This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other sections of this Quarterly Report on Form 10Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, the general economic conditions in the markets in which the Company operates, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section as set forth below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Company Overview

On May 7, 2008, the stockholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc. IGI is engaged in the development, manufacturing, filling and packaging of topical, semi solid and liquid products for pharmaceutical, cosmeceutical and cosmetic companies primarily using its licensed Novasome® encapsulation technology. The Company believes that the Novasome based products developed and manufactured by it are unique in the industry and give its customers a competitive advantage in the market place.

IGI's mission is to be a premier provider of topical liquid and semi-solid products using an encapsulation technology. Over the last two fiscal years the Company has made four major changes to better pursue its mission:

• the Company divested the metal plating business to focus on its core business of topical skin care/treatment products;
• the Company acquired filling and packaging equipment that broaden and enhance product and service offerings;
• the Company instituted a policy of charging a fee for its Product Development Services; and
• the Company initiated the development of several prescription skin treatment products with possible commercialization in 2011.

The Company's business plan includes the continued upgrading of its manufacturing capabilities and expanding its production services. The Company will also continue to market its other capabilities to customers, such as product development services and analytical services, all together or separately. In addition to this, the Company intends to explore ways to expand its intellectual property portfolio and increase its R&D product pipeline.

On May 6, 2008, the Company was notified by AMEX that it was below certain of the AMEX continued listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6 million in stockholders' equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007 fiscal years. The Company's stockholders' equity at September 30, 2008 was $3.4 million.

On July 15, 2008, AMEX notified the Company that it accepted the Company's plan of compliance and granted the Company an extension until May 6, 2009 to regain compliance with the continued listing standards described above. The Company will be subject to periodic review by AMEX staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from AMEX.

12

Results of Operations

Three months ended September 30, 2008 compared to September 30, 2007

The Company had a net loss attributable to common stockholders of $568,000, or $0.04 per share,
for the three months ended September 30, 2008, compared to a net loss of $105,000, or $0.01 per
share, in the comparable period for 2007, which resulted from the following:

Revenues (in thousands):

         Components of Revenue:           2008          2007         $ Change         % Change
                                        --------      ---------      ---------      ------------
         Product sales                      $770         $  520         $ 250               48 %
         Research and development            116            329          (213)             (65)%
         income
         Licensing and royalty income         87            156           (69)             (44)%
                                        --------      ---------      ---------      ------------
            Total Revenues                  $973         $1,005         $ (32)              (3)%
                                        --------      ---------      ---------      ------------

The increase in product sales for the three months ended September 30, 2008 is due to sales to new customers, offset by reduced sales from some of the existing customers. Research and development income will not be consistent and will vary, from quarter to quarter, depending on the required timeline of each development project. Licensing and royalty income decreased as a result of a decrease in sales of royalty bearing products.

Costs and expenses (in thousands):

                                         2008      2007     $ Change   % Change
                                        -------   -------   --------   --------
  Cost of sales                         $   732   $   494     $  238        48%
  Selling, general and administrative       672       469        203        43%
  Product development and research          136       135          1         1%
                                        -------   -------   --------   --------
     Totals costs and expenditures      $ 1,540   $ 1,098     $  442        40%
                                        -------   -------   --------   --------

Cost of sales increased for the three months ended September 30, 2008 as a result of the increase in product sales. Cost of sales as a percent of product sales and research and development income was 83% for the three month period ended September 30, 2008 compared to 58% for the comparable period in 2007. The increase in cost of sales percentage is due to a lower gross margin related to sales to a new customer in the three months ended September 30, 2008.

Selling, general and administrative expenses for the period ended September 30, 2008 increased as a result of higher stock based compensation expense of $70,000 from the issuance of stock options to our President and Chief Executive Officer, severance of $51,000 for our former Vice President of Finance as per her separation agreement, consulting fees of $21,000 and higher employer match contribution in our 401k plan of $6,000 due to a plan change.

Interest (Expense) Income (in thousands):

                      2008      2007     $ Change   % Change
                     -------   -------   --------   --------
  Interest Expense   $   (4)   $  (13)       $  9        69%
  Interest Income     $   1     $   1        $  -         -%

Interest expense decreased for the three months ended September 30, 2008 as a result of a decrease in the Company's short-term notes payable principal balance and a reduction in the Company's average interest rate on its short-term notes payable in 2008.

Net loss (in thousands, except per share numbers):

                        2008      2007     $ Change   % Change
                       -------   -------   --------   --------
  Net loss             $ (568)   $ (105)    $ (463)     (441)%
  Net loss per share     (.04)     (.01)      (.03)     (300)%

13 Nine months ended September 30, 2008 compared to September 30, 2007

Revenues (in thousands):

   Components of Revenue:                2008    2007    $ Change   % Change
                                         -----   -----   --------   --------
   Product sales                         2,547   1,865       682        37 %
   Research and development income         244     617      (373)      (60)%
   Licensing and royalty income            364     444       (80)      (18)%
                                         -----   -----   --------   --------
      Total Revenues                     3,155   2,926       229         8 %
                                         -----   -----   --------   --------

The increase in product sales relates to the Company's ability to package and fill the products we manufacture for our customer and sales of new products developed by the Company. The higher research and development income for the nine months ended September 30, 2007, related to fees paid to the Company to develop a new product line for a customer which was launched in the first quarter of 2008. The decrease in royalty revenue was related to a decline in royalties from Johnson & Johnson and Estee Lauder in 2008.

Costs and expenses (in thousands):

                                        2008    2007    $ Change   % Change
                                        -----   -----   --------   --------
  Cost of sales                         1,976   1,632        344        21%
  Selling, general and administrative   2,031   1,651        380        23%
  Product development and research        372     360         12         3%
                                        -----   -----   --------   --------
     Totals costs and expenses          4,379   3,643        736        20%
                                        -----   -----   --------   --------

Cost of sales increased for the nine months ended September 30, 2008 as a result of the increase in product sales. As a percentage of product sales and research and development income, cost of sales was 71% for the nine months ended September 30, 2008 and 66% for the nine months ended September 30, 2007. The higher cost of sales as a percentage of product sales and research and development income for 2008 relates to the increase in costs associated with hiring of additional staff for the product development and analytical services. For the utilization of the surplus manufacturing capacity, the Company also engaged in the manufacturing of lower margin products developed by its new customer, resulting in increased cost of sales as a percentage of product sales.

Selling, general and administrative expenses for the period ended September 30, 2008 increased as a result of higher stock based compensation expense of $155,000 from the issuance of stock options to our President and Chief Executive Officer, severance agreement of $51,000 for our former Vice President of Finance as per her separation agreement, bad debt expense of $34,000, consulting fees of $26,000, higher employer match contribution in our 401k plan of $19,000 as a result of changing our 401k plan and higher marketing expense of $16,000. As a percentage of total revenues, selling, general and administrative expenses were 64% and 56% of revenues for the nine months ended September 30, 2008 and 2007, respectively.

Interest (Expense) Income (in thousands):

                     2008   2007   $ Change   % Change
                     ----   ----   --------   --------
  Interest Expense   (19)   (51)        32        63 %
  Interest Income     10     12         (2)      (17)%

Interest expense decreased for the nine months ended September 30, 2008 as a result of a decrease in the Company's short-term notes payable principal balance and a reduction in the Company's average interest rate on its short-term notes payable in 2008. Interest income is lower for the same period as a result of lower cash balances.

Other income (in thousands, except per share numbers):

                 2008   2007   $ Change   % Change
                 ----   ----   --------   --------
  Other income      7     64       (57)      (89)%

14 Included in other income for the nine months ended September 30, 2007 is $58,000 of insurance settlement funds received by the Company as a result of the employee theft claim submitted earlier in 2007. The funds received were net of a $25,000 deductible the Company has on its insurance policy.

Net loss (in thousands, except per share numbers):

                                    2008       2007      $ Change      % Change
                                  --------   ---------   ---------   ------------
     Net loss                      (1,226)       (687)       (539)          (78)%
     Net loss per share              (.08)       (.05)       (.03)          (60)%

Liquidity and Capital Resources

The Company's operating activities used $448,000 of cash during the nine months ended September 30, 2008 compared to $924,000 used in the comparable period of 2007. The use of cash for the nine months ended September 30, 2008 is substantially a result of the net loss and increase in inventory offset by the collection of royalties from Manhattan Pharmaceuticals. The use of cash in the comparable period of 2007 was for the payments of accounts payable, increase in accounts receivable due to higher sales, and the net loss.

The Company's investing activities used $107,000 of cash in the nine months ended September 30, 2008 compared to $92,000 of cash provided by investing activities in the first nine months of 2007. The funds used for the period ending September 30, 2008 were for additional equipment and improvements for the packaging and filling lines. The money provided for the period ending September 30, 2007 represents a deposit of $260,000 on the metal plating equipment sold to UCT less $168,000 in capital expenditures for equipment for the packaging and filling operations in 2007.

The Company's financing activities used $152,000 of cash in the nine months ended September 30, 2008 compared to $347,000 provided by financing activities in the nine months ended September 30, 2007. The cash used for the period ended September 30, 2008 represents a pay down of the note payable balance offset by proceeds from the exercise of common stock options and warrants. For the same period in 2007 cash provided represents borrowings from the note payable and proceeds from the issuance of shares pursuant to a private placement of common stock, net of repayments of notes payable.

The Company's principal sources of liquidity are cash and cash equivalents of approximately $207,000 at September 30, 2008, future cash from operations, and a $250,000 unused balance on our line of credit from Pinnacle Mountain Partners, LLC; this line of credit will expire on January 31, 2009. The Company had working capital of $318,000 at September 30, 2008.

We believe that our operating cash flow along with our existing capital resources will not be sufficient to support our current business plan through November 2009. The Company will require additional funding. This funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, we may continue to seek to raise additional capital through the sale of our equity. We may accomplish this via a strategic alliance with a third party. In addition, there may be additional acquisition and growth opportunities that may require external financing. However, the trading price of our stock, a downturn in the U.S. equity and debt markets and the negative economic trends in general could make it more difficult to obtain financing through the issuance of equity securities or otherwise. There can be no assurance that such financing will be available or available on terms acceptable to the Company.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements as of the date of this report.

Critical Accounting Policies and Estimates

IGI's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.

15 Please refer to the Company's 2007 10-KSB for a complete list of all Critical Accounting Policies and Estimates. See also Note 2 of the Company's unaudited financial statements for the three and nine months periods ended September 30, 2008.