The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this report and is qualified in its entirety by the foregoing.

Executive Overview

Epolin, Inc. (the "Company", "we", "us" and "our") which was incorporated in the State of New Jersey in May 1984, is a specialized chemical company primarily engaged in the manufacturing, marketing, research and development of dyes and dye formulations. Our business is heavily weighted towards the development, manufacture and sale of near infrared dyes. Applications for these dyes cover several markets that include laser protection, welding, sunglasses, optical filters, glazing and imaging and security inks and tagants. Paralleling the growth of the dye business, we maintain a level of production and sales of specialty products made on a custom basis. These include additives for plastics, thermochromic materials for use in paints as well as other specialty chemicals made in low volume to sell at prices that reflect the value of the product. However, unlike the dye business, we do not expect our specialty chemical business to grow.

We sell our products to manufacturers of plastics/resins, credit cards, electronics, glass and other basic materials. Our customers are located in all regions of the world, although a material portion of our business is dependent on certain domestic customers, the loss of which could have a material effect on operations. During the year ended February 28, 2009, approximately 31.0% of sales were to three customers. During the year ended February 29, 2008, approximately 37.1% of sales were to three customers. Two of these customers, located in the Eastern United States, accounted for 29.3% of sales. The loss of one or more key customers could have a material adverse effect on the Company.

Results of Operations

The following tables set forth operations data for the year ended February 28, 2009 and year ended February 28, 2008.

                                                     2009            2008         % change
                                                 ------------    ------------     ----------
Sales                                            $  3,091,539    $  3,592,940          -14.0%

Gross profit                                        1,647,340       2,188,931          -24.7%

Gross profit percentage                                  53.3%           60.9%          -7.6%

Selling, general & administrative                   1,251,521       1,235,078            1.3%
                                                 ------------    ------------

Operating income                                      395,819         953,853          -58.5%
Other Income                                           70,861         174,229          -59.3%
                                                 ------------    ------------

Income before taxes                                   466,680       1,128,082          -58.6%

Income taxes                                          139,111         404,455          -65.6%
                                                 ------------    ------------

Net income (after taxes)                         $    327,569    $    723,627          -54.7%
                                                 ============    ============

Sales

For the year ended February 28, 2009, sales were $3,092,000 as compared to $3,593,000 for the year ended February 29, 2008, a decrease of $501,000 or 14.0%.

Such decreases in sales is primarily due to our ink and coating sales which have deteriorated significantly in recent periods compared to our other markets in which sales, although declining to a minor extent, have remained relatively stagnant. For the year ended February 28, 2009, sales in the ink and coating market decreased to $821,000 from $1,308,000 for the year ended February 29, 2008, a decrease of $487,000. The decrease in sales in the ink and coating market is primarily due to reduced sales in the security inks business which had been a key area of our growth from 2005 to 2007.

Sales in the eye protection market, which represents our oldest and traditional market, were $1,405,000 in fiscal 2009 compared to $1,409,000 in fiscal 2008, a decrease of $4,000. Sales in the light management market were $697,000 in fiscal 2009 compared to $701,000 in fiscal 2008, a decrease of $4,000, while sales of custom products were $161,000 in fiscal 2009 compared to $167,000 in fiscal 2008, a decrease of $6,000.

Sales overseas increased in Asia and Europe for the year ended February 28, 2009 compared to the prior year, while sales decreased in the United States for the year ended February 28, 2009 compared to the year ended February 29, 2008. For fiscal 2009, sales in Asia increased to $578,000 from $481,000 for fiscal 2008, while in Europe, sales increased to $398,000 from $273,000 for the prior year. In the United States, sales decreased to $2,115,000 in the year ended February 28, 2009 from $2,838,000 in the year ended February 29, 2008.

Gross Profit

Gross profit, defined as sales less cost of sales, was $1,647,000 or 53.3% of sales for the year ended February 28, 2009 compared to $2,189,000 or 60.9% of sales for the year ended February 29, 2008. In terms of absolute dollars, gross profit decreased $542,000 in fiscal 2009 compared to the prior year.

Cost of sales was $1,444,000 for the year ended February 28, 2009 which represented 46.7% of sales compared to $1,404,000 for the year ended February 29, 2008 which represented 39.1% of sales. Total cost of materials decreased $2000 in in fiscal 2009 compared to fiscal 2008, while total factory overhead increased $42,000 in fiscal 2009 compared to the prior year, primarily due to increases in research and development salaries and supplies and insurance expense, offset by decreases in applied factory overhead.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $1,252,000 or 40.5% of sales for the year ended February 28, 2009 compared to $1,235,000 or 34.4% of sales for the year ended February 29, 2008, an increase of $17,000. Such increase in absolute dollars was primarily due to increases in professional fees, directors fees (non-cash compensation resulting from the grant of shares), travel, office supplies, miscellaneous expenses and a reduction in certain allocated expenses to costs of sales, offset by a decrease in officers' salaries (primarily from the Chairman of the Board's decision to become a part-time employee with a corresponding reduction in his base salary), and a decrease in directors' and officers' insurance and employee benefits. In addition, we incurred a placement fee of $12,000 in fiscal 2008 for which there was no comparable item in fiscal 2009.

Operating Income

Operating income, in terms of absolute dollars, decreased to $396,000 in fiscal 2009 from $954,000 for fiscal 2008, a decrease of $558,000. Such change in fiscal 2009 was primarily due to the decrease in sales for the year compared to fiscal 2008. As a percentage of sales, operating income was 12.8% of sales for fiscal 2009 compared to 26.5% of sales for fiscal 2008.

Other Income

Total other income for the year ended February 28, 2009 was $71,000 as compared to $174,000 for the year ended February 29, 2008. During fiscal 2008 we received an insurance reimbursement of $61,000 for flood damage. There was not a comparable item in fiscal 2009. Also, our interest income decreased to $53,000 in fiscal 2009 from $89,000 in fiscal 2008.

Net Income

During fiscal 2009, we reported income before taxes of $467,000 as compared to income before taxes of $1,128,000 for fiscal 2008. Income taxes were $139,000 for fiscal 2009 compared to $404,000 for the year ended February 29, 2008. Changes in income taxes are generally attributed to changes from period to period in sales and expenses. Net income after taxes was $328,000 or $0.03 per share for the year ended February 28, 2009 as compared to $724,000 or $0.06 per share for the year ended February 29, 2008.

Net income in the future will be dependent upon our ability to increase revenues faster than increases, if any, in our selling, general and administrative expenses, research and development expenses and other expenses. Prior to fiscal 2007, sales had grown for a number of consecutive years. In fiscal 2007, however, sales decreased by $91,000 compared to fiscal 2006 and, in fiscal 2008, sales decreased by $17,000 compared to fiscal 2007. This has continued into fiscal 2009 with sales decreasing by $501,000 compared to fiscal 2008. Unlike fiscal 2008 and 2007, however, in which net income did improve in each year compared to the prior year, net income in fiscal 2009 decreased by $396,000 compared to fiscal 2008.

Operations Outlook

Following a period of readjustment in our business priorities, we were able to achieved $3,701,000 in sales for fiscal 2006 which was $821,000 or 28.5% greater than the prior fiscal year. In fiscal 2007, however, sales decreased to $3,610,000, a decrease of 2.5% from the prior year, and in fiscal 2008, sales decreased to $3,593,000, a decrease of 0.5% from fiscal 2007. This has continued into fiscal 2009 in which sales decreased at a much greater rate to $3,092,000 or 14.0% compared to fiscal 2008. During these periods of reduced sales, we had a major decline in sales of security inks for the credit card market which had been a key area of our growth from 2005 to 2007. While this market remains a

source of business for us, we may never be able to achieve the same level of sales in the future which we achieved from 2005 to 2007 in the security inks market. Nevertheless, we are confident that with our core group of products, we will be able to maintain sales in our principal markets, such as the eye protection market and the light management market, while always seeking new areas for the use of our dyes.

As a result of recent expressions of interest received, management began in fiscal 2009 to explore strategic alternatives for the Company. In February 2009, the Company retained Millburn Capital Group as its financial advisor in connection with the Board's decision to explore strategic alternatives for the Company, including the potential sale of the Company. The Company recently announced that it has entered into a non-binding letter of intent whereby all of the outstanding capital stock of the Company will be acquired by a strategic purchaser. There can be no assurance that any definitive agreement will be entered into, that any proposed transaction will be approved by the shareholders of the Company or that a transaction will be completed as a result of the execution of the letter of intent. The Company does not currently intend to publicly disclose additional information about the status of this process but will publicly report all required information on a timely basis.

Liquidity and Capital Resources

Our primary source of funds is cash flow from operations in the normal course of selling products. On February 28, 2009, we had working capital of $2,561,000, a debt to equity ratio of 0.15 to 1, and stockholders' equity of $3,549,000 compared to working capital of $3,007,000, a debt to equity ratio of 0.15 to 1, and stockholders' equity of $3,911,000 on February 29, 2008. On February 28, 2009, we had $1,545,000 in cash and cash equivalents, total assets of $4,096,000 and total liabilities of $547,000, compared to $1,980,000 in cash and cash equivalents, total assets of $4,478,000 and total liabilities of $566,000 on February 29, 2008.

Net cash provided by operating activities for the year ended February 28, 2009 was $445,000 which was primarily the result of net income of $328,000, depreciation of $105,000, plus a decrease in accounts receivable of $247,000 and an increase in accounts payable of $29,000 and accrued expenses of $14,000, offset by increases in inventories of $25,000, prepaid taxes of $228,000, and decreases in taxes payable of $37,000. Net cash provided by operating activities for the year ended February 29, 2008 was $802,000 which was primarily the result of net income of $724,000, plus increases in accrued expenses of $26,000 and taxes payable of $31,000, and decreases in prepaid expenses of $17,000, offset by an increase in accounts receivable of $71,000 and decreases in accounts payable of $42,000.

Net cash used by investing activities for year ended February 28, 2009 was $162,000 due to property and equipment purchases of $150,000 and increase in cash value of a life insurance policy of $12,000, while net cash used by investing activities for year ended February 29, 2008 was $94,000 due to equipment purchases of $120,000 offset by a decrease in cash value of a life insurance policy of $26,000. For the year ended February 28, 2009, net cash used by financing activities was $718,000 due to cash dividends having been paid totaling $718,000 in fiscal 2009, and was $479,000 in fiscal 2008 resulting from cash dividends having been paid totaling $479,000 during that fiscal year.

We anticipate, based on currently proposed plans and assumptions relating to our operations, that our current cash and cash equivalents together with projected cash flows from operations and projected revenues will be sufficient to satisfy its contemplated cash requirements for more than the next 12 months. Our contemplated cash requirements for fiscal 2010 and beyond will depend primarily upon level of sales of our products, inventory levels, product development, sales and marketing expenditures and capital expenditures.

Inflation has not significantly impacted our operations.

Significant Accounting Policies

Our discussion and analysis of the Company's financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note B to the consolidated financial statements included elsewhere herein. The application of our critical accounting policies is particularly important to the portrayal of our financial position and results of operations. These critical accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

Inventories - Our inventories consist of raw materials, work in process, finished goods and supplies which we value at the lower of cost or market under the first-in, first-out method.

Plant, Property and Equipment - Our plant, property and equipment are stated at cost. We compute provisions for depreciation on the straight-line methods, based upon the estimated useful lives of the various assets. We also capitalize the costs of major renewals and betterments. Repairs and maintenance are charged to operations as incurred. Upon disposition, the cost and related accumulated depreciation are removed and any related gain or loss is reflected in earnings.

Income taxes - We account for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", in which the asset and liability method is used in accounting for income taxes. We recognize deferred taxes for temporary differences between the basis of assets and liabilities for financial statement and for income tax purposes. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment and deferred compensation.

Revenue Recognition - We recognize revenue consistent with the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition", which sets forth guidelines in the timing of revenue recognition based upon factors such as passage of title, payments and customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria will be recorded as deferred revenue in the accompanying balance sheet. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. Our policy is to replace certain products that do not conform to customer specifications, however replacements are made at our discretion subject to in house product lab analysis. There are no terms or conditions set forth within our sales contracts that provide for product replacements. We expense replacement costs as incurred.

Stock-based Compensation - Effective March 1, 2006, we have adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment". SFAS 123R requires companies to measure and recognize in operations the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. In accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 107, we have adapted the modified-prospective transition method. Prior periods were not restated to reflect the impact of adopting the new standard. We determine the fair value of stock-based compensation using the Black-Scholes option-pricing model, which requires us to make assumptions regarding future dividends, expected volatility of our stock, and the expected lives of the options. Under SFAS 123R we also make assumptions regarding the number of options and the number of shares of restricted stock and performance shares that will ultimately vest. As a result of the adoption of FAS 123R, stock-based compensation expense recognized includes compensation expense for all share-based payments granted on or prior to, but not yet vested as of March 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and compensation cost for all share-based payments granted on or subsequent to March 1, 2006, based on the grant date fair value estimated in accordance with the provisions of FAS 123R.

Recently Adopted Accounting Standards

On March 1, 2008, we adopted Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements" ("FAS 157") for financial assets and liabilities, which clarifies the meaning of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under FAS 157 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the assets or liabilities in an orderly transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings or other comprehensive income when they occur. The effective date of the provisions of FAS 157 for non-financial assets and liabilities, except for items recognized at fair value on a recurring basis, was deferred by Financial Accounting Standards Board ("FASB") Staff Position FAS 157-2 ("FSP FAS 157-2") and are effective for the fiscal year beginning March 1, 2009. We are currently evaluating the impact of the provisions for non-financial assets and liabilities. The adoption of FAS 157 for financial assets and liabilities did not have an impact on our consolidated financial position or results of operations.

Also, effective March 1, 2008, we adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159") which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. As of February 28, 2009, we have not elected the fair value option for any additional financial assets and liabilities beyond those already prescribed by accounting principles generally accepted in the United States.

In October 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active ("FSP FAS 157-3")." FSP FAS 157-3 clarifies the application of FAS 157 in a market that is not active and defines additional key criteria in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with FAS 157. FSP FAS 157-3 was effective upon issuance and the application of FSP FAS 157-3 did not have a material impact on our consolidated financial statements.

Other Information

Subsequent to the end of fiscal 2006, the Board of Directors approved the adoption of a dividend policy under which we will issue a regular annual cash dividend on shares of our Common Stock. The amount of the dividend, record date and payment date will be subject to approval every year by the Board of Directors. In accordance with the new dividend policy, a regular annual cash dividend of $0.02 per share was paid in each of May 2006, May 2007 and May 2008. In addition, since of the adoption of the dividend policy in fiscal 2007, a special cash dividend of $0.02 per share was paid in each of January 2007 and January 2008, and a supplemental special cash dividend of $0.04 per share was paid in August 2008. We did not declare another special cash dividend in January 2009 similar to the special cash dividends we have paid in January of prior years. Primarily due the Company's recent decision to seek strategic alternatives, the Board has determined to postpone any action regarding the declaration of the regular annual cash dividend for 2009 pending the outcome of this process.

In August 2001, the Board of Directors of the Company authorized a 500,000 share stock repurchase program. Pursuant to the repurchase program, the Company may purchase up to 500,000 shares of its common stock in the open market or in privately negotiated transactions from time to time, based on market prices. The Company indicated that the timing of the buyback of the Company's shares will be dictated by overall financial and market conditions and other corporate considerations. The repurchase program may be suspended without further notice. There were no repurchases made by the Company of shares of its Common Stock during the fiscal years ended February 29, 2008 and February 29, 2009. In prior years, since the adoption of the program in August 2001, a total of 331,500 shares were repurchased at a cumulative cost of $195,766.

In September 2007, Murray S. Cohen advised the Board of Directors that beginning as of October 1, 2007 and in accordance with his employment agreement he will reduce the time he devotes to Company business to approximately 25% of his time. Dr. Cohen had been devoting approximately 50% of his time to the business since September 2006. Dr. Cohen has been and will remain Chairman of the Board and Chief Scientist of the Company.

Morris Dunkel, who was a director of the Company since 1984, died on August 22, 2008. Such vacancy on the Board has not been filled.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.