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 those set forth under the caption "Risk Factors" in our most recent Annual Report on Form 10-K and as revised or supplemented by our quarterly reports 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 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 broadens and enhances 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. The 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 or 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 was 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 have resulted 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. as more fully described in Footnote 9 to the Company's Consolidated Financial Statements (the "Offering"). 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. On May15, 2009, upon stockholder approval of the Offering, the Company increased its stockholders' equity to more than $6 million.

On June 19, 2009, the Company was notified by NYSE Amex that it had resolved its continued listing deficiencies and would retain its status as a listed issuer on NYSE Amex.

Results of Operations

Three months ended June 30, 2009 compared to June 30, 2008

The Company had a net loss attributable to common stockholders of $3,558,000, or $0.23 per share, for the three months ended June 30, 2009, compared to a net loss attributable to common stockholders of $699,000, or $0.05 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            $   999 $ 477  $ 522     109%
              Research and development     64     63      1     0.2%
              income
              Licensing and royalty        79    142    (63)   (44)%
              income
              Total Revenues           $ 1,142 $ 682  $ 460     67%

The increase in product sales is the result of sales to seven new customers for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Research and development income remained constant, however, 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):

                                            2009    2008   $ Change % Change
       Cost of sales                       $  929  $   563 $   366    65%
       Selling, general and administrative  1,311     697      614    88%
       Product development and research       151     123       28    23%
       Totals costs and expenditures       $ 2,391 $ 1,383 $ 1,008    73%

Cost of sales increased for the three months ended June 30, 2009 as a result of the increase 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 93% for the three month period ended June 30, 2009 as compared to 118% for the comparable period in 2008. The high cost of sales percentages were primarily due to our underutilized manufacturing capacity which led to unabsorbed overhead expenses.

Selling, general and administrative expenses for the three month period ended June 30, 2009 increased as a result of the severance arrangement of $341,000 for our former President and Chief Executive Officer as per his separation agreement and an increase of $268,000 in legal and other professional fees.

Product development and research expenses for the three months ended June 30, 2009 increased due to testing expenses related to new products.

Interest (Expense) Income (in thousands):

2009 2008 $ Change % Change Interest Expense $ (797) $ (5) $ 792 1584% Interest Income $ 6 $ 2 $ 4 200%

Interest expense increased for the three months ended June 30, 2009 as compared to the same period in 2008 due to approximately $792,000 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 9 to the Company's Consolidated Financial Statements) that were included in interest expense in 2009. Interest income increased for the three months ended June 30, 2009 as compared to the same period in 2008 due to higher average cash balances offset by lower interest rates in 2009.

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

                                              2009     2008   $ Change
            Net loss attributable to common $ (3,558) $ (699) $ 2,859
            stockholders
            Net loss per share                  (.23)   (.05)     .18

The increase in net loss attributable to common stockholders for the three months ended June 30, 2009 is due mainly to approximately $792,000 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 9 to the Company's Consolidated Financial Statements) that were included in interest expense and the dividend accreted for beneficial conversion features of $1,518,000.

Six months ended June 30, 2009 compared to June 30, 2008

The Company had a net loss attributable to common stockholders of $5,460,000, or $0.36 per share, for the six months ended June 30, 2009, compared to a net loss attributable to common stockholders of $659,000, or $0.04 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          $1,504 $1,777  $(273)   (15)%
               Research and               66    128    (62)   (48)%
               development income
               Licensing and royalty     166    277   (111)   (40)%
               income
               Total Revenues         $1,736 $2,182  $(446)   (20)%

The decrease in product sales relates to a decrease in sales to two existing customers partially offset by sales to seven new customers for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. Research and development income will not be consistent and will vary, 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):

                                             2009   2008  $ Change % Change
        Cost of sales                       $1,529 $1,244   $285     23%
        Selling, general and administrative  1,959  1,360    599     44%
        Product development and research       269    236     33     14%
        Totals costs and expenses           $3,757 $2,840   $917     32%

The increase in cost of sales was primarily due to our underutilized manufacturing capacity which led to unabsorbed overhead expenses.

Selling, general and administrative expenses for the six month period ended June 30, 2009 increased as a result of the severance arrangement of $341,000 for our former President and Chief Executive Officer as per his separation agreement, employees' compensation payable in stock of $93,000, an increase of $326,000 in legal and other professional fees, partially offset by a decrease in expense from the issuance of stock options of $192,000.

Product development and research expenses for the six months ended June 30, 2009 increased due to testing expenses related to new products

Interest (Expense) Income (in thousands):

2009 2008 $ Change % Change Interest Expense $(958) $(15) $(943) 6287% Interest Income 7 9 (2) (22)%

Interest expense increased for the six months ended June 30, 2009 as compared to the same period in 2008 due to approximately $943,000 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 9 to the Company's Consolidated Financial Statements) that were included in interest expense in 2009. Interest income decreased for the six months ended June 30, 2009 as compared to the same period in 2008 due to lower interest rates in 2009 offset by higher average cash balances.

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

                                                    2009     2008   $ Change
     Net loss attributable to common stockholders $ (5,460) $ (659) $ 4,801
     Net loss per share                               (.36)   (.04)     .32

The increase in net loss attributable to common stockholders for the six months ended June 30, 2009 is due mainly to approximately $943,000 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 9 to the Company's Consolidated Financial Statements) that were included in interest expense and the dividend accreted for beneficial conversion features of $2,488,000.

Liquidity and Capital Resources

The Company's operating activities used $1,364,000 of cash during the six months ended June 30, 2009 compared to $68,000 provided in the comparable period of 2008. The use of cash for the six months ended June 30, 2009 is substantially a result of the net loss for the period.

The Company's investing activities used $437,000 of cash in the six months ended June 30, 2009 compared to $84,000 of cash used in investing activities in the first six months of 2008. The funds used for both periods 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 six months ended June 30, 2009 compared to $152,000 used in financing activities during the six months ended June 30, 2008. The cash provided for the six month period ended June 30, 2009 is mainly from the proceeds of the Offering as more fully described in Footnote 9 to the Company's Consolidated Financial Statements. The cash used for the period ended June 30, 2008 represents a pay down of the note payable balance offset by proceeds from the exercise of common stock options and warrant.

The Company's principal sources of liquidity are cash and cash equivalents of approximately $3,650,000 at June 30, 2009 and future cash from operations. The Company had working capital of $3,617,000 at June 30, 2009.

At the Company's 2009 annual meeting of stockholders held on May 15, 2009, the Company's stockholders approved the Offering and the conversion of the principal amount of the $500,000 secured line of credit agreement with Pinnacle Mountain Partners, LLC into shares of our common stock. 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 804 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 cancelled. 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 August 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.