The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Company's MD&A and Risk Factors contained in the Form 10-K for the fiscal year ended December 31, 2011 (the "2011 Form 10-K"), and in conjunction with the consolidated financial statements included in this report and in the 2011 Form 10-K.

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. 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," or similar expressions.

General

Omega Protein Corporation is a nutritional ingredient company and the nation's leading vertically integrated producer of Omega-3 fish oil and specialty fish meal products. As used herein, the term the "Company" refers 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 operates through four primary subsidiaries: Omega Protein, Inc., Omega Shipyard, Inc., Cyvex Nutrition, Inc. and InCon Processing, L.L.C. Omega Protein, Inc. ("Omega Protein"), the Company's principal operating subsidiary, operates in the menhaden harvesting and processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. ("Omega Shipyard") owns and operates a drydock facility in Moss Point, Mississippi that is used to provide shoreside maintenance for Omega Protein's fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Cyvex Nutrition, Inc. ("Cyvex"), founded in 1984 and acquired by the Company in December 2010, is located in Irvine, California and participates in the nutraceutical industry as an ingredient provider. InCon Processing, L.L.C. ("InCon"), acquired by the Company in September 2011, is located in Batavia, Illinois and is a specialty toll processor that utilizes molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. The Company also has a number of other immaterial direct and indirect subsidiaries.

Omega Protein 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 enhanced. Omega Protein markets several grades of fish meal, as well as fish oil and fish solubles. Omega Protein's fish meal products are primarily used as a protein ingredient in animal feed for swine, aquaculture and household pets. Fish oil is used primarily for animal and aquaculture feeds, and also as additives to human food products and dietary supplements. Omega Protein's fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

All of Omega Protein's products contain healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as "essential fatty acids" because 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 "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.

Under its production process, Omega Protein produces OmegaPure®, a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3s directly affirmed (as opposed to self affirmed) by the U.S. Food and Drug Administration ("FDA") as a food ingredient that is Generally Recognized as Safe ("GRAS"). Omega Protein also produces OmegaActiv ™, a concentrated form of OmegaPure® which is marketed as a dietary supplement.

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

In December 2010, the Company acquired Cyvex, a dietary supplement ingredient supplier based in Irvine, California. Cyvex is a nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness. The Company believes that the acquisition of Cyvex will expand its presence in the human health and wellness market and will provide access to supplement manufacturers who purchase a variety of ingredients, including fish oil.

In September 2011, the Company acquired InCon, a specialty toll processor that designs, pilots, synthesizes and purifies specialty chemical compounds utilizing molecular distillation technology to concentrate a variety of compound products, including Omega-3 fish oils. The Company believes that the acquisition of InCon's concentration technology will allow Omega Protein to provide its customers with an enhanced range of Omega-3 fish oils in concentrated forms such as ethyl esters and triglycerides. The concentrated fish oils manufactured by InCon are expected to be marketed and sold under the Company's OmegaActiv™ brand by Cyvex.

Company Overview

Revenues Composition. The following table sets forth Omega Protein's revenues by
product (in millions) and the approximate percentage of total revenues
represented thereby, for the indicated periods:


                                                  Three Months Ended June 30,
                                               2012                        2011
                                       Revenues      Percent       Revenues      Percent
     Fish Meal                        $     24.7         54.9 %   $     29.7         67.2 %
     Fish Oil                                9.8         21.8            5.9         13.4
     Refined Fish Oil                        3.9          8.9            3.4          7.7
     Fish Solubles                           1.2          2.7            1.2          2.7
     Dietary Supplement Ingredients          4.2          9.3            4.0          9.0
     Other                                   1.2          2.4              -            -
     Total                            $     45.0        100.0 %   $     44.2        100.0 %



                                                   Six Months Ended June 30,
                                               2012                        2011
                                       Revenues      Percent       Revenues      Percent
     Fish Meal                        $     45.4         53.6 %   $     69.1         68.7 %
     Fish Oil                               16.3         19.2           14.4         14.3
     Refined Fish Oil                        7.8          9.2            7.7          7.6
     Fish Solubles                           2.2          2.6            2.2          2.2
     Dietary Supplement Ingredients         10.3         12.2            7.0          7.0
     Other                                   2.7          3.2            0.2          0.2
     Total                            $     84.7        100.0 %   $    100.6        100.0 %

The following table sets forth Omega Protein's revenues by geography (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:

                                           Three Months Ended June 30,
                                        2012                        2011
                                Revenues      Percent       Revenues      Percent

           Domestic Revenues   $     21.0         46.7 %   $     21.9         49.5 %
           Export Revenues           24.0         53.3           22.3         50.5
           Total               $     45.0        100.0 %   $     44.2        100.0 %



                                            Six Months Ended June 30,
                                        2012                        2011
                                Revenues      Percent       Revenues      Percent

           Domestic Revenues   $     43.8         51.7 %   $     42.7         42.4 %
           Export Revenues           40.9         48.3           57.9         57.6
           Total               $     84.7        100.0 %   $    100.6        100.0 %

2012 Fishing Information. At June 30, 2012, Omega Protein owned a fleet of 44 fishing vessels and 34 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2012 fishing season in the Gulf of Mexico, which runs from mid-April through October, Omega Protein is operating up to 26 fishing and carry vessels and 29 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. Omega Protein is operating up to 9 fishing and carry vessels and 7 leased spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in the Company's shipyard. Historical fish catch and production results at the end of the second quarter for the past five years are as follows:

                                    2012          2011          2010          2009          2008
Fish Catch in tons as of June
30,                                 229,564       188,403       166,552       139,136       149,275
Fish meal, oil and solubles
production in tons                   75,242        65,848        58,164        55,570        61,814
(excludes refined)

The Company cautions that, because of the volatility of fish catch generally, partial year catch numbers are not indicative of results that may be expected for a full year. In addition, fish oil yields, which affect inventory costs and volumes available for sale, fluctuate from year to year and month to month. The Company's 2012 oil yield results through June 30, 2012 have been the poorest in its recent history. For illustrative purposes, the Company's oil yields for the 2012 fishing season through June 30, 2012 were lower by 24.9% compared to those in the same period in the 2011 fishing season and were lower by 44.8% compared to the Company's five year oil yield average. Total yields decreased by 6.9% compared to those in the same 2011 fishing season and were lower by 12.3% compared to the Company's five year total yield average, due primarily to the lower fish oil yields. The Company believes that fish yields are influenced by multiple factors, including but not limited to, fish diet, weather, water temperature, fish population and age of fish, but such possible relationships and inter-relationships are not generally well understood. The impact of these poor oil yields has resulted in significantly higher per unit inventory cost and fewer volumes available for future sale. These higher unit costs and fewer volumes available for sale have adversely impacted financial results for the second quarter of 2012 and can be expected to adversely affect financial results through the second quarter of 2013.

Sales Contracts. Omega Protein sells a material portion of its products on a two-to-twelve-month forward contract basis with the balance sold on a spot basis through purchase orders. Omega Protein's sales contracts generally contain force majeure and other production allocation provisions. Historically, fish meal and fish oil sold on a forward contract basis has fluctuated from year to year based upon perceived market availability and forward price expectations. As of June 30, 2012, Omega Protein had sold forward on a contract basis up to approximately 91,000 short tons of fish meal and 27,000 metric tons of fish oil for 2012, contingent on 2012 production and product availability. As a basis of comparison, as of June 30, 2011 Omega Protein had sold forward on a contract basis approximately 56,000 short tons of fish meal and 38,000 metric tons of fish oil for 2011.

Omega Protein's annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. Omega Protein determines the level of inventory to be carried over based on existing contracts, 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. Omega Protein's fish meal products have a useable life of approximately one year from date of production. Practically, however, Omega Protein attempts to empty its warehouses of the previous season's products by the second or third month of the new fishing season. Omega Protein'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.

Customers and Marketing. Most of Omega Protein's marine protein products are sold directly to approximately 320 customers by Omega Protein's agriproducts sales department, while a smaller amount is sold through independent sales agents. Omega Protein's product inventory was $49.6 million as of June 30, 2012 versus $46.6 million as of December 31, 2011.

Omega Protein's products are sold both in the U.S. and internationally. International sales consist of both fish meal and fish oil and are primarily to China, Norway, Canada, Chile, Saudi Arabia and Japan. Omega Protein'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 Omega Protein currently sells products impose various tariffs and duties, none of which have a significant impact on Omega Protein'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, Omega Protein's products are shipped to its customers either by free on board shipping point or costs, insurance and freight terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on Omega Protein's products sold into these markets.

During the off season, Omega Protein fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal and oil purchased from other suppliers. Generally, prices for Omega Protein'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.

Competition. Omega Protein competes with a smaller domestic privately-owned menhaden fishing company and with numerous fish processors outside the United States. 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 Darling International, 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.

Omega Protein 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 Omega Protein'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. Omega Protein 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 Omega Protein's fish oil, as well as soybean and rapeseed oil.

Fish meal prices have generally borne a relationship to prevailing soybean meal prices, while prices for fish oil are generally influenced by prices for vegetable oils, such as rapeseed, soybean and palm oils. Thus, the prices for Omega Protein's products are established by worldwide supply and demand relationships over which Omega Protein has no control and tend to fluctuate significantly over the course of a year and from year to year. For example, during 2011, Omega Protein experienced fish oil price increases of approximately 26% when compared to 2010, and rapeseed oil and soybean oil prices rose 34% and 29%, respectively.

Regulation. Omega Protein'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.

Omega Protein'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. The ASMFC manages the menhaden fishery throughout the stock's coast-wide range. 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 Omega Protein's Chesapeake Bay menhaden harvest was capped for a five year period (and subsequently extended for an additional three-year period) at a 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 and subsequently thereafter after the cap was formally in place. The cap had no effect on Omega Protein's Chesapeake Bay harvests for the years 2007 through 2011, and is not expected to have any material adverse effect on its Chesapeake Bay harvest in 2012. As a result of the underharvest in 2011, the 2012 Chesapeake Bay catch limit will be 122,740 metric tons.

The Company supports the ASMFC's goal of maintaining a healthy population of menhaden and the current research program designed to answer ecological questions regarding menhaden in the Chesapeake Bay and coast-wide. The Chesapeake Bay cap was established as a precautionary measure while research is conducted to address, among other things, the question whether the menhaden harvest in the Bay could cause what is being termed "localized depletion" of menhaden there. No evidence of such localized depletion has been produced.

Because the research regarding menhaden is on-going, in 2009 the ASMFC and Virginia approved an extension of the existing Chesapeake Bay cap for an additional three years to 2013. Even though no evidence of localized depletion has been produced, the Company continues to support the Chesapeake Bay cap as a way to maintain the status quo while research on these matters continues.

The most recent stock assessment for the Atlantic menhaden was completed in 2010 using data collected through 2008. According to federal and ASMFC technical experts, the assessment found that the Atlantic menhaden stock had undergone slight overfishing in one year, 2008; however, the population was not considered overfished, meaning that the stock abundance remained at or near target levels, above levels of concern, and can produce enough eggs to replace itself. The assessment indicated that the population was subject to slight overfishing in 2008 by an estimated four-tenths of one percent. Multiple runs of the stock assessment model revealed that there was a 53% probability that overfishing had occurred and a 47% probability that overfishing had not occurred.

In 2011, the ASMFC initiated a regulatory review process that would: (1) require annual updates on menhaden recruits, or the numbers of fish in their first year of life, currently reviewed only every three years; (2) begin a long-term process of managing menhaden on a multi-species basis; and (3) with a goal of establishing increased menhaden abundance, initiate a management action to implement an interim overfishing threshold reference point based on achieving a rate of fishing that should result in 15% of the spawning potential that the Atlantic menhaden stock would have if such stock were not fished (a "maximum spawning potential"). By comparison, in 2008, the estimate of this maximum spawning potential was estimated to be 8%; however, those numbers have not been estimated for 2009, 2010, or 2011. These percentages do not necessarily translate into corresponding percentage reductions in fish catch.

In November 2011, the ASMFC established a new overfishing reference point at the 15% threshold level of maximum spawning potential. It also established a management target at a rate of fishing that is associated with a 30% maximum spawning potential level. The ASMFC also decided to move forward with an amendment to develop a new system of managing the fishery in line with these new reference points.

Also in November 2011, the ASMFC approved the consideration of options for phasing in potential reductions in fishing effort over a period of one to five years. In February 2012, the ASMFC approved a public scoping document with a series of potential management options. At this meeting, the ASMFC added an option to extend the phase-in period to as long as ten years. Public hearings were held throughout the spring of 2012, during which the Company had the opportunity to comment on these alternatives, which included a full range of options for quotas, limitations on the number of days fished annually, a shortened season, and other measures. Following these hearings, in May 2012 the ASMFC narrowed these alternatives to be included in a draft amendment document that will be reviewed, refined and considered for distribution for public hearing at an August 8, 2012 ASMFC meeting.

The ASMFC Menhaden Technical Committee has undertaken a new menhaden stock assessment covering 2009, 2010 and 2011. The conclusions reached by this stock assessment are likely to influence the decisions of the ASMFC's Menhaden Management Board as it considers the above possible restrictions. The Menhaden Technical Committee is scheduled to present its findings at the August 8, 2012 ASMFC meeting.

Because the process of developing a management system will take time and involve further public hearings, the Company does not expect any new constraints to be placed upon the menhaden fishery until the 2013 fishing season, at the earliest. Due to the uncertain timing and outcome of this regulatory process, the Company cannot predict with certainty what effect these new regulations will have on the Company's business. Depending on how and when these new reference points are implemented, and what future Atlantic menhaden stock assessments conclude, it is possible that the implementation of these new regulations could have a material adverse effect on the Company's business, financial results and results of operations.

The Texas Parks and Wildlife Commission has 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 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.

Omega Protein's menhaden fish catch in Texas in 2011 was estimated by the National Marine Fisheries Service to be approximately 33.6 million pounds (approximately 15,241 metric tons), or approximately 2.8% of Omega Protein's total 2011 fish catch. In 2011, the Company's Texas fish catch approached the TAC (including the 10% overage credit). The limitation is not expected to have a material adverse effect on Omega Protein's business, results of operation or financial condition.

In May 2012, the North Carolina Division of Marine Fisheries in the Department of Environment and Natural Resources issued a proclamation that banned the commercial fishing of menhaden using purse seine netting in North Carolina state waters. This proclamation prohibits the Company's fishing operations in these state waters. Federal waters outside the North Carolina three-nautical mile state water limit remain unaffected. In 2011, the Company caught approximately 1.6% of its total 2011 fish catch in North Carolina state waters.

Omega Protein, 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 . . .