MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

This "Management's Discussion and Analysis of Financial Condition and Results of Operation" section and other sections of this Annual Report on Form 10-K contain forward-looking statements 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 not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. (See "Item 1A:
Risk Factors " below.) 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

Strategic Overview

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 gives 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:

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the Company divested the metal plating business to focus on its core business of topical skin care/treatment products,

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the Company acquired filling and packaging equipment that broaden and enhance product and service offerings,

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the Company instituted a policy of charging a fee for its Product Development Services; and

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the Company sold the marketing rights of the Miaj product line to a Cosmetic marketing company.

Metal Plating Business- The Company ceased operations of the metal plating division in November 2005. In the first quarter of 2007, the Company received a purchase order and deposit in the amount of $130,000 toward the purchase of the plating equipment from Universal Chemical Technologies, Inc. ("UCT") to re-purchase the equipment back from the Company. The Company estimated the fair value of the metal plating equipment less cost to sell at $350,000. The sales price of the equipment was $378,000, which consisted of $260,000 in cash net of $118,000 owed to UCT by the Company. The Company recorded a gain of $5,000 on the sale of this equipment in 2007. The purchaser, UCT, paid all relocation and removal expenses relating to this equipment. This transaction was completed in the second quarter of 2007 and all equipment was removed from our facility as of June 30, 2007.

Filling and Packaging Equipment- In December 2006, the Company purchased three fully automatic filling and packaging lines to provide turnkey solutions to our customers. The lines were installed and fully operational in the second quarter of 2007. This added capability allowed the Company to fill and package more than 40% of the bulk product we manufacture. This also resulted in an increase of approximately 20% in revenues from contract filling and packaging of generic products in 2007.

Licensing Agreement / Fees for Product Development Services- In August 2007, the Company renegotiated its exclusive licensing, development and manufacturing agreement with Dermworx, Inc., which was originally signed in October 2006. The original agreement was for a series of dermatological specialty products utilizing Novasome encapsulation technology. The new agreement was narrowed down to include only one Keratolytic cream product. The first installment of $250,000 received by the Company for the original agreement was recorded as deferred income for the year ended December 31, 2006. This payment was recognized as Product Development revenue against the new agreement in the third quarter of 2007. Subsequently, the Company signed an additional Product Development Agreement with Dermworx for a Novasome® based sprayable moisturizer product.
The Company manufactured commercial quantities of the product developed under the amended agreement in December 2007 and has produced commercial quantities of the product from the additional agreement in the first quarter 2008.

Miaj Product Line- The Company launched its first in house product line under the name Miaj™ in June 2006. The marketing right of the product line was subsequently licensed in December 2007 to an established cosmetic marketing company. Since the licensor failed to meet certain conditions of the agreement and failed to cure the deficiencies on notice, the Company cancelled the agreement in December 2008. Since some of the products in the line were technologically obsolete, the Company decided to write off the entire inventory and recorded impairment charges of $105,000 at December 31, 2008. Additionally, the Company recorded a bad debt reserve of $63,000 related to the outstanding invoice for the purchase of the products by the marketing company.

Results of Operations

2008 Compared to 2007


The Company had a net loss attributable to common stockholders of $1,852,000, or
$(0.12) per share, in 2008 compared to a net loss of $412,000, or $(0.03) per
share, in 2007 which resulted from the following:


                                         For the years ended
Revenues                         December 31, 2008 December 31, 2007   $ change  % change
                                           (in thousands)

Product Sales, net                         $ 3,376           $ 2,904    $  472       16%
Research  and Development Income               273               836      (563)     (67%)
Licensing and Royalty Income                   420               841      (421)     (50%)

Total Revenues                             $ 4,069           $ 4,581    $ (512)     (11%)

The revenues from product sales increased by 16% for the year ended December 31, 2008 ("2008") compared to the same period in 2007. The increase in product sales can be attributed to the addition of three new customers whose products were successfully launched late in 2007. In addition, the Company executed three new product development agreements in 2008. The decline in research and development income can be attributed to the failure of PTHrP Gel product at clinical phase 2a and the decision by Manhattan Pharmaceuticals to cancel the agreement. The Company received $300,000 of research and development income from Manhattan Pharmaceuticals at the initiation of Phase 2a studies in 2007.

Licensing and royalty income decreased due to the decrease in sales of Novasome based products marketed by J&J Consumer and Estee Lauder. The Company believes the loss of certain royalties is related to the normal life cycle of the products and that certain royalties of the Company may continue to decline.

For the years ended Costs of Sales December 31, 2008 December 31, 2007 $ change % change

Cost of sales increased by 15% for the year ended December 31, 2008 compared to the same period in 2007 primarily from increased product sales. Cost of sales as a percentage of revenues can vary depending on the product mix. The increase in our cost of sales was primarily due to our underutilized manufacturing capacity which led to higher cost of sales due to the unabsorbed overhead expenses.

                                         For the years ended
Operating Expenses               December 31, 2008 December 31, 2007  $ change  % change
                                           (in thousands)

Selling General and                        $ 2,777           $ 2,430     $ 347       14%
Administrative Expenses
Product Development and Research           $   502           $   481     $  21        4%
Expense

The increase in selling, general and administrative expenses in 2008 compared to the comparable period in 2007 related to an increase in stock-based compensation expense of $270,000 in accordance with SFAS 123(R) as discussed under "Summary of Significant Accounting Policies (Footnote 1) and Stock-based Compensation (Footnote 9)" and an increase in bad debt expense of $55,000. These expenses were 68% of total revenues for 2008 compared to 53% in 2007.

For the years ended Interest December 31, 2008 December 31, 2007 $ change % change

Interest Expense, net $ 15 $ 48 ($ 33) (69%)

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

The amounts in other income, net in 2008 were $28,000 of miscellaneous income. The amounts in other income in 2007 were insurance proceeds received as reimbursement for the employee theft that was discovered in 2007 in the amount of $58,000 and $6,000 of miscellaneous income.

The tax benefit of $196,000 in 2008 and $453,000 in 2007 was the result of a sale of a portion of the Company's state tax operating loss carry forwards to a third party.

The gain from discontinued operations of $5,000 in 2007 was related to the sale of the equipment for the operations that were shutdown and discontinued in 2006.

Liquidity and Capital Resources

Our business operations have been partially funded over the past four years through equity transactions. During 2007, the Company entered into three (3) equity transactions:

with Pharmachem Laboratories for 1,500,000 shares of Common Stock for gross proceeds of $1,500,000,

with Federico Buonanno for 50 shares of Series A Convertible Preferred Stock for gross proceeds of $500,000, and

with Univest Management, Inc. EPSP for 150,000 shares of Common Stock for gross proceeds of $150,000.

Also during the first quarter of 2007, the Company entered into a revolving $1,000,000 secured line of credit agreement ("Credit Agreement") with Pinnacle Mountain Partners, LLC, ("Pinnacle"), a company owned by Dr. and Mrs. Hager, significant stockholders of the Company, for a term of eighteen months. Jane E. Hager (Mrs. Hager), a director of the Company, is also the President of Pinnacle. Loans under the Credit Agreement bear interest at Wall Street prime (3.25% at December 31, 2008), plus 1.5% and are collateralized by assets of the Company (other than real property). All accrued and unpaid interest is payable monthly in arrears on the first of each month. The Company has borrowed $500,000 against this line of credit as of December 31, 2008 and 2007.

On July 29, 2008, the Company signed an extension agreement related to the secured line of credit with Pinnacle. The extension provides for a revolving $500,000 secured line of credit for a term of six months. As in the original agreement, loans under the extension agreement bear interest at prime plus 1.5% and are collateralized by the assets of the Company (other than real property).

On January 26, 2009, the Company entered into an amendment of its line of credit agreement with Pinnacle. The amendment (a) revised the interest rate calculation from the Prime Rate as published by the Wall Street Journal plus 1.5% per annum to 8.5% per annum, and (b) extended the maturity date until July 31, 2009.

On March 13, 2009, the Company completed a $6,000,000 private placement (the "Offering"). As part of the Offering, the Company issued 202.9 shares of Series B-1 Convertible Preferred Stock ("Series B Preferred Stock"), $4,782,600 in Secured Convertible Promissory Notes ("Promissory Notes"), a Preferred Stock Purchase Warrant to purchase 797.1 shares of non-voting Series B-2 Preferred Stock ("Preferred Stock Warrant"), a Common Stock Purchase Warrant to purchase 350,000 shares of common stock ("Common Stock Warrant") and amended its Credit Agreement with Pinnacle.

The Promissory Notes bear interest at an annual rate of 5% and mature on July 31, 2009. Upon approval by the Company's stockholders of the Offering or an earlier liquidation event of the Company, the Promissory Notes automatically convert into Series B-1 Preferred Stock for $6,000 per share and the Preferred Stock Warrant becomes null and void. The board of directors anticipates submitting the Offering for approval at the Company's 2009 annual meeting of stockholders. If stockholder approval of the Offering is not obtained, the Promissory Notes will remain outstanding and the Preferred Stock Warrant will become exercisable for an aggregate of 797.1 shares of non-voting Series B-2 Preferred Stock for a term of 4 years commencing on July 31, 2009 at a price of $6,000 per share.

The Company granted its placement agent for the Offering a Common Stock Warrant to purchase 350,000 shares of common stock for $0.41 per share. Until stockholder approval of the Offering, the warrant may only be exercised for 88,550 shares of the Company's common stock. Following receipt of stockholder approval of the Offering, the warrant may be exercised in full.

In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a third amendment to the line of credit with Pinnacle pursuant to which the parties agreed to change the final payment date of the amounts borrowed under the line of credit from July 31, 2009 to instead provide that 50% of the amount of all loans and advances made by Pinnacle pursuant to the line of credit will become due and payable on July 31, 2010 and the remaining outstanding loans and advances , together with interest thereon, will become due and payable on July 31, 2011.

As a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the principal amount under the line of credit into shares of the Company's common stock at a conversion rate of $0.41 per share upon receipt of stockholder approval by the Company of such conversion.

In connection with the private placement transaction, certain holders of our capital stock, representing approximately 51.7% of the voting power of the outstanding shares of capital stock entitled to vote on the private placement transaction (or who represent approximately 44.2% of the voting power of the outstanding shares of capital stock entitled to vote in the private placement transaction if one of our interested stockholders is not able to vote with respect to such matter pursuant to the rules and regulations of the NYSE Alternext as a result of the existence of a transaction relating to the private placement), entered into a voting agreement, pursuant to which these holders agreed to vote or execute and deliver a written consent in favor of approving the private placement transaction.

If the Company receives stockholder approval of the Offering, the Company's capital resources will be sufficient to support our current business plan through March 2010. 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.

The Company's operating activities used $722,000 in 2008, compared to $668,000 used during 2007. The increase in cash used in 2008 was primarily due to the decrease in revenues and the increase in costs and expenses during 2008.

The Company's investing activities used $119,000 of cash in 2008 compared to $3,000 cash used in 2007. Cash used in 2008 was for capital expenditures related to additional equipment and improvements for the packaging and filling lines. Cash used in 2007 was for capital expenditures for the new filling lines offset by the proceeds of the sale of equipment of our plating division.

The Company's financing activities provided $98,000 of cash in 2008 compared to $966,000 provided in 2007. The cash provided in 2008 was from the proceeds of the exercise of common stock options and warrants. The cash provided in 2007 was from the proceeds from the completion of three (3) private placement transactions net of repayment of notes payable.

Recent Pronouncements

In February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115 ("Statement 159"), which permits but does not require a Company to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have evaluated the new statement and have determined that it does not have a significant impact on the determination or reporting of our financial results.

In June 2007, the FASB issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, ("EITF 07-3"). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. EITF 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007. We evaluated the new statement and have determined that it does not have a significant impact on the determination or reporting of our financial results.

In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), Business Combinations ("FAS 141R"), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. FAS 141R will only have an impact on our financial position or results of operations if we enter into a business combination.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51 ("FAS 160"), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 160 on its consolidated financial position, results of operations and cash flows but believes the adoption of FAS 160 will not have a material effect on its results of operations, financial position and cash flows.

In December 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective for the Company's collaborations existing after January 1, 2009. The Company is currently evaluating the impact, if any, of adopting EITF 07-1 on its consolidated financial statements but believes the adoption will not have a material effect on its results of operations or financial position.

In March 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS No. 161 also improves transparency about the location and amounts of derivative instruments in an entity's financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of the adoption of SFAS 161 on its consolidated financial statements but believes the adoption will not have a material effect on its results of operations or financial position.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, "Determination of the Useful Life of Intangible Assets" (FSP 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the impact of the adoption of FSP 142-3 on its consolidated financial statements but believes the adoption will not have a material effect on its results of operations or financial position.

In May 2008, the FASB issued FASB Staff Position ("FSP") No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement)," or FSP APB 14-1, which requires separate accounting for the debt and equity components of convertible debt issuances. The requirements for separate accounting must be applied retrospectively to previously issued cash-settleable convertible instruments as well as prospectively to newly issued instruments, negatively affecting both net income and earnings per share for issuers of the instruments. The Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of FSP APB 14-1 will have on its consolidated financial statements.

In June 2008, the FASB issued FSP EITF No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, "Earnings per Share." The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Company is currently evaluating the impact that the adoption of EITF 03-6-1 will have, if any, on its consolidated financial statements.

In June 2008, the FASB issued EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock. EITF 07-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, "Accounting For Derivative Instruments and Hedging Activities" and/or EITF 00-19, "Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. The Company is currently evaluating the impact that the adoption of EITF 07-5 will have, if any, on its consolidated financial statements.

In October 2008, the FASB issued FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FASB Staff Position (FSP) clarifies the application of FASB Statement No. 157, "Fair Value Measurements", in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. We evaluated the new statement and have determined that it does not have a significant impact on the determination or reporting of our financial results.

Critical Accounting Policies and Estimates

The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

Environmental Remediation Liability

On April 6, 2000, officials of the New Jersey Department of Environmental Protection ("DEP") inspected the Company's leased storage site in Buena, New Jersey, and issued Notices of Violation ("NOVs") relating to the storage of waste materials in a number of trailers at the site. The Company established a . . .