of operations and financial condition. In addition, the impact of a violation by the Company of federal, regional, state or local law or regulation relating to its fishing operations, the protection of the environment or the health and safety of its employees could have a material adverse affect on the Company’s business, results of operations and financial condition.

One example of potentially restrictive regulation is an addendum to a fisheries management plan recommended by a regional regulatory commission in August 2005. The Commonwealth of Virginia has declined to adopt the regulatory commission’s recommended plan but has instead adopted its own restrictions whereby the Company’s Chesapeake Bay menhaden harvest would be capped for a five year period at a recent five-year average (2001 to 2005) of 109,020 metric tons per year. The Virginia restrictions also allow for a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. The Company supported Virginia’s proposal and voluntarily complied with its limitations in 2006. This compliance had no effect on the Company’s Chesapeake Bay harvest in 2007 and is not expected to have a material adverse effect on the Chesapeake Bay harvest in 2008. As a result of the 2007 Chesapeake Bay’s underharvest, the 2008 Chesapeake Bay catch limit will be 122,740 metric tons. The regulations are expected to be effective commencing with the 2009 fishing season.

On March 27, 2008, the Texas Parks and Wildlife Commission adopted regulations related to the menhaden reduction fishery in Texas waters which limits the Total Allowable Catch (“TAC”) to 31.5 million pounds annually (the five year average menhaden catch for reduction purposes in Texas waters from 2002 through 2006). The regulations also allow for a 10% underage or overage in each year which is credited or deducted, as applicable, to the TAC in the following year.

The Company’s menhaden fish catch in Texas in 2007 is tentatively and preliminarily estimated by the National Marine Fisheries Service to be 35.3 million pounds (approximately 16,000 metric tons), or

46

In October 2007, two bills were introduced in the U.S. House of Representatives (H.R. 3840 and H.R. 3841) by two congressmen representing portions of New Jersey and Maryland, areas where the Company has no operations. The New Jersey congressman has announced his intention not to seek re-election to Congress in November in November 2008 and the Maryland congressman lost the Republican Party primary election for his Congressional district in February 2008, and therefore will not be the Republican nominee for that district in November 2008. The bills, if enacted, would effectively prohibit commercial fishing for Atlantic menhaden for reduction purposes in inland, state and federal waters along the Atlantic coast. The Company believes that the bills are premised on inaccurate assumptions and depictions of facts about the menhaden resource which the National Marine Fisheries Service continues to classify as healthy and not overfished. The bills would also supplant decades of fisheries management previously undertaken by the Atlantic States Marine Fisheries Commission and the National Marine Fisheries Service. The Company believes that the passage of these bills is highly unlikely; however the enactment of either of the bills, or any restrictions similar to those described in the bills, would have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company’s fish catch may be impacted by restrictions on its spotter aircraft. If the Company’s spotter aircraft are prohibited or restricted from operating in their normal manner during the Company’s fishing season, the Company’s business, results of operations and financial condition could be adversely affected. For example, as a direct result of the September 11, 2001 terrorist attacks, the Secretary of Transportation issued a federal ground stop order that grounded certain aircraft (including the Company’s fish-spotting aircraft) for approximately nine days. This loss of spotter aircraft coverage severely hampered the Company’s ability to locate menhaden fish during this nine-day period and thereby reduced its amount of saleable product.

Worldwide supply and demand relationships, which are beyond the Company’s control, influence the prices that the Company receives for many of its products and may from time to time result in low prices for many of the Company’s products. Prices for many of the Company’s products are subject to, or influenced by, worldwide supply and demand relationships over which the Company has no control and which tend to fluctuate to a significant extent over the course of a year and from year to year. The factors that influence these supply and demand relationships are world supplies of fish meal made from other fish species, animal proteins and fats, palm oil, rapeseed oil, soy meal and oil, and other edible oils.

New laws or regulation regarding contaminants in fish oil or fish meal may increase the Company’s cost of production or cause the Company to lose business. It is possible that future enactment of increasingly stringent regulations regarding contaminants in fish meal or fish oil by foreign countries or the United States may adversely affect the Company’s business, results of operations and financial condition. More stringent regulations could result in: (i) the Company’s incurrence of additional capital expenditures on contaminant reduction technology in order to meet the requirements of those jurisdictions, and possibly higher production costs for Company’s products, or (ii) the Company’s withdrawal from marketing its products in those jurisdictions.

Risks Relating to the Company’s Ongoing Operations:

The Company has a substantial amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt. As of

47

June 30, 2008, the aggregate amount of the Company’s outstanding indebtedness under its Senior Credit Facility and its loan agreements under the Title XI Fisheries Finance Program was approximately $62.1 million. The Company’s outstanding indebtedness could have important consequences for you, including the following:

•

it may be more difficult for the Company to satisfy its obligations with respect to its Senior Credit Facility and its loan agreements under the Title XI Fisheries Finance Program, and any failure to comply with the obligations of any of the agreements governing such indebtedness, including financial and other restrictive covenants, could result in an event of default under such agreements;

•

the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet its operating expenses or other general corporate obligations;

•

the amount of the Company’s interest expense may increase because certain of its borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

•

the Company will need to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other business activities;

•

the Company may have a higher level of debt than some of its competitors, which could put it at a competitive disadvantage;

•

the Company may be more vulnerable to economic downturns and adverse developments in its industry or the economy in general; and

•

the Company’s debt level could limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates.

The Company’s ability to meet its expenses and debt obligations will depend on its future performance, which will be affected by financial, business, economic, regulatory and other factors. The Company will not be able to control many of these factors, such as economic conditions and governmental regulation. The Company cannot be certain that its earnings will be sufficient to allow it to pay the principal and interest on its existing or future debt and meet its other obligations. If the Company does not have enough money to service its existing or future debt, it may be required to refinance all or part of its existing or future debt, sell assets, borrow more money or raise equity. The Company may not be able to refinance its existing or future debt, sell assets, borrow more money or raise equity on terms acceptable to it, if at all.

The Company’s strategy to expand into the functional food grade oils market may be unsuccessful. The Company’s attempts to expand its fish oil sales into the market for refined, functional food grade fish oils for human consumption may not be successful. The Company’s expectations regarding future demand for Omega-3 fatty acids may prove to be incorrect or, if future demand does meet the Company’s expectations, it is possible that purchasers could utilize Omega-3 sources other than the Company’s products.

The Company’s quarterly operating results will fluctuate as its business is seasonal in nature. The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each fiscal year) due to increased product availability, but prices during the fishing season tend to be lower than

48

during the off-season. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company defers sales of inventory based on worldwide prices for competing products that affect prices for its products, which may affect comparable period comparisons.

The Company’s business is subject to significant competition, and some competitors have significantly greater financial resources and more extensive and diversified operations than the Company. The marine protein and oil business is subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. In addition the Company competes with a smaller domestic privately-owned menhaden fishing company and international marine protein and oil producers, including Scandinavian herring processors and South American anchovy and sardine processors. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than the Company.

The Company’s foreign customers are subject to disruption typical to foreign countries. The Company’s sales of its products in foreign countries are subject to risks associated with foreign countries such as changes in social, political and economic conditions inherent in foreign operations, including:

•

Changes in the law and policies that govern foreign investment and international trade in foreign countries;

•

Changes in U.S. laws and regulations relating to foreign investment and trade;

•

Changes in tax or other laws;

•

Partial or total expropriation;

•

Current exchange rate fluctuations;

•

Restrictions on current repatriation; or

•

Political disturbances, insurrection or war.

In addition, it is possible that the Company, at any one time, could have a significant amount of its revenues generated by sales in a particular country which would concentrate the Company’s susceptibility to adverse events in that country.

The Company may undertake acquisitions that are unsuccessful and the Company’s inability to control the inherent risks of acquiring businesses could adversely affect its business, results of operations and financial condition operations. In the future the Company may undertake acquisitions of other businesses, located either in the United States or in other countries, although there can be no assurances that this will occur. There can be no assurance that the Company will be able (i) to identify and acquire acceptable acquisition candidates on favorable terms, (ii) to profitably manage future businesses it may acquire, or (iii) to successfully integrate future businesses it may acquire without substantial costs, delays or other problems. Any of these outcomes could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company’s failure to comply with federal U.S. citizenship ownership requirements may prevent it from harvesting menhaden in the U.S. jurisdictional waters. The Company’s harvesting operations are subject to the Shipping Act of 1916 and the regulations promulgated thereunder by the Department of Transportation, Maritime Administration which require, among other things, that the Company be incorporated under the laws of the U.S. or a state, the Company’s chief executive officer be a U.S. citizen, no more of the Company’s directors be non-citizens than a minority of a number necessary to constitute a quorum and at least 75% of the Company’s outstanding capital stock (including a majority of its voting capital stock) be owned by U.S. citizens. If the Company fails to observe any of these requirements, the Company will not be eligible to conduct its harvesting activities in U.S. jurisdictional waters which would have a material adverse effect on the Company’s business, results of operations and financial condition.

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The Company may not be able to recruit, train and retain qualified marine personnel in sufficient numbers. The Company’s business is dependent on its ability to recruit, train and retain qualified marine personnel in sufficient numbers such as vessel captains, vessel engineers and other crewmembers. The Company has experienced difficulty in recent years in recruiting its optimal number of employees. To the extent that the Company is not successful in recruiting, training and retaining employees in sufficient numbers, its productivity may suffer. If the Company were unable to secure a sufficient number of workers during periods of peak employment, the lack of personnel could have an adverse effect on the Company’s business, results of operations and financial condition. The impact of Hurricanes Katrina and Rita has exacerbated the difficulties of recruiting and retaining qualified marine personnel in the Gulf Coast area.

The Company has historically participated in the United States H2B Visa Program whereby foreign nationals are permitted to enter the United States temporarily and engage in seasonal, non-agricultural employment. The Company utilizes its H2B Visa workers for a portion of its fishing vessel crews and plant personnel. Changes in the H2B Visa Program, the termination of that program, or caps on the number of workers available under that program, could have a material adverse effect upon the Company’s ability to secure a sufficient number of workers during periods of peak employment or cause the Company to bear additional costs to secure domestic workers in a tight job market.

The U.S. Congress has to date failed to re-authorize the Save Our Small and Seasonal Business Act amendment to the H2B visa program which would allow returning H2B workers from certain prior years from being counted against the H2B visa program’s annual 66,000 visa cap. Because of the relatively low visa cap number, the Company has not received its historical allotment of H2B workers for the 2008 fishing season. Accordingly, the Company is utilizing all domestic workers for its 2008 fishing season. The Company has changed its recruiting programs to completely replace H2B workers, including raising certain wage scales, implementing sign-on bonuses for certain positions, offering referral fees for qualified workers, and other benefits, all of which have resulted in additional costs for the Company. In addition, some of the newly hired domestic workers have not worked in the menhaden fishing business prior to working for the Company, unlike many H2B workers who typically return year after year with the benefits of their training and experience. These newer inexperienced workers have resulted in increased training costs and likely lower productivity for the Company’s operations.

The Company’s Senior Credit Facility and other Fisheries Finance Program loan agreements contain covenants and restrictions that may limit the Company’s financial flexibility. The Company’s Senior Credit Facility and the Company’s loan agreements under the Title XI Fisheries Finance Program contain various covenants and restrictions such as prohibitions on dividends and stock repurchases without the lender’s consent. The Senior Credit Facility also contains various financial covenants that the Company must comply with.

Investment Risks. Investment risks specifically related to the Company’s common stock include:

The limited liquidity for the Company’s common stock could affect your ability to sell your shares at a satisfactory price. The Company’s common stock is relatively illiquid. As of June 30, 2008, the Company had approximately 18.5 million shares of common stock outstanding. The average daily trading volume in the common stock during the prior 60 calendar days ending on that date was approximately 244,800 shares. A more active public market for the Company’s common stock, however, may not develop, which would continue to adversely affect the trading price and liquidity of the common stock. Moreover, a thin trading market for the common stock causes the market price for the common stock to fluctuate significantly more

50

than the stock market as a whole. Without a large float, the Company’s common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of the common stock may be more volatile. In addition, in the absence of an active public trading market, you may be unable to liquidate your investment in the Company at a satisfactory price.

Issuance of shares in connection with financing transactions or under stock incentive plans will dilute current stockholders. Pursuant to the Company’s stock incentive plans, the Company’s management is authorized to grant stock awards to its employees, directors and consultants. You will incur dilution upon exercise of any outstanding stock awards. In addition, if the Company raises additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to its existing stockholders will result, and new investors could have rights superior to existing stockholders.

The number of shares of the Company’s common stock eligible for future sale could adversely affect the market price of its stock. The Company had outstanding options to purchase approximately 0.8 million shares of its common stock with a weighted average exercise price of $6.46 per share as of June 30, 2008. These shares of common stock are registered for resale on currently effective registration statements. In addition, the Company has registered the resale of 5,232,708 shares of common stock that were sold by Zapata to certain purchasers in a private transaction on a currently effective registration statement. Certain of the Company’s officers and directors have also entered into Rule 10b5-1 sales plans with brokers unaffiliated with the Company whereby they have committed to sell automatically and without discretion a predetermined number of shares of the Company’s common stock over a period of time according to their own individual criteria. The Company may issue additional restricted securities or register additional shares of common stock under the Securities Act in the future. The issuance of a significant number of shares of common stock upon the exercise of stock options, or the availability for sale, or sale, of a substantial number of the shares of common stock eligible for future sale under effective registration statements, under Rule 144 or otherwise, could adversely affect the market price of the common stock.

The Company’s Articles of Incorporation and Bylaws have provisions that discourage corporate takeovers and could prevent stockholders from realizing a premium on their investment. Certain provisions of the Company’s Articles of Incorporation and Bylaws, as well as the Nevada Corporation Law, to which the Company is subject, could delay or frustrate the removal of incumbent directors and could make difficult a merger, tender offer or proxy contest involving the Company, even if such events could be viewed as beneficial by its stockholders. The Company’s Board of Directors is empowered to issue preferred stock in one or more series without stockholder action. Any issuance of this blank-check preferred stock could materially limit the rights of holders of the Company’s common stock and render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. In additional, the Articles of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of its Board of Directors, the requiring of two-thirds vote of stockholders to amend certain provisions of the Articles of Incorporation or the inability to take action by written consent or to call special stockholder meetings. Certain provisions of the Nevada Corporation Law could also discourage takeover attempts that have not been approved by the Company’s Board of Directors. In addition, federal law requires that at least 75% of the Company’s outstanding capital stock be owned by U.S. citizens which will discourage takeover attempts by potential foreign purchasers.

The Company has not paid dividends and does not expect to pay dividends in the near future. The Company has never declared or paid any cash dividends on its common stock since it became a public company in April 1998 and has no intention to do so in the near future. Any determination as to payment of

51

dividends will be made at the discretion of the Company’s Board of Directors and will depend upon the Company’s operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. In addition, the payment of cash dividends is not permitted by the terms of the Company’s Senior Credit Facility.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

On May 27, 2008, the Company held its 2008 Annual Meeting of Stockholders. The matters voted on at the meeting and the results of the meeting were as follows:

A. Election of Class I Directors.

The stockholders elected Dr. Gary Allee and Dr. William Lands III as Class I Directors, with 12,477,474 shares voted for and 112,141 shares that withheld authority for Dr. Allee, and 12,476,771 shares voted for and 112,844 shares that withheld authority for Dr. Lands. There were no broker non-votes. The Class I Directors’ terms expire at the 2011 Annual Meeting of Stockholders.

The Class II directors, whose terms expire at the 2009 Annual Meeting of Stockholders, are Gary R. Goodwin and Harry O. Nicodemus, IV. The Class III directors, whose terms expire at the 2010 Annual Meeting of Stockholders, are Paul Kearns and Joseph L. von Rosenberg III.

B. Ratification of Appointment of Independent Registered Public Accounting Firm

The stockholders ratified the appointment of PricewaterhouseCoopers, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008, with 12,327,541 shares voted for, 202,633 shares voted against and 59,441 shares voted abstaining. There were no broker non-votes.

Item 5.

Other Information

None.

Item 6.

Exhibits


Exhibit No.		Description of Exhibit
31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer.

32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Chief Executive Officer.

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State of Nevada		76-0562134
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


	June 30, 2008		December 31, 2007
	(in thousands)
Fish meal	$	27,817	$	42,937
Fish oil		10,905		13,590
Fish solubles		854		1,461
Unallocated inventory cost pool (including off-season costs)		30,037		6,848
Other materials & supplies		7,126		6,016

Total inventory	$	76,739	$	70,852


2008	$	129
2009		263
2010		276
2011		290
2012		305
2013		128

Total minimum lease payments		1,391
Less amount representing interest		(364	)

Present value of minimum payments		1,027
Less current portion of capital lease obligation		(137	)

Long-term capital lease obligation	$	890


Fishing vessels and marine equipment, at cost	$	1,038
Less accumulated depreciation		(17	)

Property, plant and equipment, net	$	1,021


	OMEGA PROTEIN CORPORATION
	(Registrant)

August 7, 2008	By:	/s/ ROBERT W. STOCKTON
		(Executive Vice President, Chief Financial Officer)


32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Chief Financial Officer.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company