NOTE 1. SIGNIFICANT ACCOUNTING POLICIES SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

Business Description

Omega Protein Corporation (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"), which is 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. Cyvex Nutrition, Inc. ("Cyvex"), founded in 1984 and acquired by the Company in December 2010, is located in Irvine, California and is an ingredient supplier in the nutraceutical industry. 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 Corporation is a nutritional ingredient company and the nation's leading vertically integrated producer of Omega-3 fish oil and specialty fish meal products. Omega Protein 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. 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 utilized primarily for animal and aquaculture feeds, as well 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.

Omega Shipyard's drydock facility 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 is a premium, nutraceutical supplier to dietary supplement manufacturers that focus on human health and wellness.

InCon is 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. See Note 2—Acquisition of InCon Processing, L.L.C. for additional information related to the Company's acquisition of InCon.

Basis of Presentation

These interim financial statements of the Company 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, 2011. 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 March 31, 2012, and the results of its operations for the three month periods ended March 31, 2012 and 2011 and its cash flows for the three month periods ended March 31, 2012 and 2011. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Consolidation

The consolidated financial statements include the accounts of Omega Protein Corporation 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.

Gulf of Mexico Oil Spill Disaster

In 2010, the Company accounted for $18.7 million in payments received during September and October related to damages incurred from the Gulf of Mexico Oil Spill Disaster in its inventory and cost of sales. The payments partially reduced cost of sales by 11.4%, or $5.2 million, for the three months ended March 31, 2011. In April 2011, the Company agreed to a final settlement of all of its claims for costs and damages incurred as a result of the oil spill caused by the Deepwater Horizon explosion on April 20, 2010. For additional information, see Note 3 – Gulf of Mexico Oil Spill Disaster.

Inventories

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

Any costs incurred during abnormal downtime related to activity at Omega Protein's plants are charged to expense as incurred. Such costs were incurred and offset by proceeds received from the Gulf Coast Claims Facility ("GCCF") during 2010 and 2011 as a consequence of the Deepwater Horizon explosion and the resulting oil spill in the Gulf of Mexico in April 2010. For additional information, see Note 3 – Gulf of Mexico Oil Spill Disaster.

Interest Rate Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. In conjunction with a prior credit facility, the Company entered into interest rate swap agreements to manage its cash flow exposure to interest rate changes with notional amounts as indicated. As originally established, the swaps effectively converted all the Company's variable rate debt under a term loan under a prior bank credit facility to a fixed rate, without exchanging the notional principal amounts. Prior to September 30, 2009, these agreements were designated as a cash flow hedge and reflected at fair value in the Company's Consolidated Balance Sheet as a component of total liabilities, and the related gains or losses were deferred in stockholders' equity as a component of accumulated other comprehensive loss.

In September and October 2009, the Company prepaid all of the borrowings outstanding under the Term Loan under its prior credit facility. As a consequence of this debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps would not occur. As a result, hedge accounting relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to interest expense during 2009. As of December 31, 2011, the Company recorded a $103,100 liability to recognize the fair value of interest rate derivatives. The interest rate swap agreements matured at the end of March 2012 and are no longer outstanding.

Interest rate swap balances at December 31, 2011:


Date of Contract	Original Notional Amount		Notional Amounts as of December 31, 2011		Contracted Interest Rate			Total Liability as of December 31, 2011
April 4, 2007	$	19,950,000	$	6,483,750		5.16	%	$	71,600
February 7, 2008		10,237,500		3,412,500		3.36	%		22,900
March 19, 2008		4,436,250		1,478,750		2.96	%		8,600

			$	11,375,000				$	103,100

The total interest expense associated with the interest rate swap transactions for the three months ended March 31, 2012 and 2011 was $145 and $13,400, respectively.

Energy Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. During 2012, 2011 and 2010, Omega Protein entered into energy swap agreements to manage portions of its cash flow exposure related to the volatility of natural gas, diesel and Bunker C fuel oil energy prices for its fish meal and fish oil production operations. The swaps effectively fix pricing for the quantities listed below during the consumption periods.

Energy swap balances at March 31, 2012:


Energy Swap	Consumption Period	Quantity		Price Per Unit		Energy Swap Asset/(Liability) as of March 31, 2012			Deferred Tax Asset/(Liability) as of March 31, 2012
Diesel—NYMEX Heating Oil Swap	May - November, 2012		2,779,000 Gallons	$	2.87	$	903,500		$	(316,300	)
Natural Gas—NYMEX Natural Gas Swap	April – October, 2012		529,769 MMBTUs	$	3.97		(847,600	)		296,700
Bunker C – No. 6 1.0% NY-Platts Swap	May - November, 2012		1,584,240 Gallons	$	2.33		594,900			(208,200	)
Natural Gas—NYMEX Natural Gas Swap	April – October, 2013		208,000 MMBTUs	$	4.27		(171,000	)		59,900

						$	479,800		$	(167,900	)

Energy swap balances at December 31, 2011:


Energy Swap	Consumption Period	Quantity		Price Per Unit		Energy Swap Asset (Liability) as of December 31, 2011			Deferred Tax Asset (Liability) as of December 31, 2011
Diesel—NYMEX Heating Oil Swap	May - November, 2012		2,779,000 Gallons	$	2.87	$	(56,200	)	$	19,700
Natural Gas—NYMEX Natural Gas Swap	April – October, 2012		308,000 MMBTUs	$	4.90		(507,000	)		177,400
Bunker C – No. 6 1.0% NY-Platts Swap	May - November, 2012		1,584,240 Gallons	$	2.33		29,700			(10,400	)
Natural Gas—NYMEX Natural Gas Swap	April – October, 2013		104,000 MMBTUs	$	5.00		(113,100	)		39,600

						$	(646,600	)	$	226,300

As of March 31, 2012 and December 31, 2011, Omega Protein has recorded a long-term liability of $171,000 and $113,100, respectively, net of the current portion included in prepaid expenses and other current assets (accrued liabilities) of $650,800 and ($533,500), respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax (liability) asset of ($167,900) and $226,300, respectively, associated therewith. The effective portion of the change in fair value from inception to March 31, 2012 is recorded in "accumulated other comprehensive loss" 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 energy swap agreements.


	Three Months Ended March 31,
	2012			2011
	(in thousands)
Balance at January 1,	$	(420	)	$	505
Net change associated with current period swap transactions, net of tax		731			1,847

Balance at March 31,	$	311		$	2,352

The $0.3 million reported in accumulated other comprehensive loss as of March 31, 2012 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount to be reclassified, net of taxes, during the next 12 months is expected to be approximately $0.4 million.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company's energy usage or underlying hedge agreements or assumptions, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as a gain or loss in cost of sales for the applicable period. See Note 17 – Fair Value Disclosures for additional information.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss included in stockholders' equity are as follows:


	March 31,			December 31,
	2012			2011
	(in thousands)
Fair Value of Energy Swaps, net of tax (expense) benefit of ($168) as of March 31, 2012 and $226 as of December 31, 2011.	$	311		$	(420	)
Pension Benefits Adjustments, net of tax benefit of $5,391 as of March 31, 2012 and $5,524 as of December 31, 2011		(10,012	)		(10,259	)

Accumulated Other Comprehensive Loss	$	(9,701	)	$	(10,679	)

Recently Issued Accounting Standards

On December 16, 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments to help reconcile differences in the offsetting requirements under U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is evaluating the impact, if any, the adoption of this standard will have on its consolidated financial statements.

On September 15, 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities the option of performing a qualitative assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The Company's adoption of FASB ASU No. 2011-08 effective January 1, 2012 did not have an impact on the Company's consolidated results of operations, financial position and related disclosures.

On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity may present items of net income and other comprehensive income in one continuous statement, or in two separate, but consecutive statements. The change is intended to enhance comparability between entities that report under U.S. GAAP and those that report under International Financial Reporting Standards (IFRS), and to provide a more consistent method of presenting non-owner transactions that affect an entity's equity. The guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011, which corresponds to the Company's first fiscal quarter beginning January 1, 2012. However, in December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The Company's adoption of these standards effective January 1, 2012 did not have an impact on the Company's consolidated results of operations, financial position and related disclosures.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with IFRS. This guidance is effective for the first interim or annual period beginning after December 15, 2011, which corresponds to the Company's first fiscal quarter beginning January 1, 2012. The Company's adoption of FASB ASU No. 2011-04 effective January 1, 2012 did not have an impact on the Company's consolidated results of operations, financial position and related disclosures.

Stock-Based Compensation

Stock Options

The Company has a stock-based compensation plan, which is described in more detail in Note 16 to the consolidated financial statements of the Company's Form 10-K for the fiscal year ended December 31, 2011. The Company has issued non-qualified stock options under its stock incentive plans. The options generally vest in equal installments over three years and expire in ten years. Non-vested options are generally forfeited upon termination of employment.

Net income for the three months ended March 31, 2012 and 2011 includes $0.8 million and $0.7 million ($0.5 million and $0.5 million after-tax), respectively, of stock-based compensation costs related to stock options which are primarily included in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2012 there was $3.0 million ($2.0 million after-tax) of total unrecognized compensation costs related to non-vested stock options that is expected to be recognized over a weighted-average period of 1.2 years, of which $2.3 million ($1.5 million after-tax) of total stock option compensation is expected to be recognized during the remainder of fiscal year 2012.

Restricted Stock

The Company has also issued shares of restricted stock under its 2006 Incentive Plan. Holders of shares of restricted stock are entitled to all rights of a stockholder of the Company with respect to the restricted stock, including the right to vote the shares and receive any dividends or other distributions. The shares are considered issued and outstanding on the date granted and are included in the basic earnings per share calculation.

During the three month periods ended March 31, 2012 and 2011, the Company issued 25,000 shares and 0 shares, respectively, of restricted stock under the 2006 Incentive Plan. The Company's compensation expense related to restricted stock for the three months ended March 31, 2012 and 2011 was approximately $153,000 and $0 ($100,000 and $0 after tax), respectively, which is primarily reflected in selling, general and administrative expenses in the unaudited condensed consolidated statement of comprehensive income. As of March 31, 2012, there was approximately $1.6 million ($1.0 million after tax) of unrecognized compensation cost related to non-vested restricted stock that is expected to be recognized over a weighted-average period of 2.8 years, of which $0.5 million ($0.3 million after-tax) of total restricted stock compensation is expected to be recognized during the remainder of fiscal year 2012.