Product Sales

Product sales decreased by approximately 10%, or $171,000, to $1,460,000 during the three-month period ended March 31, 2009 in comparison to $1,631,000 during the same period in 2008. If we had shipped our backlog of orders aggregating approximately $48,000 as of March 31, 2009, our products sales would have been down by 8%, or $123,000. The backlog of orders as of March 31, 2009 was shipped to customers in April 2009. We are making significant investments to expand our production capacity in order to address this inventory shortage.

We appreciate the volume of business that we have maintained during these difficult economic times when our customers are being forced to cut costs wherever possible to stay in business. Even in this market with declining milk prices, our lead product, First Defense®, continues to benefit from wide acceptance as an effective tool to prevent bovine enteritis (scours) in newborn calves. However, sales of this product decreased 11% during the three-month period ended March 31, 2009 in comparison to the same period in 2008. We have sold over 9,000,000 doses of First Defense® since receiving USDA approval of this product in 1991. Sales are normally seasonal, with higher sales expected during the first and fourth quarters and lower sales expected during the second and third quarters. During 2006, certain regional organic certifying agencies determined that the ingredients in First Defense® are in compliance with the National Organic Program (NOP) and may be considered for use on organic farms. First Defense® should be considered a preventative vaccine as described in USDA-NOP regulations for organic producer consideration when establishing management plans.

Sales of Wipe Out® Dairy Wipes decreased by 16% during the three-month period ended March 31, 2009 in comparison to the same period in 2008. Domestic sales of this premium product are challenged by less expensive competitive products and by the continuing economic pressure in the U.S. dairy industry that is forcing many small producers out of business.

Other Revenues

Royalty income decreased to $1,000 during the three-month period ended March 31, 2009 in comparison to $5,000 during the three-month period ended March 31, 2008, as the result of lower sales reported by the firm that has licensed our milk protein purification technology.

                              IMMUCELL CORPORATION



Gross Margin

Changes in the gross margin on product sales are summarized in the following
table for the respective periods (in thousands, except for percentages):



                                        Three-Month Periods
                                          Ended March 31,             Decrease
                                        2008            2009        Amount      %
          Gross margin               $       817       $   721     $     96     12 %
          Percent of product sales            50 %          49 %          1 %    2 %

                                       Twelve-Month Periods
                                          Ended March 31,             Decrease
                                        2008            2009        Amount      %
          Gross margin               $     2,442       $ 1,973     $    469     19 %
          Percent of product sales            50 %          44 %          6 %   12 %

We now experience lower gross margin percentages in comparison to those achieved in the past. The gross margin as a percentage of product sales was 49% and 50% during the three-month periods ended March 31, 2009 and 2008, respectively. The gross margin as a percentage of product sales was 44% and 50% during the twelve-month periods ended March 31, 2009 and 2008, respectively. This compares to gross margin percentages of 45%, 52% and 56% for the years ended December 31, 2008, 2007 and 2006, respectively. Our current annual target for gross margin percentage is 50%, a level consistent with our experience for the year ended December 31, 2007 and for the twelve-month period ended March 31, 2008. We expect some fluctuations in gross margin percentages from quarter to quarter. We feel that a number of factors account for the relative increase in costs and for their variability. Biological yields from the raw material used in the production of First Defense ® do fluctuate over time. Like most manufacturers in the U.S., we have been experiencing increases in the cost of raw materials that we purchase. Product mix also affects gross margin in that we earn a higher gross margin on First Defense® and a lower gross margin on Wipe Out® Dairy Wipes. Because First Defense® customers are price sensitive, we held its selling price without significant increase for approximately seven years, believing that we could benefit more from higher unit sales volume than through a higher average selling price per unit. However, during the first quarter of 2008, we did implement a modest increase to the selling price of First Defense®.

Product Development and Licensing

Product development expenses increased by approximately 30%, or $100,000, to $432,000 during the three-month period ended March 31, 2009 in comparison to the same period in 2008. Product development expenses aggregated 30% and 20% of total revenues during the three-month periods ended March 31, 2009 and 2008, respectively. The increased expenses during the three-month period ended March 31, 2009 principally reflect the costs of funding the development of Mast Out® internally.

In April 2000, we acquired an exclusive license from Nutrition 21, Inc. to develop and market Nisin-based products for animal health applications, which allowed us to initiate the development of Mast Out®. In November 2004, we paid Nutrition 21 approximately $965,000 to buy out this royalty and milestone-based license to Nisin, thereby acquiring control of the animal health applications of Nisin. Nisin, the same active ingredient contained in Wipe Out®Dairy Wipes, is an antibacterial peptide that is commonly used as a preservative in dairy food products. Nisin is known to have activity against most gram positive and some gram negative bacteria. Mast Out ®, an intramammary infusion product containing Nisin, is being developed as an alternative to traditional antibiotics used in the treatment of mastitis in lactating dairy cows. The use of antibiotics in food-producing animals may be a contributing factor to the rising human public health problem of bacterial drug resistance. Mast Out® could potentially reduce the use of traditional antibiotics in the treatment of mastitis.

Traditional antibiotic products currently on the market for use in the treatment of mastitis are sold subject to a requirement to discard milk from treated cows during the course of and for a period following antibiotic treatment (the milk discard requirement). Currently, mastitis treatment is generally limited to only clinical cases - those cases where cows are producing abnormal milk - since that milk already is unsuitable for commercial sale. Because milk from cows with subclinical mastitis (those with infected udders,

but still producing normal milk) can be sold, dairy producers generally do not treat subclinical mastitis - as doing so would give rise to the milk discard requirement. The safety profile of Nisin and its long history as a food preservative may allow for the use of Mast Out® in the U.S. without a milk discard requirement, which would be a significant competitive advantage. We are not aware of any other intramammary mastitis treatment product that has such a "zero discard" claim. Without the milk discard requirement, we believe Mast Out ® could expand the subclinical mastitis treatment market niche. Regulations in the European Union will likely require that Mast Out® be sold subject to a milk discard requirement in that territory.

In January 2004, we achieved positive results from an experimental field trial of Mast Out® in 139 cows with subclinical mastitis. The placebo-controlled, blinded, multi-farm study was conducted in collaboration with researchers at Cornell University. Mast Out® demonstrated a statistically significant overall cure rate in two separate dosage groups as compared to the placebo group. The currently proposed treatment regimen (three doses at three consecutive milkings) demonstrated a 58% efficacy rate in eliminating infection in lactating cows with culture-confirmed mastitis (compared to a placebo cure rate of 10%). This efficacy rate represents a blended average of results from cows with mastitis caused by several different pathogens. For example, Mast Out® achieved a statistically significant 100% efficacy rate in Streptococcus agalactiae cases (compared to a placebo cure rate of 25%), where antibiotics are commonly used effectively, and a statistically significant 28% efficacy rate in Staphylococcus aureus cases (compared to a placebo cure rate of 0%), where antibiotics are often not effective.

In December 2004, we entered into a product development and marketing agreement with Pfizer Animal Health, a division of Pfizer, Inc. covering Mast Out®. In July 2007, we received notice from Pfizer that it had elected to terminate the product development and marketing agreement. Since then, Pfizer has returned to us all rights, data, information, files, regulatory filings, materials and stocks of Nisin and Nisin producing cultures relating to the development of Mast Out®. Under that agreement (as amended and supplemented), we received $2,375,000 in payments from Pfizer. During 2005, Pfizer completed a study further supporting the effectiveness of Mast Out® in cows with subclinical mastitis. During 2006, Pfizer made significant progress developing data required for product registration in the areas of effectiveness, manufacturing and pharmacokinetics.

We do not believe that Pfizer's decision to terminate the product development and marketing agreement was based on any unanticipated efficacy or regulatory issues. Rather, we believe Pfizer's decision was primarily market driven, largely relating to concerns that the use of Mast Out® may require specific treatment restrictions at the herd level, when used to treat subclinical mastitis with no milk discard. Due to its antibacterial nature, Nisin in bulk tank milk could interfere with the manufacture of certain (but not all) cultured milk products, such as some kinds of cheese and yogurt, if a high enough percentage of animals from a herd is treated at any one time. We believe that this risk can be eliminated by following a herd-level treatment guideline, currently estimated at approximately 2% of the herd on Mast Out® treatment in any given week. This guideline would require the subclinically mastitic cows in a herd to be treated over a period of weeks rather than all at once, in order to ensure that Nisin levels in bulk tank milk remain below levels that could affect the susceptible starter cultures. Milk that is sold exclusively for fluid milk products would not be subject to this restriction. We believe that the benefits of using Mast Out® would outweigh the management costs associated with implementing this treatment guideline. Over time and with market acceptance of Mast Out®, Nisin-resistant starter cultures could be developed using starter development and improvement programs that are common in the cheese industry for development of desirable culture characteristics such as phage-resistance and flavor development. These activities could result in relaxation or elimination of the herd-level treatment guidance. Our decision to continue product development efforts reflects our belief that Mast Out® is approvable by the FDA without a milk discard requirement for sale in the U.S. We believe that such a product has significant sales potential in the U.S. dairy market.

In July 2007, we began preparations for the pivotal effectiveness study required for FDA approval of Mast Out®. Such preparations included the production of registration batches of drug product to fulfill the pivotal regulatory requirements of effectiveness, target animal safety, and stability at no less than 10% of the scale anticipated for commercial manufacture. In June 2008, we initiated the pivotal effectiveness study. We are working with more than a dozen investigators across the U.S. to complete this study. As of the end of April 2009, we had enrolled approximately 85% of the qualified cases required to reach our targeted study size. It has taken longer than we first estimated to achieve the enrollment of the total number of cases meeting our clinical requirements, but we believe the extra time invested at this stage will provide us with more robust results. We expect to complete this study during the first half of 2009. Upon completion of the treatment phase, it will take approximately two to three months to close out all clinical sites, perform statistical analysis of the data and discuss the results with the FDA before a public announcement of study results can be made.

Commercial introduction of Mast Out ® in the United States is subject to approval of our New Animal Drug Application (NADA) by the U.S. Food and Drug Administration (FDA), Center for Veterinary Medicine, which approval cannot be assured. Foreign regulatory approvals would be required for sales in key markets outside of the United States and would involve some similar and some different requirements. While positive results from a pivotal effectiveness study are necessary to support continued development of Mast Out®, the approval of several additional Technical Sections under the FDA's phased review of a NADA is also required. Included among the additional Technical Sections required for NADA final approval are: 1) Environmental Impact, 2) Target Animal Safety, 3) Human Food Safety, 4) Chemistry, Manufacturing and Controls (CMC) and 5) several administrative requirements. During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter from the FDA. Work required for the Target Animal Safety Technical Section has been initiated, and critical studies are planned for 2009. The Human Food Safety data will determine if a milk discard period will not be required. The Human Food Safety Technical
Section includes several subsections such as residue chemistry (which is in progress), total metabolism (which is complete), effects of drug residues in food on human intestinal microbiology (which is under FDA review), effects on bacteria of human health concern or antimicrobial resistance (which is complete) and toxicology (which is complete). Toxicology studies establish an Acceptable Daily Intake (ADI) level for humans, and the toxicological ADI for Nisin supports a zero milk and meat withhold claim. The toxicology studies were similar to the studies performed by others that affirmed the Generally Regarded As Safe (GRAS) status of Nisin for use as a food preservative. All of these subsections must be completed before the Human Food Safety Technical Section Complete Letter establishing a zero milk discard or a milk withhold period can be issued by the FDA.

Before the CMC Technical Section can be completed, a commercial scale manufacturing site for the Active Pharmaceutical Ingredient (API) that is compliant with current Good Manufacturing Practice (cGMP) regulations must be identified. This site will be subject to FDA approval and inspection. As the result of work we have done with outside companies to examine manufacturing options, we have recently determined that contracting for the manufacture of the API may require investments that could potentially deplete all of our available cash. We are not prepared to take that risk at this time without a partner. We do have a commercial manufacturing relationship with an FDA-approved drug product manufacturer to formulate the API into drug product, conduct sterile-fill of syringes and perform final packaging. We intend to complete all the Technical Sections pertaining to the safety, effectiveness and zero milk discard claims during 2009. Subject to achieving these critical development milestones, it is our objective to enter into an alliance with a partner that could help underwrite the commercial manufacturing costs and complete the CMC Technical Section and subsequently optimize the launch, distribution and sales of Mast Out®.

In addition to our work on Mast Out ®, we are actively exploring further improvements, extensions or additions to our current product line. For example, we currently are investigating therapies that could prevent scours in calves caused by enteric pathogens other than E. coli K99 and bovine coronavirus (the current First Defense® claims). In connection with that effort, during the second quarter of 2006 we obtained an option to an exclusive license from Baylor College of Medicine covering certain rotavirus vaccine technology. We anticipate converting this option into a license during the second quarter of 2009. Additionally, during the second quarter of 2007, we acquired an option to an exclusive license from Ohio State University covering certain rotavirus technology. Results from recently completed pilot studies justify conducting a pivotal effectiveness study in 2009. This study could position us for USDA approval of a product effective against scours caused by rotavirus in 2010. While we continue to pursue internally funded product development programs, we also remain interested in acquiring new products and technologies that fit with our sales focus on the dairy and beef industries. As additional opportunities arise to commercialize our own technology, or licensable technology, we may begin new development projects.

We believe that market opportunities for growth of First Defense ® sales exist in foreign territories. Regulatory authorities in some foreign territories may require that our manufacturing operations be compliant with cGMP regulations. We are working with in-country consultants in key markets to help us through the process of seeking foreign regulatory approvals. Because of import restrictions, in-country production may be required to gain regulatory approval to sell First Defense ® in Australia and New Zealand. In March 2008, we entered into a license agreement with Immuron, Ltd. (formerly Anadis, Ltd.). Under this agreement, we gained access to relevant production technology and capabilities of Immuron in Australia. We are obligated to pay Immuron a royalty on any sales of First Defense® manufactured in Australia in collaboration with Immuron.

Over the past three years, we have initiated efforts to become compliant with current Good Manufacturing Practice (cGMP) regulations in our manufacturing operations. Compliance with cGMP regulations will require a sustained investment. We believe that cGMP standards will further increase product quality and compliance with current regulations applicable to certain of our products and may open access to foreign markets where such standards are imposed.

General and Administrative Expenses

During the three-month period ended March 31, 2009, general and administrative expenses decreased by 6%, or $15,000, to $234,000 as compared to the same period in 2008. While we implement efficiencies where possible, we continue to incur costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company.

Product Selling Expenses

During the three-month period ended March 31, 2009, product selling expenses decreased by 25%, or $44,000, to $128,000, as compared to the same period in 2008, aggregating 9% and 11% of product sales during the three-month periods ended March 31, 2009 and 2008, respectively. The decrease resulted, in large part, from a reduction in advertising expenses. Our objective is to maintain the ratio of product selling expenses to product sales below 15% on an annual basis.

(Loss) Income Before Income Taxes and Net (Loss) Income

Our loss before income taxes of $(36,000) during the three-month period ended March 31, 2009 contrasts to income before income taxes of $129,000 during the three-month period ended March 31, 2008. Our income tax benefit was 5% of our loss before income taxes during the three-month period ended March 31, 2009 in contrast to income tax expense of 40% of our income before income taxes during the three-month period ended March 31, 2008. Our net loss for the three-month period ended March 31, 2009 was $(35,000) (or $(0.01) per share) in contrast to net income of $78,000 (or $0.03 per share) during the three-month period ended March 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments increased by 2%, or $86,000, to $5,140,000 at March 31, 2009 from $5,054,000 at December 31, 2008. Net cash provided by operating activities amounted to $5,000 during the three-month period ended March 31, 2009 as compared to $558,000 during the three-month period ended March 31, 2008. Total assets increased by 1%, or $105,000, to $10,233,000 at March 31, 2009 from $10,128,000 at December 31, 2008. We have no outstanding bank debt. Net working capital increased by 2%, or $153,000, to $6,398,000 at March 31, 2009 from $6,245,000 at December 31, 2008. Stockholders' equity increased by 1%, or $98,000, to $9,742,000 at March 31, 2009 from $9,644,000 at December 31, 2008, primarily as a result of the net loss being more than offset by an increase in equity from stock option exercises, during the first three months of 2009.

As we implement process improvements, we are investing in personnel, equipment and facility modifications to increase the efficiency and quality of our operations. In 2008, our Board of Directors authorized an investment of approximately $1,029,000 for facility modifications and production equipment. In December 2008, our Board of Directors increased the authorized spending limit by $285,000. We have been monitoring the status of the economy and our business as we make decisions pertaining to these investments. As of April 1, 2009, we have authorization from our Board of Directors to spend up to $848,000 on this project, net of payments made since January 1, 2008. Currently, we do not believe that we will need to invest this full amount to meet our objectives.

The return of the Mast Out®product rights to us has caused us to increase our spending on product development expenses that are no longer being funded by Pfizer. As previously reported, we expected a net loss in 2008, and we are projecting another net loss for 2009, after the nine consecutive years of profitability that we recorded during the years ended December 31, 1999 to December 31, 2007. We believe that the commercial prospects for Mast Out ® warrant this level of investment. With approximately $5,140,000 in cash and short-term investments as of March 31, 2009, we believe that we have sufficient capital resources to meet our working capital requirements and to finance our ongoing business operations during at least the next twelve months.