The following is a discussion of the Company's financial condition and results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company appearing under Item 8 of this Report. Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. Such reclassifications do not affect earnings or stockholders' equity.

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 include regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company's fish meal products are used as nutritional feed additives by animal feed manufacturers and by commercial livestock producers. The Company's crude fish oil is sold to food producers and feed manufacturers, and its refined fish oil products are used in food production and certain industrial applications. Fish solubles are sold as protein additives for animal feed and as fertilizers.

Fishing. The Company's harvesting season generally extends from May through December on the mid-Atlantic coast and from April through October on the Gulf coast. During the off-season and the first few months of each fishing season, the Company fills purchase orders from the inventory it has accumulated during the previous fishing season or in some cases, by re-selling meal and oil purchased from other suppliers.

On September 13, 2008, the Company's Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. Both of these facilities were non-operational immediately after the hurricane. Operations at the Abbeville fish processing facility were restored to full capacity on September 22, 2008. The Company anticipates the Cameron fish processing facility to be fully functional prior to the beginning of the 2009 fishing season. These hurricane damages adversely affected the Company's business, results of operations and financial condition.

The direct impact of the hurricane 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. The amounts of these losses are more fully described in Notes 2, 3, 5 and 13 to the Consolidated Financial Statements.

During 2008, the Company experienced higher costs of production and below average fish catch. The higher costs of production were primarily attributed to increased energy, labor and repair costs. The reduced fish catch was primarily attributable to adverse weather conditions mainly associated with hurricane activity. As a result of the higher costs of production and below average fish catch, the Company experienced significantly higher per unit product costs (approximately 27.3% increase as compared to the 2007 fishing season) which have adversely affected the Company's earnings for 2008. The impacts of higher cost inventories will be carried forward and are expected to adversely affect the Company's earnings through the second quarter of 2009. In addition, the lost fishing days resulted in lower 2008 product volumes available for sale in the first half of 2009.

The fish catch is processed into three general types of products; fish meal, fish oil and fish solubles at the Company's four meal and oil processing plants, two in Louisiana, one in Mississippi and one in Virginia.

                                           Years Ended December 31,
                                           2008      2007      2006
                 Fish catch (tons) (1)    458,079   542,102   541,059

                 Production (tons):
                 Fish meal
                 Regular grade             33,083    23,605    19,250
                 Special Select            68,839   108,700   116,831
                 Sea-Lac                   13,570    10,821    10,864
                 Oil
                 Crude                     43,119    42,152    39,963
                 Refined                   13,258    13,997     9,907
                 Solubles                   6,797     6,617     5,962

                 Total Production         178,666   205,892   202,777

(1) Fish catch has been converted to tons using the National Marine Fisheries Service ("NMFS") fish catch conversion ratio of 670 pounds per 1,000 fish.

The Company's harvesting and processing business is seasonal and fluctuates from year to year and month to month due to natural conditions over which the Company has no control. For illustrative purposes, the Company's oil yields for the 2006 fishing season were the poorest in recent history and 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 causes of lower fish oil yields are believed to relate to fish diet, weather and water temperature but are not generally well understood.

Markets. Pricing for the Company's products has been volatile in the past several years and is attributable mainly to the international availability, or the perceived international availability, of fish meal and fish oil inventories. In an effort to reduce price volatility and to generate higher, more consistent profit margins, the Company has implemented a quality control program designed to increase its capability of producing higher quality fish meal products and, in conjunction therewith, enhanced it sales efforts to penetrate premium product markets. During 2000, the Company's production percentage of specialty meal products was approximately 46% of total meal production. During 2008, the Company's specialty meal production percentage accounted for 71% of total meal production. Future volumetric growth in specialty meal sales will be dependant upon increased harvesting efforts and market demand. Additionally, the Company is attempting to introduce its refined fish oil into the food market. The Company has made sales, which to date have not been material, of its refined fish oil, trademarked OmegaPure®, to food manufacturers in the United States and Canada at prices that provide substantially improved margins over the margins that can be obtained from selling non-refined crude fish oil. The Company cannot estimate, however, the size of the actual domestic or international markets for Omega Pure or how long it may take to develop these markets.

During 2002, the Company developed a business plan to expand its purchase and resale of other manufacturers' fish meal and fish oil products which focused initially on the purchase and resale of Mexican fish meal and fish oil. In 2002, revenues generated from these types of transactions represented less than 2% of total Company revenues. During 2003 and 2004 the Company's fish catch and resultant product inventories were reduced, primarily due to adverse weather conditions. During 2005, 2006 and 2008, 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

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 2006, 2007, and 2008 approximately 70%, 50%, and 65%, respectively, of the Company's fish meals and crude fish oil had been sold on a forward contract basis prior to those years' respective fishing season. 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.

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:

                                            Years Ended December 31,
                             2008                     2007                     2006
                      Revenues    Percent      Revenues    Percent      Revenues    Percent
    Regular Grade    $     22.8      13.0 %   $     21.1      13.5 %   $     17.0      12.1 %
    Special Select         68.7      38.7           73.9      47.0           63.4      45.3
    SeaLac                 13.3       7.5           11.7       7.4            9.2       6.6
    Crude Oil              48.5      27.3           33.9      21.6           38.3      27.4
    Refined Oil            20.3      11.4           13.7       8.7            9.3       6.7
    Fish Solubles           3.8       2.1            2.6       1.7            2.2       1.6
    Other                    -         -             0.2       0.1            0.4       0.3

    Total            $    177.4     100.0 %   $    157.1     100.0 %   $    139.8     100.0 %

Critical Accounting Policies and Estimates

For information on critical accounting policies and estimates, see Note 1 to the consolidated financial statements included in Item 8-Financial Statements and Supplementary Data.

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

                                                             Years Ended December 31,
                                                         2008           2007         2006
Revenues                                                  100.0 %        100.0 %     100.0 %
Cost of sales                                              75.7           77.9        83.4

Gross profit                                               24.3           22.1        16.6
Selling, general and administrative expenses                9.3           10.4         9.8
Research and development expenses                           1.0            0.8          -
Loss resulting from natural disaster, net-2008              1.1             -           -
(Insurance recoveries and other proceeds) losses
relating to natural disaster, net-2005                     (0.8 )         (6.8 )       1.1
Loss on disposal of assets                                  0.4            0.2          -

Operating income                                           13.3           17.5         5.7
Interest income                                             0.3            0.2         0.4
Interest expense                                           (2.4 )         (3.5 )      (1.8 )
Loss resulting from debt refinancing                         -            (1.9 )        -
Other expense, net                                         (0.1 )         (0.2 )      (0.2 )

Income before income taxes                                 11.1           12.1         4.1
Provision for income taxes                                  4.0            4.4         0.8

Net income                                                  7.1            7.7         3.3

2008 - 2007

Revenues. Revenues increased $20.3 million, or 12.9%, from $157.1 million in 2007 to $177.4 million in 2008. The increase in revenues was due to higher sales prices of 2.0% and 73.4% for the Company's fish meal and fish oil, respectively, which was partially offset by lower sales volumes of 3.8% and 16.7% for the Company's fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $34.8 million increase in revenues due to increased sales prices and a $14.5 million decrease in revenue caused by decreased sales volumes, when comparing 2008 to 2007.

Cost of Sales. Cost of sales, including depreciation and amortization, for 2008 was $134.4 million, an $11.9 million increase, or 9.7%, as compared to 2007. Cost of sales as a percentage of revenues was 75.7% for 2008 as compared to 77.9% for 2007. The decrease in cost of sales as a percentage of revenue was primarily due to increased fish oil sales prices, partially offset by increased per unit production costs due to increased energy, labor and repair costs and below average fish catch attributable to adverse weather conditions mainly associated with hurricane activity.

Gross Profit. Gross profit increased $8.3 million, or 24.0%, from $34.7 million in 2007 to $43.0 million in 2008. Gross profit as a percentage of revenues was 24.3% for 2008 as compared to 22.1% for 2007. The increase in gross profit as a percentage of revenues 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 $0.1 million, or 0.5%, from $16.4 million in 2007 to $16.3 million in 2008. The decrease was primarily due to decreased employee bonuses incurred in 2008 as compared to 2007, partially offset by increased public affairs costs in 2008 as compared to 2007. Additionally, during 2008, the Company recorded approximately $0.4 million related to the estimated cost of an environmental remediation for one of the Company's properties. The Company anticipates that the remediation will be completed in 2009.

Loss resulting from natural disaster, net-2008. During 2008, the Company incurred losses, net of insurance receivable, of $2.0 million relating to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike.

(Insurance recoveries and other proceeds) losses relating to natural disaster, net -2005. During 2008, the Company received a federal hurricane assistance grant of $1.3 million, net of fees, related to the impact of Hurricane Rita on the Company. During 2007, the Company settled the lawsuit with its primary and secondary insurance carriers which resulted in the recognition of $10.7 million in net proceeds in excess of amounts previously recorded.

Loss on disposal of assets. Loss on disposal of assets increased $0.4 million from a loss of $0.3 million in 2007 to a loss of $0.7 million in 2008. The increase was the result of disposal of miscellaneous assets in the ordinary course of business during 2008.

Operating income. As a result of the factors discussed above, the Company's operating income decreased $3.9 million from $27.4 million in 2007 to $23.5 million in 2008. As a percentage of revenues, operating income decreased from 17.5% in 2007 to 13.3% in 2008.

Interest income. Interest income increased by $0.1 million from $0.4 million in 2007 to $0.5 million in 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 $1.2 million from $5.5 million in 2007 to $4.3 million in 2008. The decrease in interest expense is primarily due to decreased debt balances and interest rates during 2008 as compared to 2007.

Loss resulting from debt refinancing. Loss resulting from debt refinancing was $3.0 million in 2007. The expenses related to previously deferred debt issuance costs 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 2008.

Other income (expense), net. Other income (expense), net decreased by $0.2 million from a net expense of $0.3 million in 2007 to a net expense of $0.1 million in 2008. The decrease was primarily due to an enterprise zone grant awarded to the Company by the Commonwealth of Virginia in the amount of $159,000 during 2008 and a decrease in fees paid to the Company's bank and related lenders.

Provision for income taxes. The Company recorded a $7.1 million provision for income taxes in 2008 representing an effective tax rate of 36.0% for income taxes compared to 36.0% in 2007. 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 34% for U.S. federal taxes was in effect for the respective periods.

2007 - 2006

Revenues. Revenues increased $17.3 million, or 12.4%, from $139.8 million in 2006 to $157.1 million in 2007. The increase in revenues was due to higher sales prices of 21.2% and 18.4% for the Company's fish meal and fish oil, respectively, which was partially offset by lower sales volumes of 1.6% and 15.6% for the

Cost of Sales. Cost of sales, including depreciation and amortization, for 2007 was $122.5 million, a $5.8 million increase, or 5.0%, as compared to 2006. Cost of sales as a percentage of revenues was 77.9% for 2007 as compared to 83.4% for 2006. The 5.5% decrease in cost of sales as percentage of revenue was primarily due to increased sales prices, partially offset by increased per unit production costs due to increased labor and repair costs.

Gross Profit. Gross profit increased $11.5 million, or 49.6%, from $23.2 million in 2006 to $34.7 million in 2007. As a percentage of revenues, the Company's gross profit margin increased 5.5% in 2007 as compared to 2006. The increase in gross profit was primarily due to increased sales prices partially offset by increased per unit production costs as discussed above.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.7 million, or 19.8%, from $13.7 million in 2006 to $16.4 million in 2007. The increase was primarily due to increased employee bonuses incurred in 2007 that were not incurred in 2006. This increase was partially offset by costs incurred in 2006 related to the relocation of the administrative offices from Louisiana to Texas that were not incurred in 2007. As a percentage of revenue, selling, general and administrative expense increased 0.6% from 9.8% in 2006 to 10.4% in 2007.

Research and development expenses. Research and development expenses were approximately $1.2 million in 2007. This balance represents costs incurred at the Company's OmegaPure Technology and Innovation Center which commenced operations in January 2007. No such expenses were recognized in 2006.

Insurance recoveries and other proceeds-2005. During 2007, the Company settled the lawsuits with its primary and secondary insurance carriers which resulted in the recognition of $10.7 million in net proceeds in excess of insurance recoveries previously recorded. The losses of approximately $1.5 million incurred in 2006 represent costs in excess of the original estimated involuntary conversion loss recorded at December 31, 2005.

Loss on disposal of assets. Loss on disposal of assets increased $334,000 from a loss of $9,000 in 2006 to a loss of $343,000 in 2007. The increase was the result of disposal of miscellaneous assets in the ordinary course of business during 2007.

Operating income. As a result of the factors discussed above, the Company's operating income (loss) increased $19.4 million from $8.0 million in 2006 to $27.4 million in 2007. As a percentage of revenues, operating income (loss) increased 11.8% from 5.7% in 2006 to 17.5% in 2007.

Interest income. Interest income decreased by $272,000 from $622,000 in 2006 to $350,000 in 2007. The decrease was primarily due to decreased average cash balances.

Interest expense. Interest expense increased $2.9 million from $2.6 million in 2006 to $5.5 million in 2007. The increase in interest expense is primarily due to additional debt the Company had outstanding during 2007 that was incurred in October 2006 and refinanced in March 2007.

Loss resulting from debt refinancing. Refinancing expenses were $3.0 million in 2007. The expenses relate to previously deferred debt issuance costs and other costs that became immediately recognized when the Company refinanced its prior credit facility on March 26, 2007. No such expenses were recognized in 2006.

Other income (expense), net. Other income (expense), net increased by $89,000 from $244,000 in 2006 to $333,000 in 2007. The increase was primarily due to increased fees paid to the Company's bank and miscellaneous charges incurred during 2007 that were not incurred in 2006.

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 ("NMFS") under Title XI of the Marine Act of 1936 ("Title XI"). These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt and the purchase and retirement of shares of the Company's common stock in 2006.

At December 31, 2008, the Company had an unrestricted cash balance of $14.0 million, down $5.3 million from December 31, 2007. This decrease was primarily due to capital expenditures, changes in receivables and debt payments, offset by increased revenue, proceeds received from stock options exercised and insurance recoveries and other proceeds received during 2008. 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 selling prices for its products increased in 2008 over 2007 and 2006, those increases were offset by higher energy, labor and repair costs and below average fish catch attributable to adverse weather conditions mainly associated with hurricane activity experienced during the 2008 fishing season, which resulted in significantly higher per unit inventory costs. It is expected that the significantly higher per unit inventory costs related to the 2008 fishing season will also negatively impact the first and second quarters of 2009.

The aggregate amount of the Company's outstanding indebtedness at December 31, 2008 was approximately $59.0 million compared to approximately $65.3 million at December 31, 2007. The Company has a highly leveraged financial structure, limiting its financial flexibility. 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."

Capital and Credit Market Crisis

It is possible that the recent unprecedented volatility in capital and credit markets may create additional risks in the upcoming months and possibly years.

• Liquidity in the capital and credit markets-The Company believes that it has sufficient liquidity despite the disruption of the capital and credit markets. While not significant to the Company to date, the disruptions in capital and credit markets may result in increased borrowing costs associated with short-term and long-term debt.

• Counterparty creditworthiness-The Company is subject to credit risk, which relates to the ability of its customers to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted energy.