This " Management ' s Discussion and Analysis of Financial Condition and Results of Operations " section and other sections of this Quarterly Report on Form 10 Q 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 NovasomeŽ 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 its 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 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. T he Company will also continue to market its other capabilities to customers, such as product development services and analytical services, either as a comprehensive package or on an individual basis. 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 NYSE Amex that it was failing to satisfy certain of NYSE Amex's 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 last six fiscal years. The Company's stockholders' equity at March 31, 2009 was $3.6 million.

On June 8, 2008, the Company submitted a plan advising NYSE Amex of the actions that it would take to bring the Company into compliance with the continued listing standards. On July 15, 2008, NYSE 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 NYSE 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 NYSE Amex.

On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the "Offering") as more fully described in Footnote 11 to the Company's Consolidated Financial Statements. On May 4, 2009, NYSE Amex notified the Company that it had determined that the Company has made a reasonable demonstration of its ability to regain compliance with Sections 1003(a)(ii) and (iii) of the Company Guide in accordance with Section 1009 and therefore granted the Company an extension from May 6, 2009 until May 31, 2009 to regain compliance with these continued listing standards.

Results of Operations

Three months ended March 31, 2009 compared to March 31, 2008

The Company had a net loss attributable to common stockholders of $1,902,000, or $0.13 per share, for the three months ended March 31, 2009, compared to net income of $40,000, or $0.00 per share, in the comparable period for 2008, which resulted from the following:

Revenues (in thousands):


        Components of Revenue:           2009     2008    $ Change  % Change
        Product sales                   $   505 $   1,300 $   (795)    (61)%
        Research and development income       1        65      (64)    (98)%
        Licensing and royalty income         88       135      (47)    (35)%
          Total Revenues                $   594 $   1,500 $   (906)    (60)%

The decrease in product sales is due to poor economic conditions resulting in a decrease in orders from our existing customers for the three months ended March 31, 2009. A portion of the decrease in revenue was offset by revenue from new 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; the decrease in research and development income during the period ended March 31, 2009 as compared to the same period in 2008 is attributable to this variance. Licensing and royalty income decreased as a result of a decrease in sales of royalty- bearing products.

Costs and expenses (in thousands):

                                            2009     2008   $ Change % Change
      Cost of sales                        $   600  $   681 $   (81)    (12)%
      Selling, general and administrative      648      663     (15)     (2)%
      Product development and research         119      113       6        5%
        Totals costs and expenditures     $  1,367 $  1,457 $   (90)     (6)%

Cost of sales decreased for the three months ended March 31, 2009 as a result of the decrease in product sales. Cost of sales as a percent of product sales can vary depending on product mix. Cost of sales as a percentage of product sales was 119% for the three month period ended March 31, 2009 as compared to 52% for the comparable period in 2008. The increase in the cost of sales percentage was primarily due to our underutilized manufacturing capacity which lead to unabsorbed overhead expenses.

Selling, general and administrative expenses for the three month period ended March 31, 2009 decreased as a result of lower stock based compensation expense of $39,000 from the issuance of stock options offset by an increase in professional fees and other fees of $32,000.

Interest (Expense) Income (in thousands):

                                  2009      2008   $ Change  % Change
               Interest Expense $   (160) $   (10) $   (150)  (1500)%
               Interest Income   $     1   $    7  $     (6)    (86)%

Interest expense increased for the three months ended March 31, 2009 as compared to the same period in 2008 due to approximately $151,000 of accrued interest and amortization of debt discount and debt issuance costs related to the convertible notes payable issued in connection with the Offering (see Footnote 11 to the Company's Consolidated Financial Statements) that were included in interest expense in 2009. Interest income decreased for the three months ended March 31, 2009 as compared to the same period in 2008 due to lower average cash balances and interest rates in 2009.

Net (loss) income attributable to common stockholders (in thousands, except per share numbers):

                                    2009         2008      $ Change
    Net (loss) income            $   (1,902)       $   40 $   (1,942)
    attributable to common
    stockholders
    Net (loss) income per share        (.13)          .00       (.13)

Liquidity and Capital Resources

The Company's operating activities used $825,000 of cash during the three months ended March 31, 2009 compared to $58,000 used in the comparable period of 2008. The use of cash for the three months ended March 31, 2008 is substantially a result of the net loss for the period.

The Company's investing activities used $145,000 of cash in the three months ended March 31, 2009 compared to $6,000 of cash used in investing activities in the first three months of 2008. The funds used for the period ending March 31, 2009 were for additional equipment and improvements for the packaging and filling lines.

The Company's financing activities provided $5,280,000 of cash in the three months ended March 31, 2009 compared to $247,000 used in the three months ended March 31, 2008. The cash provided for the three month period ended March 31, 2009 is mainly from the proceeds of the Convertible Preferred Stock and the Note Payable as more fully described in Footnote 11 to the Company's Consolidated Financial Statements. The cash used for the period ended March 31, 2008 represents a pay down of the note payable balance offset by proceeds from the exercise of common stock options.

The Company's principal sources of liquidity are cash and cash equivalents of approximately $4,481,000 at March 31, 2009 and future cash from operations. The Company had working capital of $253,000 at March 31, 2009.

At the Company's 2009 annual meeting of stockholders held on May 15, 2009, the Company's stockholders approved the Offering and Note Conversion. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of promissory notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company's Series B-1 Preferred Stock and the warrants to purchase shares of the Company's Series B-2 Preferred Stock issued to these investment funds were terminated. Additionally, the $500,000 principal amount outstanding under the Pinnacle line of credit was converted into 1,219,512 shares of the Company's common stock.

We believe that our operating cash flow along with our existing capital resources will be sufficient to support our current business plan through May 2010. The Company may 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 on terms acceptable to the Company, or at all.

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.

Please refer to the Company's 2008 10-K for a complete list of all Critical Accounting Policies and Estimates. See also Footnote 3 to the Company's Consolidated Financial Statements.