UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

                        -----------------------------

                                  

FORM 10-K

 (Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

                                     2008

OR

[ ]   

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the transition period from _______________ to _______________.

                      .

Commission file number 001-08568

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IGI Laboratories, Inc.
           (Exact name
(Name of registrant as specifiedsmall business issuer in its charter)

                Delaware                                     01-0355758
    (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                     Identification No.)

      105 Lincoln Ave., Buena, NJ                             08310
(Address of principal executive offices)                    (Zip Code)

     Registrant's

Delaware
01-0355758
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
105 Lincoln Ave., Buena, NJ
08310
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:number: (856) 697-1441

Securities registered pursuant to Section 12(b) of the Act:

     Title of each class          Name of each exchange on which registered
     -------------------          -----------------------------------------
Common Stock-$0.01 Par Value              American Stock Exchange Act:

Title of each class
Name of each exchange on which registered
Common Stock—$0.01 Par Value
NYSE Alternext US

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  ¨    No  x

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes  ¨    No  x

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]x    No  [ ]

¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and  will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ ]

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨     Accelerated filer   ¨     Non-accelerated filer   ¨     Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [ ]¨    No  [X]

x

The aggregate market value of the registrant'sregistrant’s voting common stockequity held by non-
affiliatesnon-affiliates of the registrant on June 30, 2004 (based2008 was approximately $ 13,461,000.  Such aggregate market value was computed by reference to the closing price of the common stock as reported on the closing stock priceNYSE Alternext US on the
American Stock Exchange) on such date was approximately $17,490,000.

June 30, 2008.

As of March 15, 2005,23, 2009, there were 11,732,88014,923,407 shares of common stock outstanding.  

Documents Incorporated By Reference
Certain information contained in the definitive Proxy Statement for the Company'sCompany’s 2009 Annual Meeting of Stockholders to be held on May 23, 2005 is incorporated by reference into Part III hereof.


1

PART I

ITEM 1.
DESCRIPTION OF BUSINESS

Overview

IGI Laboratories, Inc. is a Delaware corporation formed in 1977.  On May 7, 2008, the stockholders of IGI, Inc. ("IGI" orapproved the "Company") was incorporatedname change of the Company from IGI, Inc. to IGI Laboratories, Inc. As used in Delaware in
1977.  Its executive officesthis report, the terms the “Registrant,” the “Company,” “IGI, Inc.” and “IGI” refer to IGI Laboratories, Inc., unless the context requires otherwise. The Company’s head-office, product development laboratories and manufacturing facility are located at 105 Lincoln Avenue, Buena, New Jersey. The CompanyIGI is currentlyprincipally engaged in the productiondevelopment, manufacturing, filling and marketingpackaging of cosmeticstopical, semi solid and skin care (consumer) products.  Beginning inliquid products for pharmaceutical, cosmeceutical and cosmetic companies.   The primary focus of the first
quarter of 2005,business is on the Company will also be engaged in the metal finishing
business, specifically nickel boride, using the UltraCem technology (refer
to Item 7 for more detail).

      In December 1995, IGI distributed its ownershipcommercialization of its majority-owned
subsidiary,licensed Novasome® encapsulation technology for skin care/treatment products. Except as otherwise specified, information in this report is provided as of December 31, 2008 (the end of the Company’s fiscal year).

The Company licenses the Novasome® encapsulation technology from Novavax, Inc. ("Novavax"),for applications in the form of a tax-free stock
dividend, to IGI stockholders.  Novavax had comprised the biotechnology
business segment of IGI.  In connection with the distribution, the Company
paid Novavax $5,000,000 in return for a ten-year license (the "IGI License
Agreement") entitling IGI to the exclusive use of the Novasome(R) lipid
vesicle encapsulation and certain other technologies ("Microencapsulation
Technologies" or collectively the "Technologies") in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals, and the processes for making the same (collectively, the "IGI Field"“IGI Field”).  IGI has the
option, exercisable within the last year of the ten-year term, to extend
the exclusive license

Manufacturing

The Company’s product manufacturing is conducted in an FDA registered facility for an additional ten-year period for $1,000,000.
Novavax has retained the right to use the Technologies for applications
outside the IGI Field, mainly human vaccines and pharmaceuticals.

      Consumer Products Business  IGI's Consumer Products business is
primarily focused on the continued commercialization of the
Microencapsulation Technologies for skin care applications.  These efforts
have been directed toward the development of high quality skin care
products that the Company markets through collaborative arrangements with
majorveterinary pharmaceutical and cosmetic and consumer products companies.  IGI plans to continue to
work with cosmetics, food, personal care products and over-the-counter
("OTC") pharmaceutical companies for commercial applications of the
Microencapsulation Technologies.  Because of their ability to encapsulate
skin protective agents, oils, moisturizers, shampoos, conditioners, skin
cleansers and fragrances and to provide both a controlled and a sustained
release of the encapsulated materials, Novasome(R) lipid vesicles are well-
suited to cosmetics and consumer product applications.  For example,
Novasome(R) lipid vesicles may be used to deliver moisturizers and other
active ingredients to the deeper layers of the skin or hair follicles for a
prolonged period; to deliver or preserve ingredients which impart favorable
cosmetic characteristics described in the cosmetics industry as "feel,"
"substantivity," "texture" or "fragrance" and to deliver normally
incompatible ingredients in the same preparation, with one ingredient being
shielded or protected from the other by encapsulation within the
Novasome(R) vesicle.

      The Company produces Novasome(R) vesicles for various skin care
products. Pursuant to the Company's agreement with Estee Lauder, Estee Lauder
utilizes the Novasome technology in their products such as "All You Need,"
"Re-Nutriv," "Virtual Skin," "100% Time Release Moisturizer," "Resilience,"
"Surface Optimizing," "Vibrant" and others.  Sales to Estee Lauder
accounted for $1,248,000 or 35% of 2004 revenues $1,812,000 or 51% of 2003
revenues and $2,629,000 or 60% of 2002 revenues. Also, the Company
received $184,000 and $28,000 of royalty income in 2004 and 2003,
respectively, from Estee Lauder pursuant to the Company's agreement with
Estee Lauder for various Novasome(R) vesicles skin care products produced
by Estee Lauder.

      In February 2001, the Company signed a new manufacturing and supply
agreement and an assignment of trademark agreement for the WellSkin(tm)
line of skin care products with Genesis Pharmaceutical, Inc. The manufacturing operations include compounding, filling and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options.  The Company received a lump sum
paymentpackaging of $525,000 for the assignment of the trademark, which is being
recognized ratably over the term of the arrangement.  The Company
recognized $105,000 of income related to this agreement in each of the
years ended December 31, 2004, 2003 and 2002.

      The Company entered into a sublicense agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995.  The agreement provided
J&J with a sublicense to produce and sell Novasome(R) microencapsulated
retinoidNovasome® based products and provides for the payment of royalties on net sales of
such products.  J&J began selling such products and making royalty payments
in the first quarter of 1998.  The Company recognized $385,000, $488,000
and $714,000 of royalty income related to this agreement for the years
ended December 31, 2004, 2003 and 2002, respectively.  As noted above,
royalties are calculated on net sales of microencapsulated retinoid
products.  The sales of these products have been declining; we anticipate
this trend will continue in the future.

      In August 1998, the Company granted Johnson & Johnson Medical
("JJM"), a division of Ethicon, Inc., worldwide sublicense rights for the
use of the Novasome(R) technology for certain products and distribution
channels.  The agreement provided for JJM to pay the Company $300,000 as well as future royalty payments based on JJM's sales of sublicensedconventional dermatological, cosmeceutical and cosmetic cream and lotion products.  The Company


  2


recognized $30,000, $35,000 and $32,000 of royalty income in 2004, 2003 and
2002, respectively, related to the agreement. In March of 2002, the
agreement betweenDecember 2006, the Company purchased three fully automatic filling and JJM was amended stating that JJM is no
longer required to make minimum payments and the sublicense has been
converted to a non-exclusive worldwide sublicense with the exception of
Japan, which will remain exclusive.  If the amount of royalties paid by JJM
equals or exceeds $200,000 in any year, the following calendar year will
become an exclusive worldwide agreement and will remain so until royalties
fall below that amount.

      In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Apollo Pharmaceutical (Canada), Inc.
("Apollo"), previously known as Prime Pharmaceutical Corporation. The
purpose of the agreement was to develop a facial lotion, a facial creme and
scalp application for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Apollo. During 2002 and 2003, there was no
activity between the Company and Apollo due to a change in management at
Apollo.  In 2004, the Company resumed activity with Apollo and recognized
$137,000 of product sales.

      In November 2002, the Company entered into a Manufacturing Service
Agreement with Desert Whale Jojoba Company, Inc.  The purpose of this
agreement was to develop and manufacture jojobasomes to be used as a
personal care product.  This project was in a developmental stage through
2002. The Company recognized $7,000 of product sales related to this project
in 2003.  The Company is no longer doing business with Desert Whale Jojoba
Company, Inc.

      In July 2004, the Company, in order to allow growth and new business
opportunities, renegotiated its contract with Estee Lauder, a significant
customer.  The goal of the Company was to lift the exclusivity it had under
the prior agreement with Estee Lauder that did not allow the Company to do
business with competitors of Estee Lauder.  The exclusivity provision was
removed from the agreement, the terms of which are as follows: Estee Lauder
is manufacturing all Novasome(R) and non-Novasome(R) products at their
facility and is paying the Company a royalty per kilogram on all
Novasome(R) products manufactured by Estee Lauder, including all new
products developed, plus they paid to the Company a one time payment of
$100,000, which was paid in 2004 for the use of the Novamix machine.  The
Company's contract manufacturing of Estee Lauder non-Novasome(R) products,
which accounted for $559,000 of the $1,248,000 (i.e., 45%) in revenues in
2004, terminated contractually on June 30, 2004, without any required
future royalties or other payments to be received by the Company on any
non-Novasome(R) products manufactured by Estee Lauder.  However, Estee
Lauder may from time to time require the assistance of IGI to manufacture
Novasome(R) and non-Novasome(R) products at Estee Lauder's request.  In
addition, during the six month period from January through June 2004, the
Company agreedpackaging lines to provide Estee Lauder's contract manufacturing services at
a reduced price of $2.00 per kilo, as comparedturnkey solutions to the prior rate of $3.03
per kilo.

      Metal Plating Business  In February 2004, the Company signed a
license agreement with Universal Chemical Technologies, Inc. ("UCT") to
utilize its patented technology for an electroless nickel boride metal
finishing process. This is a new venture for the Companyour customers. The lines were installed and the Company
has had initial capital expenditures of approximately $782,000 in order to
set up the operations.   The Company has also hired two new employees to
oversee the facility operations and for sales and marketing of the product.
The Company has an exclusive license within a 150 mile radius of its
facility for commercial and military applications. The Company believes
there is the possibility of revenue and profit growth using this
application, but there is no guarantee that it will materialize.  Frank
Gerardi, the Company's Chairman and Chief Executive Officer, as well as a
major IGI stockholder, has personally invested $350,000 in UCT, which
represents less than a 1% ownership interest in UCT.  We anticipate
additional capital expendirures of approximately $120,000 in 2005.

Other Novasome(R) Lipid Vesicles Developments

      On July 23, 2003, Dr. Michael F. Holick, a professor of Medicine,
Dermatology, Physiology and Biophysics at the Boston University School of
Medicine, was appointed to head IGI's newly formed Scientific Advisory
Board. Dr. Holick's many accomplishments, including the discovery of the
active form of Vitamin D, and his extensive research in dermatology,
combined with IGI's exclusive use of the patented Novasome( technologies in
its delivery systems, should enable the Company to further advance IGI's
position in the topical dermatologics market.

      On August 11, 2003, researchers at Boston University Medical Center,
led by Dr. Holick, reported the first successful development of a topical
peptide drug for the treatment of psoriasis. The parathyroid hormone analog
PTH (1-34) was successfully encapsulated in Novasome(R) A cream, which
enhanced the absorption of this peptide drug into human skin.  This study
appeared in the August 2003 issue of the British Journal of Dermatology.
The study conducted a randomized, self-controlled double-blinded trial of
15 adult patients with chronic plaque psoriasis.  Each patient applied to
one lesion Novasome(R) A cream and a comparable lesion with Novasome(R) A
cream that contained PTH (1-34).  The psoriatic lesions treated with PTH
(1-34) showed marked improvement in scaling, erythema and in duration.
There was a 67.3% improvement in the global severity score for the lesion
treated with Novasome(R) A cream containing PTH (1-34) compared to the
placebo-treated lesion, which only showed a 17.8% improvement. In an open
trial, ten patients topically applied PTH (1-34) in Novasome(R) A cream on
all of their lesions in a step wise manner.  A Psoriasis Area and Severity
Index score analysis of all patients revealed an improvement of 42.6%
(p < 0.02). None of the patients experienced


  3


hypercalcemia or hypercalciuria or developed any side effects with the
medication. The study concluded that patients who were resistant to at
least one standard therapy for psoriasis had an improvement in their
psoriasis when they applied PTH (1-34) in Novasome(R) A cream to their
lesion. No patients experienced any significant adverse events.  This
pilot study suggests that topical PTH (1-34) encapsulated in Novasome(R) A
cream is a safe and effective novel therapy for psoriasis.  This was the
first demonstration for the successful encapsulation of a peptide drug for
the treatment of a skin disease.

      On August 26, 2003, Dr. Holick and his team of scientists at Boston
University Medical Center reported that in animal studies a parathyroid
hormone related peptide antagonist [PTH (7-34)] stimulated epidermal
proliferation and hair growth in mice. The biologic action of parathyroid
hormone (PTH) related peptide (PTHrP) in normal skin was investigated in
cultured human keratinocytes and in SKH-1 hairless mice. The results
indicated that the PTHrP receptor antagonist PTH (7-34) stimulated
epidermal DNA synthesis in SKH-1 hairless mice by 144%.  In addition, these
hairless mice had marked increase in the number (146%) and length (80%) of
hair shafts, respectively. They also found that the PTHrP receptor agonist
[PTH (1-34)] was effective in inhibiting DNA synthesis in the epidermis
(Holick, M.F., Ray, S., Chen, T.C., Tian, X., and Persons, K.S., A
Parathyroid Hormone Antagonist Stimulates Epidermal Proliferation and Hair
Growth in Mice, Proc. Nat'l. Acad. Sci, Vol. 91, 8014-8016 (1994)). These
results provide evidence that PTHrP may be an important regulator in normal
skin physiology and that its receptor agonists and antagonists have
potentially wide therapeutic applications in the treatment of
hyperproliferative skin disorders and aging skin and could also be
effective in stimulating and maintaining hair growth.

      Chemotherapy-induced alopecia is one of the fundamental unsolved
problems of clinical oncology, which is driven in part by abnormalities
induced by the chemotherapy on the hair follicle cycle.  Dr. Holick and his
team have explored the therapeutic potential of PTHrP receptor agonists and
antagonists in a mouse model of chemotherapy (cyclophosphamide) induced
alopecia. Mice that received PTH (7-34) significantly mitigated the hair
follicular response to cyclophosphamide. Furthermore, there was more rapid
hair regrowth of more robust hair follicles, compared to the animals that
received  placebo and chemotherapy (Peters, Eva, M.J., Foitzik, K., Paus,
R., Ray, S., and Holick, M.F.,  A New Strategy for Modulating Chemotherapy-
Induced Alopecia, Using PTH/PTHrP Receptor Agonist and Antagonist, J.
Invest. Dermatol. 117:173-178; 2001).

      This study is an established animal model for chemotherapy-induced
alopecia, which closely mimics human chemotherapy induced alopecia,
suggests the possibility that PTHrP receptor agonists and antagonists can
be developed as novel therapeutic agents in chemotherapy-induced alopecia.
Based on these findings, a study is planned to determine whether topical
PTH (7-34) formulated in Novasome(R) cream will be effective in mitigating
chemotherapy induced alopecia in breast cancer patients and help accelerate
more robust hair regrowth.

      On September 26, 2003, the Company entered into an employment
agreement with Dr. Holick where he will serve as the Company's Vice
President of Research and Development and Chief Scientific Officer for a
term of three years.

      On December 24, 2003, the Company entered into a License Agreement
with Dr. Holick and A&D Bioscience, Inc., a Massachusetts corporation
wholly owned by Dr. Holick (collectively referred to as "Holick"), whereby
Holick granted an exclusive license to the Company to all his rights to the
parathyroid hormone related peptide technologies and the glycoside
technologies (referred to as "PTH Technologies" and "Glycoside
Technologies", respectively) that he developed for various clinical usages,
including treatment of psoriasis, hair loss and other skin disorders. In
consideration for entering into the License Agreement, Holick received up-
front a $50,000 non-refundable payment from the Company. He also received a
grant of 300,000 stock options under the Company's authorized stock option
plans.  Holick was also entitled to receive a $236,000 milestone payment
that was contingent on the execution of a sublicense agreement between the
Company and a third-party for the licensed technology.


      On April 19, 2004, IGI signed a sublicense agreement with Tarpan
Therapeutics, Inc. ("Tarpan") for the PTH (1-34) technology under which the
third party will be obligated at its sole cost and expense to develop and
bring the PTH (1-34) technology to market as timely and efficiently as
possible, which includes its sole responsibility for the cost of
preclinical and clinical development, research and development,
manufacturing, laboratory and clinical testing and trials and marketing of
products. In addition, the sublicense agreement calls for various payments
to IGI throughout the term. IGI was paid a lump sum sublicense fee of
$300,000, from which amount IGI paid the sum of $232,000 to Dr. Holick,
representing the $236,000 payment due to Dr. Holick in accordance with the
terms of his License Agreement with the Company, net of $4,000 of additional
legal fees. Certain subsequent royalty payments received by the Company under
the sublicense agreement will be shared with Holick after the Company has
recovered any payments previously made to Holick under the License
Agreement and an amount equal to the value of the options received
by Holick under the License Agreement. The Company is responsible for any
and all costs, fees and expenses for the prosecution and oversight of any
intellectual property rights related to the licensed technologies.  The
term of the License Agreement is the longer of twenty (20) years or the
life of each of the patents thereunder.  The License Agreement, however,
granted Holick the right to terminate the Company's license to (i) the
Glycoside Technologies if the Company did not sublicense the Glycoside
Technologies within 90 days of the effective date of the License Agreement,
and (ii) the PTH Technologies if the Company did not sublicense the PTH
Technologies within 90 days of the effective date of the License Agreement.
As noted above, the Company entered into a sublicense agreement for the PTH
Technologies on April 19, 2004.  The Company did not, however, sublicense
the Glycoside Technologies within the 90 day period.


  4


As a result, Holick terminated the Company's license to the Glycoside
Technologies on April 5, 2004.  The Company is engaged in discussions with
the same third party entity for a similar sublicense for the PTH (7-34)
technology.

      The $50,000 payment to Holick was expensed in the third quarter of
2003 and the $236,000 payment to Holick was expensedfully operational in the second quarter of 2004 because2007. This added capability allowed the PTH Technologies are in a preliminary development phaseCompany to fill and do not have any readily determinable alternative future use. The other
consideration called for under the License Agreement, such as amounts
advanced for the prosecution and oversight of any intellectual property
rights related to the licensed technologies which amounted to $27,500 and
the fair valuepackage more than 40% of the 300,000 stock options granted to Holick, which
amounted to $520,000, was also expensed by the Company in the second
quarter of 2004 (included inbulk product developmentwe manufacture into tubes, bottles and research expenses in
the consolidated statement of operations), when the sublicense agreement
with Tarpan was executed and Holick could no longer terminate the license
agreement as it relates to the PTH Technologies and the options became
fully vested.  The fair value of the stock options was calculated under
SFAS No. 123 using the Black -Scholes model.

      On July 27, 2004, the Company signed an exclusive license agreement
with the University of Massachusetts Medical School (University) for the
patented invention entitled "The Treatment of Skin with Adenosine or
Adenosine Analogs."  The Company intends to encapsulate adenosine or
adenosine analogs in Novasome(R) for use in the skin care field.  As
consideration of the rights granted in this agreement, the Company made
nonrefundable payments of $25,000 upon the execution of this agreement and
$25,000 in September 2004.  Both of these payments were expensed during the
third quarter of 2004 and are included in product development and research
expenses.  The agreement also calls for minimum royalty payments of $25,000
per year commencing on July 27, 2007.  If the Company enters into a sublicense
agreement with a third party, the Company must pay the University 50% of all
sublicense income.

Discontinued Operations

      On May 31, 2002, the stockholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet
Products division for the year ended December 31, 2002.  The gain is net of
direct costs incurred by the Company in connection with the sale and the
reduction in the purchase price resulting from post-closing adjustments.
For the year ended December 31, 2003, the Company had a gain on the
disposal of discontinued operations of $435,000, which primarily consisted
of a net gain of $169,000 for an insurance settlement, net of legal costs,
for damages incurred by the Company as a result of a heating oil leak at
the Companion Pet Products manufacturing site and a net gain of $288,000 on
the sale of the former Companion Pet Products manufacturing site land and
building on December 18, 2003. The Companion Pet Products division incurred
a loss of $523,000 for the year ended December 31, 2002.  The results for
the year ended December 31, 2002 included an impairment charge of $630,000
related to the Companion Pet Products warehouse.  Upon the sale of the
Companion Pet Products division, the Company paid all of its debt and
interest owed to Fleet Capital Corporation ("Fleet") and American Capital
Strategies, Ltd. ("ACS").  As a result, the Company incurred a $2,654,000
loss from early extinguishment of debt in connection with the prepayment
fees paid to Fleet and ACS and the write-off of the ACS debt discount.

      During 2001, the Company recorded non-recurring charges related to
the cessation and shutdown of the manufacturing operations at the Companion
Pet Products facility. The Company applied to the New Jersey Economic
Development Authority and the New Jersey Department of Environmental
Protection for a grant and loan to provide partial funding for the costs of
investigation and remediation of the environmental contamination discovered
at the Companion Pet Products facility.  On June 26, 2001, the Company was
awarded an $81,000 grant and a $246,000 loan.  The $81,000 grant was
received in the third quarter of 2001.  The loan, which required monthly
principal payments, had a term of ten years at a rate of interest of 5%.
The Company received funding of $45,000 and $182,000 from the loan during
2003 and 2002, respectively. On December 18, 2003, the loan was paid in
full upon the sale of the former Companion Pet Products facility, which had
served as collateral for the loan.

Manufacturing

      The Company's manufacturing operations include bulk manufacturing and
testing of cosmetics, dermatologics, emulsions and shampoos.jars. The raw materials included inused for these products are available commercially from several suppliers. The Company produces quantities of Novasome(R) lipid vesicles adequatehas manufacturing capacity to meet its current and foreseeable needs.  5



Research and Product Development

The Company's consumer productsCompany’s product development efforts are directed toward Novasome(R)formulating topical pharmaceutical cream, lotion and liquid products, in many products, using Novasome® encapsulation technology to improve performance and efficacy of  pesticides, specialty and other chemicals, biocides, cosmetics, consumer
products, flavors and dermatologic products. TotalIn late 2006, the Company instituted a policy of charging fees for providing product development services to its customers. Besides developing products as per the Product Development Agreements with its customers, IGI also initiated the research and research expenses were $1,727,000, $762,000development of generic and $549,000 in 2004, 2003 and
2002, respectively.

Patents

      All of the names of the Company's major products are registered in
the United States and all significant markets in which the Company sells
itsbranded pharmaceutical products.  The Company maintains patentsanticipates finishing the development of these products up to the Clinical Phase I stage and then seeking partnership with other Pharmaceutical companies to further develop and commercialize these products. This process will span several years. The Company also initiated development of several Over The Counter Liquid Oral and Nasal Spray products with anticipated commercialization in various countries covering
certain of its products.  the 2nd Quarter 2009.

Patents and Trademarks

Under the terms of thea license agreement entered into in 1995 IGI License
Agreement,and renewed in 2005, the Company has an exclusive ten-year license to use the Patented Technologies licensed from Novavax in the IGI Field.Field until December 11, 2015. Novavax holds 44the U.S. patents and a number of foreign patents covering the Technologiestechnologies licensed to IGI.

IGI with various expiration dates thru 2021. The scientists in the research laboratories of IGI are constantly seeking new chemical entities capable of making different membrane structures of Novasome®. A new patent on such chemical entity was filed in January 2008 and research work on additional patents is being continued.  

Government Regulation and Regulatory Proceedings

Government Regulations

      

In the United States, pharmaceuticals including over-the-counter
products that are manufactured by the Company are subject to rigorous Food and Drug Administration ("FDA"(“FDA”) regulations, including pre-clinical and
clinical testing.regulations. The process of completing clinical trials and obtaining
FDA approvals for a new drug often takes a number of years, requires the
expenditure of substantial resources andCompany is often subject to unanticipated
delays.  There can be no assurance that any product will receive such
approval on a timely basis, or at all.

      In addition to product approval, the Company may be required to obtain a satisfactory inspection by the FDA covering its manufacturing facilities before a product can be marketed in the United States. Any non-compliance with the regulatory guidelines may necessitate corrective action that may result in additional expenses and use of more resources. The Company was audited by the FDA will review the manufacturing proceduresin April 2007 and inspect the facilities and
equipment forwas found to be in compliance with applicable rules andthe agency’s regulations.  Any
material change by the Company in the manufacturing process, equipment or
location would necessitate additional review and approval.

      Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental authorities in foreign
countries must be obtained prior to the commencement of clinical trials and
subsequent marketing of such product in such countries.  The approval
procedure varies from country to country, and the time required may be
longer or shorter than that for FDA approval.  Although there are some
procedures for unified filing for certain European countries, in general,
each country has its own procedures and requirements.

      



2

In addition to regulations enforced by the FDA, the Company is also is subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's product development and research involves the controlled use
ofCompany’s analytical service group uses certain hazardous materials and chemicals.chemicals in limited and controlled quantities. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company has procedures in place to be in compliance with the standards prescribed by the regulators.

Intense Competition in Consumer Products Business

      the Marketplace

The Company's Consumer Products businessCompany competes with large, well-
financed cosmeticswell-financed cosmetic, pharmaceutical and consumer products companies, with development and marketing groups that are experienced in the industry and possess far greater resources than those available to the Company. There is no
assuranceThe Company faces great challenges ensuring that the Company's consumerits products can compete successfully against its competitors and in developing new products that will be favorably received in the marketplace. Furthermore, certain of the Company's customers that use the Company's encapsulation technology in their products could decide to reduce their purchases from the Company or shift their business to other technologies.

Dependence on Major Customers

The Company has successfully broadened its customer base to fuel its revenue growth. Based on its product sales, the Company has four (4) major customers.  Major customers of the Company are defined as having sales for the latest fiscal year equal to or greater than 10% of that year’s total gross product sales. The loss of any of these customers would have a material adverse effect on the Company. In 2008, the Company had sales to four customers which individually accounted for more than 10% of the Company’s product sales. These customers had sales of $615,000, $555,000, $555,000 and $471,000 respectively, and aggregately represented 65% of revenues from product sales. Accounts receivable related to the Company’s major customers comprised 48% of all account receivables as of December 31, 2008. In 2007, the Company had sales to one customer which individually accounted for more than 10% of the Company’s product sales. This customer had sales of $1,012,000 representing 35% of revenues from product sales.

Employees

On March 23, 2009, the Company had a total of 23 employees, all of which are fulltime. The Company has no collective bargaining agreement with its employees, and believes that its employee relations are good.

ITEM 1A.
RISK FACTORS

Our current business and future results may be affected by a number of risks and uncertainties, including those described below. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that itwe currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

We face intense competition in the consumer products business.

Our business competes with large, well-financed cosmetic, pharmaceutical and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to us. There is no assurance that our products can compete successfully against our competitors’ products or that we can develop and market new products that will be favorably received in the marketplace. In addition, certain of the
Company'sour customers that use the Company's Novasome(R)our Novasome® lipid vesicles in their products may decide to reduce their purchases from the Companyus or shift their business to other suppliers.

Employees

      At March 15, 2005,technologies.

Rapidly changing technologies and developments by our competitors may make our technologies and products obsolete.

We expect to sublicense our technologies to third parties, which would manufacture and market products incorporating these technologies. However, if our competitors develop new and improved technologies that are superior to our technologies, our technologies could be less acceptable in the Company had 20 full-time employees.  Twomarketplace and our business could be harmed.



3

We will need to raise additional capital that will be required to operate and grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

Operating our business and maintaining our growth efforts will require additional cash outlays and capital expenditures. If cash on hand and cash generated from operations are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We cannot assure you that we will be able to raise needed cash on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current price per share of our common stock. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans based on available funding, if an y, which would harm our ability to grow our business or even stay in business.

We rely on a limited number of customers for a large portion of our revenues.

We depend on a limited number of customers for a large portion of our revenue. For the year ended December 31, 2008 and 2007, four of our customers accounted for 54% of our revenue in 2008 and three of our customers accounted for 43% of our revenue in 2007. The loss of one or more of these customers could have a significant impact on our revenues and harm our business and results of operations.

We face increased financial risk from the inaccurate pricing of our agreements.

Since our product development agreements are often structured as fixed price agreements, we bear the financial risk if we initially under price our agreements or otherwise overrun our cost estimates. Such under pricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

We are subject to stringent regulatory requirements. Failure to adhere to such requirements could harm our business and results of operations.

In the United States, pharmaceuticals are subject to rigorous Food and Drug Administration (FDA) regulations. Any non-compliance with the regulatory guidelines may necessitate corrective action that may result in additional expenses and use of more of our resources.

We are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Failure to adhere to such regulations could harm our business and results of operations. In addition, our analytical department uses certain hazardous materials and chemicals in limited and controlled quantities. We have implemented safety procedures for handling and disposing of such materials, however, such procedures may not comply with the standards prescribed by federal, state and local regulations. Even if we follow such safety procedures for handling and disposing of hazardous materials and chemicals and such procedures comply with applicable law, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages and any such liability could exc eed our resources.

The failure to obtain, maintain or protect patents and other intellectual property could impact our ability to compete effectively.

To compete effectively, we need to develop and maintain a proprietary position with regard to our own technology, products and business. We have obtained or have the use of over 50 patents, either through development by us or entry into license agreements with third parties, and are seeking to develop additional patents. The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:
•
the pending patent applications we have filed or may file, or to which we have exclusive rights, may not result in issued patents, or may take longer than we expect to result in issued patents;
•
changes in U.S. patent laws may adversely affect our ability to obtain or maintain our patent protection;
•
we may be subject to interference proceedings;  
•
the claims of any patents that are issued may not provide meaningful protection;
•
we may not be able to develop additional proprietary technologies that are patentable;
•
the patents licensed or issued to us or our collaborators may not provide a competitive advantage;
•
other companies may challenge patents licensed or issued to us or our collaborators;
•
other companies may independently develop similar or alternative technologies, or duplicate our technology;


4

•
other companies may design around technologies we have licensed or developed; and
•
enforcement of patents is complex, uncertain and expensive.

We cannot be certain that patents will be issued as a result of any future pending applications, and we cannot be certain that any of our issued patents or the proprietary rights of third parties whose patents we license, will give us adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file patent applications covering those inventions. In the event that another party has also filed a patent application relating to an invention claimed by us, we may be required to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs for us, even if the eventual outcome w ere favorable to us. It is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so.

The cost to us of any patent litigation or other proceeding relating to our patents or applications, even if resolved in our favor, could be substantial. Our ability to enforce our patent protection could be limited by our financial resources, and may be subject to lengthy delays. If we are unable to effectively enforce our proprietary rights, or if we are found to infringe the rights of others, we may be in breach of our license agreements with our partners.

In addition to patents and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary technology. We require our employees, wereconsultants, advisors, and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to any other parties. We require our employees and consultants to disclose and assign to us their ideas, developments, discoveries, and inventions. These agreements may not, however, provide adequate protection for our trade secrets, know-how, or other proprietary information in marketing, distributionthe event of any unauthorized use or disclosure.

Economic conditions could severely impact us.

Current economic conditions may cause a decline in business and customer support, five
wereconsumer spending which could adversely affect our business and financial performance. Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, realization of inventory, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in manufacturing, seven werethe availability of credit, financial market volatility and recession.

Adverse conditions in the economy and disruption of financial markets could negatively impact our customers and therefore our results of operations.

An economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations. Volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume that could have a negative impact on our results of operations. Additionally, economic conditions and market turbulence may also impact our suppliers causing them to be unable to supply in a timely manner sufficient quantities of product components, thereby impairing our ability to manufacture on schedule and at commercially reasonable costs.
If the U.S. economy rapidly contracts or expands, we may have difficulty quickly scaling our operations in response, which may negatively impact our business and financial position.

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
We will need to hire additional qualified personnel with expertise in nonclinical testing, clinical research and development, fourtesting, government regulation, formulation and manufacturing, sales and marketing and finance. We compete for qualified individuals with numerous pharmaceutical and consumer products companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.


5

We have a history of losses and cannot assure you that we will become profitable, and as a result, we may have to cease operations and liquidate our business.

Our expenses have exceeded our revenue in each of the last five years, and no net income has been available to common shareholders during each of these years. As of December 31, 2008, our shareholders’ equity was $3 million and we had an accumulated deficit of $24.4 million. Our future profitability depends on revenue exceeding expenses, but we cannot assure you that this will occur. If we do not become profitable, we could be forced to curtail operations and sell or liquidate our business, and you could lose some or all of your investment.

If we fail to comply with the reporting obligations of the Securities Exchange Act of 1934 and Section 404 of the Sarbanes-Oxley Act of 2002, or if we fail to achieve and maintain adequate disclosure controls and procedures and internal control over financial reporting, our business results of operations and financial condition, and investors' confidence in us, could be materially adversely affected.

As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we are required under applicable law and regulations to integrate our systems of disclosure controls and procedures and internal control over financial reporting. Our management assessed our existing disclosure controls and procedures as of December 31, 2008, and our management concluded that our disclosure controls and procedures were not effective as of December 31, 2008 due to the material weakness described below in executive, financeItem 9A(T). – “Controls and administrative functions,Procedures” in this Annual Report on Form 10-K.

If we fail to achieve and two weremaintain the adequacy of our disclosure controls and procedures and internal control over financial reporting, we may not be able to ensure that we can conclude that we have effective disclosure controls and procedures and internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective disclosure controls and procedures and internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 on a timely basis could result in the metal
plating operations.loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common stock.

Risks Related to Our Securities

Our principal stockholders, directors and executive officers own a significant percentage of our stock and will be able to exercise significant influence over our affairs.

Our current principal stockholders, directors and executive officers beneficially own more than 67.8% of our outstanding capital stock entitled to vote, and if stockholders approve the private placement with Signet Healthcare Partners discussed in footnote 17. below. Then such ownership will increase to 80.3% of our outstanding capital stock entitled to vote. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit. During the last two fiscal years, our stock price has traded at a low of $.48 in the fourth quarter of 2008 to a high of $2.57 in the second quarter of 2008. The Companyvolatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:

•
publicity regarding actual or potential clinical results relating to products under development by our competitors or us;
•
delay or failure in initiating, completing or analyzing nonclinical or clinical trials or the unsatisfactory design or results of these trials;
•
achievement or rejection of regulatory approvals by our competitors or us;
•
announcements of technological innovations or new commercial products by our competitors or us;
•
developments concerning proprietary rights, including patents;
•
developments concerning our collaborations;


6

•
regulatory developments in the United States and foreign countries;
•
economic or other crises, especially given the recent financial deterioration in the markets in which we compete, and other external factors;
•
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the cosmetic, pharmaceutical and consumer products industry;
•
actual or anticipated sales of our common stock, including sales by our directors, officers or significant stockholders;
•
period-to-period fluctuations in our revenues and other results of operations;
•
speculation about our business in the press or the investment community;
•
changes in financial estimates by us or by any securities analysts who might cover our stock; and
•
sales of our common stock.

In the past, securities class action litigation has no collective bargaining agreementoften been instituted against companies following periods of volatility in their stock price. This type of litigation, even if it does not result in liability for us, could result in substantial costs to us and divert management’s attention and resources.

Shares of our common stock are relatively illiquid which may affect the trading price of our common stock.

For the year ended December 31, 2008, the average daily trading volume of our common stock on the NYSE Alternext was approximately 10,625 shares. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies with its employees, and believes that its employee relations are good.


  6


Executive Officersbroader public ownership. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

If we fail to meet the continued listing standards of the Company

      The following table sets forth (i) the nameNYSE Alternext our common stock could be delisted and age of each executive
officerour stock price could suffer.

On May 6, 2008, we were notified by NYSE Alternext that we were below certain of the Company asNYSE Alternext continued listing standards. Specifically, we are required to reflect income from continuing operations and/or net income in one of March 30,our five most recent fiscal years and a minimum of $6 million in stockholders’ equity to remain listed on the exchange. We had net income from continuing operations in our 2002 fiscal year, but had net losses and losses from continuing operations in each of our 2003, 2004, 2005, (ii) the position2006, 2007 and 2008 fiscal years. Our stockholders’ equity at December 31, 2008 was $3.0 million.

On July 15, 2008, NYSE Alternext notified us that it accepted our plan of compliance and granted us an extension until May 6, 2009 to regain compliance with the Company heldcontinued listing standards described above.  We will be subject to periodic review by eachNYSE Alternext 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 our being delisted from NYSE Alternext.

We could be required to repay our debt obligations relating to the Promissory Notes and we may not become compliant with the NYSE Alternext listing requirements if we fail to obtain stockholder approval of our March 2009 private placement transaction, which could affect our liquidity, financial position and results of operations.

If we do not obtain stockholder approval of our March 2009 private placement transaction with affiliates of Signet Healthcare Partners, the Promissory Notes issued to certain affiliates of Signet Healthcare Partners in connection with the private placement transaction will become due and payable on July 31, 2009 and our liquidity, financial position and results of operations will be negatively affected. Further, if we do not receive stockholder approval of the private placement, we may not increase our stockholder equity to thresholds required by the NYSE Alternext listing requirements, which could result from our being delisted from the NYSE Alternext. See—“If we fail to meet the continued listing standards of the NYSE Alternext US our common stock could be delisted and our stock price could suffer,” above. In connection with the private placement transaction, certain holders of our capital stock, representing approximately 51.7% of the voting power of the outstanding sh ares 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 executive officermatter pursuant to the rules and (iii)regulations of the principal
occupation held by each executive officer for at leastNYSE Alternext as a result of the past five years.


                                   Officer      Principal Occupation and Other Business
Name                       Age      Since          Experience During Past Five Years
- ----                       ---     -------      ---------------------------------------


Frank Gerardi              60        2003       Appointed Chief Executive Officer on
                                                September 5, 2003 and Chairman on June 27,
                                                2003. President of Univest Management, Inc.,
                                                a management consulting company since 1986;
                                                member of the New York Stock Exchange from
                                                1969 to 1986.

Dr. Michael F. Holick      59        2003       Appointed Vice President of Research and
                                                Development and Chief Scientific Officer in
                                                September 2003.  Dr. Holick has been a
                                                Professor of Medicine, Physiology and
                                                Biophysics at Boston University School of
                                                Medicine since 1987.

Nadya Lawrence             36        1995       Appointed Vice President of Operations in
                                                2001.  Prior to that, Ms. Lawrence served
                                                as the Company's R&D Technical Director and
                                                R&D Manger from 1995 to 2001.

Carlene Lloyd              32        2004       Appointed Vice President of Finance in July
                                                2004.  Prior to that, Ms. Lloyd served as
                                                the Company's Controller and Senior
                                                Accountant from 1998 to 2004.
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.


7

If the holders of our Series A Preferred Stock, Series B-1 Convertible Preferred Stock, options and warrants to purchase common stock exercise their conversion rights, our common stock will be diluted.

We have Series A Preferred Stock outstanding, Series B-1 Convertible Preferred Stock outstanding, outstanding options and warrants to purchase common stock, and outstanding Notes, which are convertible into shares of Series B-1 Convertible Preferred Stock upon stockholder approval of the Private Placement. If all or any number of these holders of derivative securities were to exercise their conversion rights, our common stock would be substantially diluted, which could negatively impact our stock price.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

      
DESCRIPTION OF PROPERTY

The Company'sCompany’s executive administrative offices are located in Buena, New Jersey, in a 25,000 square foot facility built on 2.8 acres of land in 1995, which the Company owns. This facility is also used for production, product development, marketing and warehousing for the Company'sCompany’s pharmaceutical, cosmeceutical and cosmetic dermatologic and personal care products. ITEM 3. LEGAL PROCEEDINGS

Gallo Matter

      As previously reported by the CompanyWe believe this facility is in its historical filings with
the Securities and Exchange Commission ("SEC"), including without
limitation its Form 10-Kgood operating condition for the year ending December 31, 1999, for most of
1997 and 1998 the Company was subject to intensive government regulatory
scrutiny by the U.S. Departments of Justice, Treasury and Agriculture.  In
June 1997, the Company was advised by the Animal and Plant Health
Inspection Service ("APHIS") of the United States Department of Agriculture
("USDA") that the Company had shipped quantities of some of its poultry
vaccine products without complying with certain regulatory and record
keeping requirements.  The USDA subsequently issued an order that the
Company stop shipment of certain of its products.  Shortly thereafter, in
July 1997, the Company was advised that the USDA's Office of Inspector
General had commenced an investigation into possible violations of the
Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company voluntarily provided to the SEC.

      Based upon these events, the Board of Directors caused an immediate
and thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel.  The Company continued
to refine and strengthen its regulatory programs with the adoption of a
series of compliance and enforcement policies, the addition of new managers
of Production and Quality Control and a new Senior Vice President and
General Counsel.  At the instruction of the Board of Directors, the
Company's General Counsel established and oversaw a comprehensive employee
training program, designated in writing a Regulatory Compliance Officer,
and established a fraud detection program, as well as an employee
"hotline."  The Company continued to cooperate with the USDA and SEC in all
aspects of their investigation and regulatory activities.  On March 13,
2002, the Company reached a settlement with the staff of the SEC to resolve
matters arising with respect to the investigation of the Company.  Under
the settlement, the Company neither admitted nor denied that the Company
violated the financial reporting and record-keeping requirements of Section
13 of the Securities and Exchange Act of 1934, as amended, for the three
years ended December 31, 1997.  Further, the Company agreed to the entry of
an order to cease and desist from any such violation in the future.  No
monetary penalty was assessed.

      As a result of its internal investigation, in November 1997, the
Company terminated the employment of John P. Gallo as President and Chief
Operating Officer for willful misconduct.  On April 21, 1998, the Company
instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court.
The lawsuit alleged willful misconduct and malfeasance in office, as well
as embezzlement and


  7


related claims (referred to as the "IGI Action").  On April 28, 1998, Mr.
Gallo instituted a separate action against the Company and two of its
Directors, Edward Hager, M.D. and Constantine Hampers, M.D., alleging that
he had been wrongfully terminated from employment and further alleging
wrongdoings by the two Directors (referred to as the "Gallo Action").  The
Court subsequently ordered the consolidation of the IGI Action and the
Gallo Action (collectively referred to as the "Consolidated Action").

      In response to these allegations, the Company instituted an
investigation of the two Directors by an independent committee
("Independent Committee") of the Board assisted by the Company's General
Counsel.  The investigation included a series of interviews of the
Directors, both of whom cooperated with the Company, and a review of
certain records and documents.adequately serving our needs. The Company also requested an interview
with Mr. Gallo who, through his counsel, declined to cooperate.  In
September 1998, the Independent Committee reported to the Board that it had
found no credible evidence to support Mr. Gallo's claims and allegations
and recommended no further action.  The Board adopted the recommendation.

      The Company denied all allegations plead in the Gallo Action and
asserted all claims in the Gallo Action to be without merit.  The Company
did not reserve any amount relating to such claims.  The Company tendered
the claimowns four acres of land adjacent to its insurance carriers, but was denied insurance coveragemain facility that can be used for both defense and indemnity of the Gallo Action.

      In July 1998, the Company sought to depose Mr. Gallo in connection
with the Consolidated Action.  Through his counsel, Mr. Gallo asserted his
Fifth Amendment privilege against self-incrimination and advised that he
would not participate in the discovery process until such time as a federal
grand jury investigation, in which he was a target, was concluded.  In
January 1999, at the suggestion of the Court, the Company and Mr. Gallo
agreed to a voluntary dismissal without prejudice of the Consolidated
Action, with the understanding that the statute of limitations was tolled
for all parties and all claims, and that the Company and Mr. Gallo were
free to reinstate their suits against each other at a later date, with each
party reserving all of their rights and remedies against the other.

      As of the date hereof, neither the Company nor Mr. Gallo have filed
suit against each other in the Superior Court of New Jersey or any other
court of competent jurisdiction to reinstitute the claims, in whole or
part, previously at issue in the Consolidated Action, and pursuant to the
previous order of dismissal entered in the Consolidated Action, the statute
of limitation on all claims and defenses continues to be tolled as to both
parties.  However, the Company did receive a letter dated November 21, 2003
from Mr. Gallo's attorneys seeking to reach a settlement of the claims
asserted against IGI in the Gallo Action without further resort to the
courts.  The letter provides a general description of Mr. Gallo's claims
and a calculation of damages allegedly sustained by Mr. Gallo relative
thereto.  The letter states that Mr. Gallo's damages are calculated to be
in the range of $3,400,000 to $5,100,000.  The Company denies liability for
the claims and damages alleged in the letter from Mr. Gallo's counsel dated
November 21, 2003, and as such, the Company did not make any formal
response thereto.  Mr. Gallo has contacted the Company's Chief Executive
Officer & Chairman, Frank Gerardi, in a continued effort to initiate
settlement discussions.  As of the present date, the Company continues to
deny any merit and/or liability for the claims alleged by Mr. Gallo and has
not engaged in any formal settlement discussions with either Mr. Gallo or
his attorneys.

      On December 8, 2003, Mr. Gallo filed suit against Novavax, Inc. in
the Superior Court of New Jersey, Law Division, Atlantic County, docket no.
ATL-L-3388-03, asserting claims under seven counts for damages allegedly
sustained as a result of the cancellation of certain Novavax stock options
held by Mr. Gallo due to his termination from IGI in November 1997 for
willful misconduct (referred to as the "Novavax Action").

      On March 5, 2004, Novavax filed an Answer denying the allegations
asserted by Mr. Gallo in his First Amended Complaint.  In addition, while
denying any liability under the First Amended Complaint, Novavax also filed
a Third Party Complaint in the Novavax Action against the Company for
contribution and indemnification, alleging that if liability for Mr.
Gallo's claims is found, the Company has primary liability for any and all
such damages sustained.

      IGI has been notified by its insurance carriers that coverage is not
afforded under their respective policies of insurance for defense and/or
indemnification of the claims alleged by the Third Party Complaint.  After
IGI was notified of the foregoing, but prior to IGI's filing of any
responsive pleading, the Third Party Complaint against IGI was voluntarily
dismissed without prejudice by Novavax on June 30, 2004.  Novavax may at
any time pursuant to the rules of court re-file its Third Party Complaint
against IGI.

      In July 2004, Novavax filed a motion for summary judgment on all
claims asserted under Gallo's First Amended Complaint (referred to as the
"SJ Motion").  Gallo filed in opposition to the SJ Motion contesting all
relief sought thereunder.  In August 2004, the Court held a hearing on the
SJ Motion and denied without prejudice the relief sought by the motion for
dismissal of Gallo's First Amended Complaint.  Upon information and belief,
the parties are currently proceeding with discovery in the Novavax Action.
The Company, as a non-party witness in the Novavax Action, was recently
served by counsel for Gallo with a subpoena for the production of documents
as responsive thereto.

      As of the date hereof, Novavax has not sought to re-file its Third
Party Complaint against IGI for which coverage was previously denied by its
insurance carriers, but Novavax is not precluded from doing so and may seek to
do so in the future.


  8


Other Matters

      future expansion.  

ITEM 3.
LEGAL PROCEEDINGS

On April 6, 2000, officials of the New Jersey Department of Environmental Protection (“DEP”) inspected the Company'sCompany’s leased storage site in Buena, New Jersey, and issued Notices of Violation ("NOV"(“NOVs”) relating to the storage of waste materials in a number of trailers at the site. The Company established a disposal and cleanup schedule and completed the removal of materials from the site. The Company continues to discuss with the
authorities a resolution of any potential assessment under the NOV and has
accrued the estimated penalties related to such NOV.

      OnIn March 2, 2001,2006, the Company discoveredreceived a judge’s decision from the presenceOffice of environmental contamination resultingAdministrative Law (“OAL”) of a fine in the amount of $35,000 in respect to the NOVs the Company received from an unknown heating oil leak at
its Companion Pet Products manufacturing site.  Thethe DEP. Due to the criminal settlement that was reached between the Company immediately
notified the New Jersey Department of Environmental Protection and the local authorities, and hired a certified environmental contractor to assess
the exposure and required clean up.  Based on the initial information from
the contractor,DEP in 2002, the Company originally estimated the cost for the cleanup
and remediationhad a credit of $40,000 to be $310,000.  In September 2001, the contractor updated
the estimated total cost for the cleanup and remediation to be $550,000.  A
further update was performed in December 2002 and the final estimated cost
was increased to $620,000, of which $82,000 remains accrued as of December
31, 2004. The remediation was completed by September 30, 2003. There will
be periodic testing and removal performed, which is projected to span over
the next four years.  The estimated cost of the monitoring is included in
the accrual.

      This contamination also spread to the property adjacent to the
manufacturing facility and the Company is currently involved in a lawsuit
with the owner of that property, Ted Borz.  Mr. Borz runs a business on
that property and he seeking remuneration for loss of income and the
reduction in his property value from IGIused against any fines determined as a result of the oil spill.  IGI
believescivil matter, therefore, the Company did not have to pay any money to the DEP for the settlement amount. The DEP subsequently issued a final decision, which accepted the viola tion findings but rejected the OAL Judge’s penalty recommendation, reinstituting a previously proposed penalty by the DEP of $215,000, less the $40,000 credit previously mentioned or $175,000. The Company appealed this to the Superior Court of the NJ Appellate Division, which determined that it has performed all the necessary tasks requiredCommission’s decision was reasonable thus affirming the DEP Commissioner’s decision. This amount of $175,000 was accrued for in the fourth quarter of 2007. The Company reached a settlement with DEP Commissioner and agreed to properly
decontaminate Mr. Borz's property.  Management does not, however, feel that
itpay the above amount in six equal installments. The final installment is possible to estimate the outcome of this case at this date.

due on June 30, 2009.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company'sCompany’s stockholders during the last quarter of 2004.


  9


2008.


8

PART II

ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

The Company has never paid cash dividends on its Common Stock. (See
"Management's($.01 par value) (the “Common Stock”) The principal market for the Company’s Common Stock is the NYSE Alternext US (“NYSE Alternext”) (symbol: “IG”).   

On May 6, 2008, we were notified by NYSE Alternext that we were below certain of the NYSE Alternext’s continued listing standards. Specifically, we are required to reflect income from continuing operations and/or net income in one of our five most recent fiscal years and a minimum of $6 million in stockholders’ equity to remain listed on the exchange. We had net income from continuing operations in our 2002 fiscal year, but had net losses and losses from continuing operations in each of our 2003, 2004, 2005, 2006, 2007 and 2008 fiscal years. Our stockholders’ equity at December 31, 2008 was $3.0 million.

On July 15, 2008, NYSE Alternext notified us that it accepted our plan of compliance and granted us an extension until May 6, 2009 to regain compliance with the continued listing standards described above.  We will be subject to periodic review by NYSE Alternext 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 our being delisted from NYSE Alternext.

On March 13, 2009, the Company completed a private placement transaction with affiliates of Signet Healthcare Partners (“Investors”) pursuant to which the Company issued certain securities to the Investors. The Company believes that it will be in compliance with the NYSE Alternext listing requirements upon stockholder approval of the private placement transaction. The private placement transaction with the Investors is further described in “Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.")

      The principal market for the Company's Common Stock ($.01 par value)
(the "Common Stock") is the American Stock Exchange ("AMEX") (symbol:
"IG").  On March 28, 2002, the Company was notified by AMEX that it was
below certain of the Exchange's continuing listing standards. Specifically,
the Company was required to reflect income from continuing operations and
net income for 2002 and a minimum of $4,000,000 in stockholders' equity by
December 31, 2002 in order to remain listed.  On April 25, 2002, the
Company submitted a plan of compliance to AMEX.  On June 12, 2002, AMEX
notified the Company that it had accepted the Company's plan of compliance
and had granted the Company an extension of time to regain compliance with
the continued listing standards by December 31, 2002.  In February 2003,
the Company contacted AMEX after release of the Company's 2002 year-end
results. On April 14, 2003, the Company received formal notification from
AMEX that the Company was deemed to be in compliance with all AMEX
requirements for continued listing on AMEX. This determination is subject
to the Company's favorable progress in satisfying the AMEX guidelines for
continued listing and to AMEX's routine periodic reviews of the Company's
SEC filings.  Based on the Company's 2004 year-end results, the Company is
not in compliance with the AMEX requirement for reporting income from
continuing operations and net income for the year ended December 31, 2004.
As of the date of the filing of the Form 10-K, the Company has not been
contacted by AMEX concerning the Company's non-compliance with the AMEX
requirements. While as of this date, the Company has not received any
notification of non-compliance from AMEX, the Company has no knowledge of
nor can it predict whether AMEX shall at any time hereafter issue formal
notification to the Company of its non-compliance with the requirements for
continued listing on AMEX, which could result in the Company's delisting
from AMEX or otherwise adversely affect the Company.

      Operations.”  

The following table shows the range of high and low closing sale prices on the AMEXNYSE Alternext for the periods indicated:

                            High       Low
                            ----       ---

2003
- ----
First quarter              $ .78      $ .54
Second quarter              1.78        .75
Third quarter               2.87        .98
Fourth quarter              2.39       1.25

2004
- ----
First quarter              $2.35      $1.40
Second quarter              2.54       2.05
Third quarter               2.33       1.30
Fourth quarter              1.58       1.16

      

 
High
Low
2008
 
 
 
 
 
First quarter
$ 2.10
  $ 1.30
Second quarter
   2.57
     1.95
Third quarter
   2.34
     1.30
Fourth quarter
   1.40
       .48
 
 
 
2007
 
 
 
 
 
First quarter
$ 1.25
  $   .84
Second quarter
     .94
       .62
Third quarter
   1.13
       .65
Fourth quarter
   1.41
       .91

The approximate number of holders of record of the Company'sCompany’s Common Stock at March 15, 200523, 2009 was 667590 (not including stockholders for whom shares are held in a "nominee"“nominee” or "street"“street” name).  10


                                   PART II


Recent Sales of Unregistered Securities

None.

ITEM 6.
SELECTED FINANCIAL DATA

      Five-Year Summary

We are a smaller reporting company as defined by Rule 12b-2 of Selected Financial Data (in thousands, except
earnings per share information):


                                                                    Year ended December 31,
                                                  -----------------------------------------------------------
                                                    2004         2003         2002         2001         2000
                                                    ----         ----         ----         ----         ----


Statement of Operating Results
Revenues                                          $ 3,558      $ 3,557      $ 4,364      $ 4,294      $  6,552
Operating profit (loss)                            (1,220)        (972)          79         (752)         (993)
Loss from continuing operations                      (892)        (757)      (3,130)      (1,303)       (8,824)
Loss from discontinued operations *                     -            -         (523)        (720)       (2,559)
Gain on disposal of discontinued operations             -          435       12,433          283           114
Cumulative effect of accounting change                  -            -            -            -          (168)
Net income (loss)                                    (892)        (322)       8,780       (1,740)      (11,437)
                                                  =======      =======      =======      =======      ========
Income (loss) per share-basic and diluted:
  Continuing operations                           $  (.08)     $  (.07)     $  (.28)     $  (.11)     $   (.86)
  Discontinued operations                               -            -         (.05)        (.07)         (.25)
  Gain on disposal of discontinued operations           -          .04         1.09          .03           .01
  Cumulative effect of accounting change                -            -            -            -          (.02)
                                                  -------      -------      -------      -------      --------
  Net income (loss)                               $  (.08)     $  (.03)     $   .76      $  (.15)     $  (1.12)
                                                  =======      =======      =======      =======      ========



                                                                       As of December 31,
                                                  -----------------------------------------------------------
                                                    2004         2003         2002         2001         2000
                                                    ----         ----         ----         ----         ----


Balance Sheet Data
Working capital                                   $   922      $ 1,710      $ 2,064      $(6,733)     $ (6,917)
Total assets                                        4,730        5,024        5,929       10,539        12,387
Short-term debt and notes payable                       -           -            18        9,804         9,785
Long-term debt and notes payable
 (excluding current maturities)**                       -           -           164            -             -
Stockholders' equity (deficit)                      4,008       4,166         4,509       (4,185)       (3,275)
Average number of common and
 common equivalent shares:
  Basic and diluted                                11,548      11,374        11,430       10,957        10,205


*     On September 15, 2000, the stockholders of the Company approved, and
      the Company consummated, the sale of the assets and transfer of the
      liabilities of the Vineland division.  On May 31, 2002, the
      stockholders of the Company approved and the Company consummated the
      sale of the assets and transfer of the liabilities of the Companion
      Pet Products division.  The Consolidated Financial Statements present
      these segments as discontinued operations.

**    In connection with certain amendments to the Company's debt
      agreements, the Company reflected certain debt as short-term debt as
      of December 31, 2001 and 2000.
the Exchange Act and are not required to provide the information required under this item.



9

ITEM 7.  MANAGEMENT'S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OPERATION

Forward-Looking Statements

This "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"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'smanagement’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,"“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 "Factors Which May Affect Future Results"“Item 1A:  Risk Fact ors ” 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.  11

Company Overview

      In 2003,

Strategic Overview

IGI is engaged in the three goals in placedevelopment, manufacturing, filling and packaging of topical, semi solid and liquid products for management were a reduction of
generalpharmaceutical, cosmeceutical and administration expenses, an expansion of research and
development expenditures and to lay the foundation for revenue growth.  In
2004, with these goals having been achieved, the Company's focus was on
growth.  Management feelscosmetic companies primarily using its licensed Novasome® encapsulation technology. The Company believes that the decisions that were made during this
past year will open up new doorsNovasome based products developed and provide new opportunities formanufactured 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:

•
the Company divested the metal plating business to focus on its core business of topical skin care/treatment products,
•
the Company acquired filling and packaging equipment that broaden and enhance product and service offerings,
•
the Company instituted a policy of charging a fee for its Product Development Services; and
•
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 very near future.  Oneamount of $130,000 toward the purchase of the decisions madeplating 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 changeUCT by the wayCompany. 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 did business with Estee Lauder.  Estee Lauder's
agreement contained an exclusivity clause that did not allowpurchased 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 sellfill 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 technologyexclusive 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 anyinclude only one Keratolytic cream product. The first installment of Estee Lauder's competitors.  In July 2004,$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 amendment to the contractadditional Product Development Agreement with Estee Lauder which (i)
removed the exclusivity clause, (ii) moved the production of Estee Lauder's
Novasome(R) products to their facility, and (iii) obligates Estee Lauder to
pay IGIDermworx for a royalty of $5.00 per kilogram produced, up to $2 million, and
then $2.00 per kilogram thereafter.  With the exclusivity removed, IGI may
now offer its technology to other cosmetics companies that it once could
not.

      Realizing that the renegotiation of the Estee Lauder contract would
leave a void in revenues, management decided to fill the void with a new
technology, unrelated to cosmetics, while we develop our relationships with
new cosmetic companies, which can sometimes take several years.  The new
technology is UltraCem metal finishing.  In February 2004, the Company
signed a license agreement with Universal Chemical Technologies, Inc.
("UCT") to utilize its patented technology for an electroless nickel boride
metal finishing process.  This is a new venture for the Company and the
Company has had initial capital expenditures of approximately $782,000 in
order to set up the operations.  The Company has also hired two new
employees to oversee the facility operations and for sales and marketing of
theNovasome® based sprayable moisturizer product.  The Company manufactured commercial quantities of the product developed under the amended agree ment in December 2007 and has an exclusive license within a 150 mile radiusproduced commercial quantities of its facility for commercial and military applications.  the product from the additional agreement in the first quarter 2008.


10

Miaj Product Line-  The Company believes there islaunched its first in house product line under the possibilityname Miaj™ in June 2006.  The marketing right of revenuethe 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 profit growth using this
application, but there is no guarantee that it will materialize.

      As an additional cost saving measure,failed to cure the deficiencies on notice, the Company authorized a
reductioncancelled the agreement in December 2008. Since some of the products in the size of its Board of Directors to four members.  In
furtherance of this purpose, Dr. Constantine Hampers and Earl Lewis
voluntarily tendered their resignations from the Board, effective January
4, 2004.  In April of 2004, the Vice President of Business Development leftline were technologically obsolete, the Company decided to write off the entire inventory and management decided not to fill the position but rather
delegate those responsibilities primarily to outside distributors who work
on a contingency basis.  In Junerecorded impairment charges of 2004,$105,000 at December 31, 2008. Additionally, the Company also decided notrecorded a bad debt reserve of $63,000 related to renew the employment contract with its Chief Financial Officer, Domenic
Golato, which resulted in additional cost savingsoutstanding invoice for the Company.

      In 2004, product and developmental expenses increased. Through such
product development efforts, the Company gained two new customers for
Novasome(R) encapsulated products.  Our existing customers are beginning to
incorporate Novasomes(R) into additional product lines.  Genesis
Pharmaceutical, Inc., a division of Pierre-Fabre, has approved a new line
of products utilizing the patented Novasome(R) delivery system.  Chattem,
Inc., makers of Gold Bond and Icy Hot, launched a new Novasome(R) based
product with an advertising campaign that will be sold in mass markets and
other outlets, and we are currently working on another new product for
them.

      IGI will continue its efforts to identify new opportunities in
dermatologics, cosmetics, pharmaceuticals and nutrients for topical
delivery.  The Company will also seek to expand the use of its Novasome(R)
encapsulation technology for flavors and fragrances, as well as fuel
additives. The Company has a Joint Development Agreement with Pure Energy
Corporation ("PEC). The goalpurchase of the Joint Development Agreement is to
develop a new class of cleaner burning alternative fuel formulations based
on PEC's proprietary fuel formulations and IGI's microencapsulation
technology or a new class of high performance fuel additives based on PEC's
proprietary fuel additives and IGI's microencapsulation technology. Stephen
J. Morris, a Director and a major stockholder ofproducts by the Company, is the sole
shareholder of PEC and a member of the PEC Board of Directors.


  12


marketing company.  

Results of Operations

      2004

2008 Compared to 2003

      2007

The Company had a net loss attributable to common stockholders of $892,000,$1,852,000, or $(.08)$(0.12) per share, in 20042008 compared to a net loss of $322,000,$412,000, or $(.03)$(0.03) per share, in 2003.

      Total2007 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 2004the 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 $3,558,000, which represented an
increasesuccessfully 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 $1,000PTHrP 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 revenuesManhattan Pharmaceuticals at the initiation of $3,557,000Phase 2a studies in 2003.  2007.

Licensing and royalty income decreased due to the decrease in sales of $1,007,000 in 2004Novasome 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
 
(in thousands)
 
 
 
 
 
 
 
Costs of Sales
$ 2,851
$ 2,476
$ 375
15%

Cost of sales increased by $351,00015% for the year ended December 31, 2008 compared to 2003,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 Administrative Expenses
$ 2,777
$ 2,430
$ 347
14%
Product Development and Research Expense
$    502
$    481
    $   21
4%

The increase in selling, general and administrative expenses in 2008 compared to the comparable period in 2007 related toan 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
 
(in thousands)
 
 
 
 
 
 
 
Interest Expense, net
         $   15
           $   48
    ($ 33)
     (69%)


11

Interest expense decreased in 2008 as a result of a $300,000 payment from Tarpan Therapeuticsdecrease in the Company’s average short-term notes payable principal balance and royalties from Estee Lauder.  A significant portiona 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 the Company's
product sales are attributable to a single customer.  In addition,
licensing and royaltymiscellaneous income. The amounts in other income is primarily generated from arrangements with
three customers.

      Product sales of $2,551,000 in 2004 decreased $350,000, or 12%,
compared to 2003 due mainly to lower product sales to Estee Lauder, the
Company's major customer, but2007 were partially offset by higher sales to
Genesis, Vetoquinol USA and new customers.  Vetoquinol USA, the company
that purchased our Companion Pet Care Division, became a new customerinsurance proceeds received as reimbursement for the Companyemployee theft that was discovered in 2002 as a result2007 in the amount of the sale$58,000 and $6,000 of the Companion Pet Care
Division. miscellaneous income.  

The Company continues to manufacture severaltax benefit of the pet care
shampoos$196,000 in 2008 and lotions for Vetoquinol USA.

      Cost of sales decreased by $92,000, or 7%,$453,000 in 2004 as compared to
2003.  As a percentage of product sales, cost of sales increased from 46%
in 2003 to 49% in 2004.  The decrease in gross profit from 54% in 2003 to
51% in 2004, as a percent of product sales,2007 was the result of the change in
mix to lower gross profit products sold.

      Selling, general and administrative expenses decreased by $624,000,
or 26%, from $2,422,000 in 2003 to $1,798,000 in 2004. These expenses were
68% of revenues for 2003 compared to 51% in 2004.  The decrease is
primarily due to a reduction of salaries in 2004, which was a goal of
management in 2004.

      Product development and research expenses increased by $965,000 in
2004, or 127%, compared to 2003. The increase is a result of the Company
recording a $545,000 non cash expense related to the SFAS No. 123 value of
300,000 stock options granted to Dr. Holick under his license agreement and
25,000 stock options granted to Dr. Holick for his service on the
Scientific Advisory Board, plus a cash payment of $232,000 made to Dr.
Holick in accordance with his license agreement.  The Company has also made
a $50,000 cash payment to the University of Massachusetts in accordance
with the license agreement between the Company and the University.  There
are many new projects being undertaken by the research and development
department as a result of new agreements signed in 2004.

      Interest income amounted to $25,000 in 2004 compared to interest
income (net of expense) of $7,000 in 2003. The Company had no interest
expense in 2004 and only recorded income related to marketable securities
and overnight investments of our daily cash balance.

      The tax benefit of $290,000 in 2004 was a result of the sale of a portion of the Company'sCompany’s state tax operating loss carryforwardscarry forwards to a third party.

The gain from discontinued operations of $5,000 in exchange
for proceeds of $298,000, offset by the current year's state tax expense of
$82,000.  The tax benefit increased by $82,000 from 20032007 was  related to 2004.

      2003 Compared to 2002

      The Company had a net loss of $322,000, or $(.03) per share, in 2003
compared to net income attributable to common stockholders of $8,647,000,
or $.76 per share, in 2002.  The majority of the change from 2002 to 2003
is the result of the gain on the sale of the Companion Pet Products
divisionequipment for the operations that were shutdown and discontinued in 2002.

      Total revenues2006.

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:

(i)
with Pharmachem Laboratories for 2003 were $3,557,000, which represented1,500,000 shares of Common Stock for gross proceeds of $1,500,000,
(ii)
 with Federico Buonanno for 50 shares of Series A Convertible Preferred Stock for gross proceeds of $500,000, and
(iii)
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 decreaserevolving $1,000,000 secured line of $807,000,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 18%, from revenuesan earlier liquidation event of $4,364,000the 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 2002. The decreased
revenues were due mainly to lower product sales. Licensing and royalty
income of $656,000 in 2003 decreased by $195,000 compared to 2002,
primarilyfull.


12

In addition, as a result of decreased licensing revenues from Johnson &
Johnson offset by royalty revenue from Estee Lauder. Licensing revenues
from Johnson & Johnson are based on its sales.  A significant portioncondition to the consummation of the Company's product sales are attributable to a single customer.  In
addition, licensing and royalty income is primarily generated from
arrangements with two customers.

      Product sales of $2,901,000 in 2003 decreased $612,000, or 17%,
compared to 2002 due mainly to lower product sales to Estee Lauder, the
Company's major customer, but were partially offset by higher sales to
Genesis, Vetoquinol USA and new customers.


  13


Vetoquinol USA, the company that purchased our Companion Pet Care Division,
became a new customer forOffering, 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 2002the 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 saleexistence 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 Companion Pet Care Division.  The Company continues to manufacture
several ofOffering, the pet care shampoos and lotions for Vetoquinol USA.

      Cost of sales decreased by $33,000, or 2%, in 2003 as compared to
2002.  As a percentage of product sales, cost of sales increased from 39%
in 2002 to 46% in 2003.  The decrease in gross profit from 61% in 2002 to
54% in 2003, as a percentage of product sales, was the result of the change
in mix to lower gross profit products sold and underabsorbed fixed costs.

      Selling, general and administrative expenses increased by $64,000, or
3%, from $2,358,000 in 2002 to $2,422,000 in 2003. These expenses were 54%
of revenues for 2002 compared to 68% in 2003.  The increase is primarily
due to a $202,000 charge in the second quarter of 2003 for the cost of
benefits provided by the Company under a severance package to one of the
Company's executives, offset by a decline in salary expense due to staff
reductions after the sale of the Companion Pet Products division.

      Product development and research expenses increased by $213,000 in
2003, or 39%, compared to 2002. The increase is a result of additional
projects undertaken by the Company for existing and potential new customers
and the $50,000 payment made to Dr. Holick related to the licensing of the
PTH and Glycoside Technologies.

      Interest income (expense) went from a net interest expense of
$283,000 in 2002 to a net interest income of $7,000 in 2003. The change is
due to lower interest rates and the payment of debt on May 31, 2002 using
the proceeds from the sale of the Companion Pet Products division.

      The loss on the early extinguishment of debt of $2,654,000 in 2002
related to the write off of the deferred financing costs and the
unamortized debt discount in connection with the repayment of the Company's
senior debt and the subordinated debt.

      The tax benefit of $208,000 in 2003 was a result of the sale of a
portion of the Company's state tax operating loss carryforwards in exchange
for proceeds of $224,000, offset by the current year's state tax expense of
$16,000. Tax expense in 2002 was a result of a New Jersey change in the tax
law in July 2002 that was retroactive to January 1, 2002.  The change
suspended the use of net operating losses for a two year period.
Therefore, the gain from the sale of the Companion Pet Products division
could not be offset against prior net operating losses, resulting in tax
expense for 2002.  The effect of this change was required to be reflected
as a component of continuing operations.  The Company sold some of its
state tax operating loss carryforwards in exchange for proceeds of $249,000
in 2002.  The 2002 proceeds partially offset the effect of the tax law
change.

      The $435,000 of income from discontinued operations in 2003 consisted
of a $169,000 insurance settlement, net of legal costs, received for
damages incurred by the Company as a result of a heating oil leak at the
Company's Companion Pet Products site and a $288,000 gain on the sale of
the Company's Companion Pet Products facility offset by $15,000 of
regulatory expenses and $7,000 of other expenses. In 2002, discontinued
operations consisted of the gain on the sale of the Companion Pet Products
division and the loss from operations of that division.

Liquidity and Capital Resources

      The Company's operating activities used $235,000 of cash during 2004,
compared to $468,000 used in 2003.

      The Company used $427,000 of cash in 2004 for investing activities
compared to $452,000 used 2003. The majority of the 2004 investing
activities were for the machinery and equipment purchases to set up the
metal plating line, which was offset by proceeds from the sale of marketable
securities.  In 2003, the cash was primarily used to purchase marketable
securities offset by proceeds from the sale of property.

      The Company's financing activities provided $221,000 of cash in 2004
compared to $258,000 used in 2003. The cash provided in 2004 was from the
exercise of stock options by a former director of the Company and in 2003
cash was used primarily to pay off the loan from the New Jersey Economic
Development Authority.

      The Company's principal sources of liquidity are cash from
operations, cash and cash equivalents and marketable securities.  The
Company has undergone many changes within the past year, including the
release of the exclusivity on the Estee Lauder contract and the expansion
of the facility to house the metal plating line.  These changes have made
it necessary for the Company to utilize its cash.  However, these changes
were made in an effort to position the Company for future growth and
expansion.  Management was aware of the impact these changes would have on
the cash balance and management believes that existing cash and cash
equivalents and cash flows from operationsCompany’s capital resources will be sufficient to meetsupport our current business plan through March 2010. If necessary, we may continue to seek to raise additional capital through the Company's foreseeable cash needs for at least the next year.  If these
funds are not sufficient to meet the Company's needs, two stockholderssale of the Company have agreed to loan the Company up to $500,000 each, if
necessary, to fund the Company's commitment to Novavax due December 13, 2005
or to fund the deficit through December 31, 2005.  Thereour equity. We may accomplish this via a strategic alliance with a third party. In addition, there may be additional acquisition and other growth opportunities that may require additional external financing.   14


Management may, from timeHowever, 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 time, seek additional funds fromobtain financing through the public or
private issuancesissuance of equity securities or debt securities.otherwise. There can be no assurance that such financing will be available or available on terms acceptable to the Company.

The total contractual obligations overCompany’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 next five yearsdecrease in revenues and beyond
are as follows:

                       Expectedthe 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 Payments By Year
                               (in thousands)


                                                                         2009 and
Contractual Commitments           2005      2006      2007      2008      beyond      Total
- -----------------------           ----      ----      ----      ----     --------     -----


Operating lease obligations       $34       $25       $22       $22        $22         $125
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 2004,2007, 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 signed a license agreement with UCT to utilize their patented technologymeasure financial instruments and certain other items at fair value. Unrealized gains and losses on items for an electroless nickel boride metal
finishing process. The Company spent $782,000 in capital expenditures on
this new venture in order to set up the operations.

      The Company has an option, which is exercisable on December 13, 2005,
to extend its exclusive license for the use of the Technologies in the IGI
Field for an additional ten-year term in exchange for a $1,000,000 cash
payment.

Factors Which May Affect Future Results

      The industry segments in which the Company competesfair value option has been elected are subject to
intense competitive pressures.  The following sets forth some ofreported in earnings. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have evaluated the risks
which the Company faces.

Intense Competition in Consumer Products Business
- -------------------------------------------------

      The Company's Consumer Products business competes with large, well-
financed cosmeticsnew statement and consumer products companies with development and
marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company.  There is no
assurance that the Company's consumer products can compete successfully
against its competitors orhave determined that it can developdoes 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 market new productsDevelopment Activities, (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be favorably received inused or rendered for future research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the marketplace.  In addition, certain ofrelated goods are delivered or the Company's customers that useservices are performed. EITF 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007. We evaluated the Company's Novasome(R) lipid vesicles in
their products may decide to reduce their purchases from the Company or
shift their business to other suppliers.

Effect of Rapidly Changing Technologies
- ---------------------------------------

      The Company expects to sublicense its technologies to third parties,
which would manufacturenew statement and market products incorporating the technologies.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, its technologies could be less
acceptable in the marketplace and therefore the Company's planned
technology sublicensing could be materially adversely affected.

Revision of Current Contract with Estee Lauder
- ----------------------------------------------

      As noted above, in 2004, the Company renegotiated its agreement
with Estee Lauder. The Company will no longer manufacture products for
Estee Lauder.  Estee Lauder now manufactures all products in house and pays
the Company $5.00 per kilogram produced, up to $2 million, and then $2.00 per
kilogram thereafter.  In addition, the exclusivity clause was removed from
the Estee Lauder agreement and, consequently, the Company may now sell its
products in department and specialty stores. Although it is the Company's
belief that this will increase business and revenue in the future, there is
no guaranteehave determined that it will occur.

Licensing Agreement with Universal Chemical Technologies, Inc.
- --------------------------------------------------------------

      In February 2004, the Company signeddoes not have a license agreement with UCT to
utilize their patented technology for an electroless nickel boride metal
finishing process. This is a new venture for the Company that required
$782,000 to be spent to date to set up the operations at our facility.  The
Company has an exclusive license within a 150 mile radius of its facility
for commercial and military applications. The Company believes there is the
possibility of major revenue and profit growth using this application, but
there is no guarantee that it will materialize.


  16


American Stock Exchange (AMEX) Continuing Listing Standards
- -----------------------------------------------------------

      On March 28, 2002, the Company was notified by AMEX that it was below
certain of the Exchange's continuing listing standards.  Specifically, the
Company was required to reflect income from continuing operations and net
income for 2002 and a minimum of $4,000,000 in stockholders' equity by
December 31, 2002 in order to remain listed.

      On April 25, 2002, the Company submitted a plan of compliance to
AMEX.  On June 12, 2002, AMEX notified the Company that it had accepted the
Company's plan of compliance and had granted the Company an extension of
time to regain compliance with the continued listing standards by December
31, 2002. The Company was subject to periodic review by the AMEX staff
during the extension period.  Basedsignificant impact on the Company's reported results for
2002, the Company was not in compliance with the AMEX listing standards for
income from continuing operations. On April 14, 2003, the Company received
formal notification from AMEX that the Company was deemed to be in
compliance with all AMEX requirements for continued listing on AMEX. This
determination is subject to the Company's favorable progress in satisfying
the AMEX guidelines for continued listing and to AMEX's routine periodic
reviewsor reporting of the Company's SEC filings. Based on the Company's 2004 year-end
results, the Company is not in compliance with the AMEX requirement for
reporting income from continuing operations and net income for the year
endedour financial results.


13

In December 31, 2004. As of the date of the filing of the Form 10-K, the
Company has not been contacted by AMEX concerning the Company's non-
compliance with the AMEX requirements. While as of this date, the Company
has not received any notification of non-compliance from AMEX, the Company
has no knowledge of nor can it predict whether AMEX shall at any time
hereafter issue formal notification to the Company of its non-compliance
with the requirements for continued listing on AMEX, which could result in
the Company's delisting from AMEX or otherwise adversely affect the
Company.

Recent Pronouncements

      In January 2003,2007, the Financial Accounting Standards Board ("FASB"(“FASB”) issued InterpretationStatement of Financial Accounting Standards (“SFAS”) No. 46, "Consolidation of Variable Interest Entities"
(FIN 46)141 (revised 2007),Business Combinations (“FAS 141R”), which addresses consolidation byreplaces 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 enterprises of variable
interest entities ("VIEs").   FIN 46 is applicable immediately for VIEs
created after January 31, 2003 andcombination. FAS 141R is effective for reporting periods endingas of the beginning of an entity's fiscal year that begins after December 15, 2003, for VIEs created prior to February 1, 2003. In
December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify
some of the provisions of the interpretation and to defer the effective date
of implementation for certain entities. Under the guidance of FIN 46R, public
companies that2008. FAS 141R will only have interests in VIE's that are commonly referred to as
special purpose entities are required to apply the provisions of FIN 46R for
periods ending after December 15, 2003. A public company that does not have
any interests in special purpose entities but does have a variable interest
in a VIE created before February 1, 2003, must apply the provisions of FIN
46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The adoption of FIN 46 had noan impact on theour financial conditionposition or results of operations since the Company does not have investments
in VIEs.

      if we enter into a business combination.

In November 2004,December 2007, the FASB issued SFAS No. 151, "Inventory Costs,"160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51 ("FAS 160"), which clarifiesestablishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the accounting for abnormal amountsparent, the amount of idle facility
expense, freight, handling costs,consolidated net income attributable to the parent and wasted material (spoilage).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 provisionsStatement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of this Statement shall bethe parent and the interests of the noncontrolling owners. FAS 160 is effective for inventory costs
incurred duringas of the beginning of an entity's fiscal years beginningyear that begins after JuneDecember 15, 2005.2008. The Company is currently evaluating the effectspotential impact, if any, of the adoption of this statementFAS 160 on i ts 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 Company'sincome statement; and what participants should disclose in the notes to the financial statements.

      In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment." SFAS No. 123R requires employee stock options and rights to
purchase shares under stock participation plans to be accounted for under
the fair value method, and eliminates the ability to account for these
instruments under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees",
and allowed under the original provisions of SFAS No. 123. SFAS No. 123R
requires the use of an option-pricing model for estimating fair value,
whichstatements about a collaborative arrangement. EITF 07-1 is amortized to expense over the service periods. The requirements of
SFAS No. 123R are effective for fiscal periods beginningthe Company’s collaborations existing after June 15,
2005.January 1, 2009. The Company is currently evaluating the transition methods.

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 state ments 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.


14

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 statemen ts.

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

      In December 2001, the SEC issued disclosure guidance for "critical
accounting policies."  

The SEC defines "critical“critical accounting policies"policies” as those that require application of management'smanagement’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 judgementsjudgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.  16



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 disposal and cleanup schedule and completed the removal of materials from the site. In March 2006, the Company received a judge’s decision from the Office of Administrative Law (“OAL”) of a fine in the amount of $35,000 in respect to the NOVs the Company received from the DEP. Due to the criminal settlement that was reached between the Company and the DEP in 2002, the Company had a credit of $40,000 to be used against any fines determined as a result of the civil matter, therefore, the Company did not have to pay any money to the DEP for the settlement amount. The DEP subsequently issued a final decision, which accepted the viola tion findings but rejected the OAL Judge’s penalty recommendation, reinstituting a previously proposed penalty by the DEP of $215,000, less the $40,000 credit previously mentioned or $175,000. The Company appealed this to the Superior Court of the NJ Appellate Division, which determined that the Commission’s decision was reasonable thus affirming the DEP Commissioner’s decision. This amount of $175,000 was accrued for in the fourth quarter of 2007. The Company reached a settlement with DEP Commissioner and agreed to pay the above amount in six equal installments. The final installment is due on June 30, 2009.

On March 2, 2001, the Company became aware of environmental contamination resulting from an unknown heating oil leak at its Companion Pet Products manufacturing facility. The Company immediately notified the New Jersey Department of Environmental Protection and the local authorities, and hired a contractor to assess the exposure and required clean up.  Based on the initial information from the contractor, the
Company originallyup costs. The total estimated the costcosts for the cleanupclean up and remediation to be
$310,000.  In September 2001, the contractor updated the estimated total
cost for the cleanup and remediation to be $550,000.  In December 2002, a
further update was performed and the final estimated costs were increased
to $620,000,is $652,000, of which $82,000$50,000 remains accrued as of December 31, 2004.2008. Based on information provided to the Company from its environmental consultant and what is known to date, the Company believes the reserve is sufficient for the remaining remediation of the environmental contamination. There is a possibility, however, that the remediation costs may exceed the Company'sCompany’s estimates.


15

Long-Lived Assets
- -----------------

      

The Company'sCompany’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset.
Based on available information, management believes that
If the carrying value
of its long-lived assets are currently recoverable from future net
undiscounted cash flows expectedconsidered to be generated from such assets.  Thereimpaired, the impairment to be recognized is a possibility, however, that changes could occur inmeasured by the future (e.g.,
the loss of a significant customer)amount by which would negatively impact the
Company's ability to recover the carrying amount exceeds the fair value of its long-livedthe assets.
The occurrence of such an event might result in the Company having to
record an impairment charge.


Deferred Tax Valuation Allowance
- --------------------------------

      

Deferred taxes arise due to temporary differences in the bases of assets and liabilities and from net operating losses and credit carryforwards.carry forwards. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company's statement of operations become deductible expenses under applicable income tax laws or loss or credit carryforwardscarry forwards are utilized. Accordingly, realization of deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers historical operating losses, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As a result, the Company concluded that it was more likely than not that it will be unable to realize the gross deferred tax assets in the foreseeable future and established a valuation reserve for all such deferred tax assets.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      

Revenue Recognition

The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred or contractual services rendered, the sales price is fixed or determinable, and collection is reasonably assured in conformity with SAB No. 104,Revenue Recognition.

The Company derives its revenues from three basic types of transactions: sales of manufactured product, licensing of technology, and research and product development services performed for third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company utilizes, different revenue recognition policies for each.

Product Sales: The Company recognizes revenue when title transfers to its customers, which is generally upon shipment of products. These shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form. The revenues associated with these transactions, net of appropriate cash discounts, product returns and sales reserves, are recorded upon shipment of the products.

Licensing Revenues: Revenues earned under licensing or sublicensing contracts are recognized ratably over the life of the agreements. Advance payments by customers are initially recorded as deferred income on the Consolidated Balance Sheet and then recognized ratably over the life of the agreement or as contract obligations are completed.

Product Development Services: The Company establishes agreed upon product development agreements with its customers to perform product development services. Product development revenues are recognized in accordance with the product development agreement upon the completion of the phases of development and when we have no future performance obligations relating to that phase of development. Revenue recognition requires the Company to assess progress against contracted obligations to assure completion of each stage. Payments under these arrangements are generally non-refundable and are reported as deferred until they are recognized as revenue. If no such arrangement exists, product development fees are recognized ratably over the entire period during which the services are performed.

In making such assessments, judgments are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. Changes in total estimated contract cost and losses, if any, are recognized in the period they are determined. Billings on product development contracts are typically based upon terms agreed upon by the Company and customer and are stated in the contracts themselves and do not always align with the revenues recognized by the Company. On occasions when revenue recognized exceeds the milestone or progress billed to our customer, an “unbilled” receivable is recorded on our Consolidated Balance Sheet.


16

Stock-based Compensation

SFAS No. 123(R), Share-Based Payment, defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions.

Market Risk

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flow of the Company due to adverse changes in market prices and interest rates. The Company is exposed to market risk because of changes in interest rates and changes in the fair
market value of its marketable securities portfolio.

      The Company does not use derivative instruments in its marketable
securities portfolio. The Company classifies its investments in its
marketable securities portfolio as available-for-sale and records them at
fair value. The securities unrealized holding gains and losses are excluded
from income (loss) and are recorded directly to stockholders' equity in
accumulated other comprehensive income (loss).rates. Changes in interest rates are not expected to have an adverse material effect on the Company'sCompany’s financial condition or results of operations.

operations due to the amount of indebtedness the Company carries or expects to carry on its financial statements.

The Company does not use derivative instruments.

Accounts Receivable and Allowance for Doubtful Accounts

The Company extends credit to its customers, based upon credit evaluations, in the normal course of business, primarily with 30- day terms. The Company does not require collateral from its customers. Bad debt provisions are provided for on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable.  The Company charges off uncollectible receivables when the likelihood of collection is remote.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      

The Company’s consolidated financial statements and notes thereto listed in the
accompanying index to financial statements (Item 15) are filed as partbegin on page F-1 of this Annual Reportreport and are incorporated herein by reference.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.  17



ITEM 9A.  9A(T).
CONTROLS AND PROCEDURES

      Under the supervision

Evaluation of Disclosure Controls and Procedures.Our management, with the participation of certain members
of the Company's management, including theour Chief Executive Officer and Vice
President of Finance, the Company completed an evaluation ofActing Principal Financial Officer, evaluated the effectiveness of the design and operation of itsour disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Acting Principal Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were ineffective, due to the material weaknesses detailed below in our internal control over financial reporting that have not been fully remediated as of December 31, 2008.


17

Internal Control over Financial Reporting

(a)  Management's Report on Internal Control over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")). amended. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal controls o ver financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Based on thisour evaluation under the framework inInternal Control—Integrated Framework, management concluded that our internal control over financial reporting was ineffective as of December 31, 2008 due to material weaknesses in our internal control over financial reporting that have not been fully remediated as of December 31, 2008, as detailed below:

•
Our management has determined that we have a material weakness in our internal control over financial reporting related to not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process.
•
We did not maintain appropriate segregation of duties associated with the design controls and use of personnel within the organization. Currently, we do not have sufficient staffing to perform these responsibilities associated with proper segregation of duties.  

Until these deficiencies in our internal control over financial reporting are remediated, there is a reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner.

In 2008 our efforts to remediate these material weaknesses was hampered by our limited financial resources. We are committed to appropriately addressing these matters in 2009, as follows:

•
We will reassess our accounting and finance staffing levels to determine and seek the appropriate accounting resources to be added to the team to handle the existing workload, provide extra technical accounting depth and further promote segregation of duties;

•
We will adopt formal policy and procedure guidelines related to Information Technology practices, covering systems development and change management, security authentication and related measures and operational activities;

•
We will expand the training and education of our accounting and finance staff members, including Sarbanes-Oxley compliance training, in an effort to improve their effectiveness.

This annual report does not include an attestation report of the Company's Chief Executive Officer and Vice President
of Finance believe thatregistered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the disclosure controls and procedures were
generally effective asCompany's registered public accounting firm pursuant to temporary rules of the end ofSecurities and Exchange Commission that permit the period covered by thisCompany to provide only management's report with
respect to timely communicating to them and other members of management
responsible for preparing periodic reports all material information
required to be disclosed in this report as it relates to the Company and
its consolidated subsidiaries.  Such evaluation did not identify anyannual report.

(b)  Changes in Internal Control over Financial Reporting

There was no change in the Company'sour internal control over financial reporting during the Company's last fiscalour fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company'sour internal control over financial reporting.

      In a report to the Audit Committee of our Board of Directors and
management of the Company, delivered by our independent audit firm, Amper,
Politziner, & Mattia P.C., on March 24,2005 in connection with their review
of our financial results for the year ended December 31, 2004, two items were
identified to be material weaknesses in our internal controls.  A "material
weakness" is a reportable condition in which the design or operation of
one or more of the internal control components does not reduce to a relatively
low level the risk that misstatements caused by error or fraud in amounts that
would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Our material weaknesses
are insufficient resources and administrative support in the accounting
department and an unreliable accounting software package. As a result of
these material weaknesses, our internal controls over financial reporting are
ineffective. We agree with our independent auditors and we have begun taking
steps to alleviate these material weaknesses. We will be hiring an additional
support person in the accounting department and a new accounting/manufacturing
software package is currently being installed throughout the Company.  The
impact of the above conditions did not affect the results of this period or
any prior period.

      The Company's management cannot assure that its disclosure controls
and procedures or its internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and breakdowns can occur because of
simple errors or mistakes. Additionally, controls can be circumvented by
the individual acts of some person or by collusion of two or more people.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. Accordingly, the Company's disclosure controls
and procedures are designed to provide reasonable, not absolute, assurance
that the objectives of its disclosure control system are met and, as set
forth above.


ITEM 9B.
OTHER INFORMATION

None.


18

PART III

ITEM 10.
DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT

      AND CORPORATE GOVERNANCE

A portion of the information required by this item is contained in part under the caption "Executive Officers of the Registrant" in Part I
hereof, and the remainder is contained in the Company's Proxy Statement for the Company's 20052009 Annual Meeting of Stockholders (the "2005"2009 Proxy Statement") under the captions "PROPOSAL"Proposal No. 1 -– Election of Directors -
Nominees for Election as Directors," "Committees”, “Structure and Practices of the Board of Directors - Committees of the Board of Directors – Audit Committee" andCommittee”, "Section 16(a) Beneficial Ownership Reporting Compliance", and “Executive Compensation”, which are incorporated herein by this reference.  Officers are elected on
an annual basis and serve at the discretion of the Board of Directors. The Company expects to file the 20052009 Proxy Statement no later than April 29,
2005.

      10, 2009.

The Company has adopted a written code of ethics that applies to all directors, officers and employees of the Company and its subsidiaries. The Company'sCompany’s code of ethics is available at its web site at www.askigi.com. Any amendments to the code of ethics or waivers from the provisions of the code of ethics for the Company’s principal executive officer and principal financial and accounting officer will be disclosed on the Company’s Internet website within four business days following the date of such amendment or waiver.

ITEM 11.
EXECUTIVE COMPENSATION

The information required by this item is contained in the Company's 20052009 Proxy Statement under the captions "EXECUTIVE COMPENSATION," "OPTION
GRANTS IN LAST FISCAL YEAR"”Executive Compensation”, "AGGREGATED OPTION EXERCISES IN FISCAL YEAR
2004 AND YEAR END 2004 OPTION VALUES," "Compensation Committee Interlocks
and Insider Participation,"“Structure and "Director Compensation and Stock Options"Practices of the Board of Directors – Director Compensation” and is incorporated herein by this reference.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

A portion of the information required by this item is contained in the Company's 20052009 Proxy Statement under the caption "Beneficial"Security Ownership of Common Stock"Certain Beneficial Owners and Management " and is incorporated herein by this reference.

Securities Authorized For Issuance Under Equity Compensation Plans

The following table includes information as of December 31, 20042008 relating to the Company'sCompany’s 1989 Stock IncentiveOption Plan, 1991 Stock Incentive, 1999 Stock Incentive Plan, andthe 1999 Director Stock Option Plan and the 1998 Director Stock Plan, which comprisecomprises all of the equity compensation, plans of the Company. The table provides the number of securities to be issued upon the exercise of outstanding options under such plans, the weighted-average exercise price of such outstanding options and the number of securities remaining available for future issuance under such equity compensation plans:


- -----------------------------------------------------------------------------------------------------------
                                                                                     Number of securities
                                                                                    remaining available for
                                                                                     future issuance under
                                  Number of securities to     Weighted-average       equity compensation
                                  be issued upon exercise     exercise price of        plans (excluding
                                  of outstanding options,    outstanding options,    securities reflected
Plan category                      warrants and  rights      warrants and rights         in column(a))
- -----------------------------------------------------------------------------------------------------------
                                            (a)                      (b)                       (c)
- -----------------------------------------------------------------------------------------------------------


Equity compensation plans
 approved by security holders            2,588,048                  $1.85                   940,902
- -----------------------------------------------------------------------------------------------------------
Equity compensation plans
 not approved by security
 holders                                         -                      -                         -
- -----------------------------------------------------------------------------------------------------------
Total                                    2,588,048                  $1.85                   940,902
- -----------------------------------------------------------------------------------------------------------

Plan category
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of outstanding options
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
 
(a)(1)
(b)(1)
(c)(2)
Equity compensation plans approved by security holders

2,705,532

$ 1.43

1,352,298
Equity compensation plans not approved by security holders

-

-

-
      Total
2,705,532
$ 1.43
1,352,298

(1)
Includes information with respect to the 1989 Stock Option Plan, 1999 Stock Incentive Plan, and the 1999 Director Stock Option Plan.
(2)
Includes information with respect to the 1989 Stock Option Plan, 1999 Stock Incentive Plan, the 1999 Director Stock Option Plan, and the 1998 Directors Stock Plan. As of December 31, 2008, we had 470,280 shares available for issuance pursuant to the 1998 Directors Stock Plan.


19

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is contained in the Company's 20052009 Proxy Statement under the captioncaptions “Proposal – 1  Election of Directors – Independence of Directors”, “Structures and Practices of the Board of Directors – Committees of the Board of Directors” and  "Certain Relationships and Related Transactions" and is incorporated herein by this reference.  19



ITEM 14.
PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES

The information required by this item is contained in the Company's
2005Company’s 2009 Proxy Statement under the caption "Relationship“Relationship with Independent Public Accountants"Accountants” and is incorporated herein by this reference.

                                   PART IV


ITEM 15.
EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   (1)   Financial Statements:

Exhibit
Number
Description
(3)(a)
Amended and Restated Certificate of Incorporation of IGI Laboratories, Inc., dated May 7, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K, File No. 001-08568, filed May 12, 2008).
(3)(b)
Amended and Restated Bylaws of IGI Laboratories, Inc., effective May 7, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K, File No. 001-08568, filed May 12, 2008).
(3)(c)
Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock of IGI Laboraties, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed March 19, 2009 (the “March 2009 8-K”)).
(3)(d)
Certificate of Correction to Correct a Certain Error in the Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock (incorporated by reference to Exhibit 3.2 to the March 2009 8-K).
(4.1)
Specimen stock certificate for shares of Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 001-08568, filed March 28, 2001 (“the 2000 Form 10-K”)).
(4.2)
Form of Secured Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the March 2009 8-K).
(4.3)
Form of Preferred Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the March 2009
8-K).
(4.4)
IGI Laboratories, Inc. Common Stock Purchase Warrant in favor of Rockport Venture Securities, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.3 to the March 2009 8-K).
(4.5)
Third Amended and Restated Revolving Note in favor of Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.4 to the March 2009 8-K).
(10.1)
IGI, Inc. 1989 Stock Option Plan (incorporated by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders held May 11, 1989, File No. 001-08568, filed April 12, 1989).
(10.2)#
IGI, Inc. 1998 Directors Stock Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-67565), filed March 12, 2009.
(10.3)
Common Stock Purchase Warrant No. 5 to purchase 150,000 shares of IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11, 1999 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 001-08568, filed April 12, 1999 (“the 1998 Form 10-K")).
(10.4)#
1999 Director Stock Option Plan as amended approved by the Board of Directors on September 15, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8/A, File No. 333-52312, filed April 25, 2006).
(10.5)
Common Stock Purchase Warrant No. 7 to purchase 120,000 shares of IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March 11, 1999 (incorporated by reference to Exhibit 10.42 to the 1998 Form 10-K).
(10.6)
Manufacturing and Supply Agreement dated as of February 14, 2001 among IGI, Inc., IGEN, Inc., Immunogenetics, Inc. and Genesis Pharmaceutical, Inc. (incorporated by reference to Exhibit 10.59 to the 2000 Form 10-K).
(10.7)
Manufacturing and Supply Agreement dated May 31, 2002 between IGI, Inc. and IGEN, Inc. (collectively Suppliers) and Vetoquinol, USA, Inc. (Purchaser) (incorporated by reference to Exhibit 10.93 to the 2002 Form 10-K).


20


(10.8)
Technological Rights Agreement dated May 31, 2002 between IGI, Inc. and IGEN, Inc. (collectively Sellers) and Vetoquinol, USA, Inc. (Purchaser) (incorporated by reference to Exhibit 10.94 to the 2002 Form 10-K).
(10.9)
Supplemental Agreement dated May 31, 2002 between IGI, Inc. (Seller) and Vetoquinol, USA, Inc. (Buyer) (incorporated by reference to Exhibit 10.95 to the 2002 Form 10-K).
(10.10)
Amendment dated March 19, 2002, to License Agreement by and among Ethicon, Inc. and IGI, Inc., IGEN, Inc. and Immunogenetics, Inc. (incorporated by reference to Exhibit 10.98 to the 2002 Form 10-K).
(10.11)
Product Development Agreement dated November 10, 2003, between Pure Energy Corporation d/b/a/ Pure Energy of America, Inc. and IGI, Inc. (incorporated by reference to Exhibit 10.99 on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, File No. 001-08568, filed April 14, 2004 (“the 2003 Form 10-K)).
(10.12)
License Agreement effective December 24, 2003, by and among Michael F. Holick, MD, PhD, A&D Bioscience, Inc. and IGI, Inc. (incorporated by reference to Exhibit 10.103 to the 2003 Form 10-K).
(10.13)
License Agreement dated February 9, 2004, between Universal Chemical Technologies, Inc. and IGI, Inc. (incorporated by reference to Exhibit 10.104 to the 2003 Form 10-K).
(10.14)
License Agreement by and between Micro-Pak, Inc. (now known as Novavax, Inc.) and IGEN, Inc. effective as of December 13, 1995 (incorporated by reference to Exhibit (10) (v) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 001-08568, filed March 29,1996).
(10.15)
Agreement for Development Services dated March 27, 2003, between Chattem, Inc. and IGI, Inc (incorporated by reference to Exhibit 10.107 to the 2003 Form 10-K).
(10.16)
Sublicense Agreement between IGI, Inc. and Tarpan Therapeutics, Inc. dated April 19, 2004 (incorporated by reference to Exhibit 10.109 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed May 14, 2004).
(10.17)
Amendment of the supply and license agreement between IGI, Inc. and Estée Lauder, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed November 24, 2004).
(10.18)
Secured Promissory Note, dated December 12, 2005 (“Univest Note”), in favor of Univest Management, Inc. EPSP (“Univest”), c/o Frank Gerardi, Trustee (incorporated by reference to Exhibit 10.1 to the Company's 8-K filed on December 16, 2005).
(10.19)
Letter Agreement dated January 30, 2006 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on February 3, 2006).
(10.20)
Letter Agreement dated July 21, 2006 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on July 27, 2006).
(10.21)
Letter Agreement dated October 4, 2006 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on October 4, 2006).
(10.22)
Letter Agreement dated December 28, 2006 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on December 29, 2006).
(10.23)
Letter Agreement dated January 31, 2007 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on February 2, 2007).
(10.24)
Letter Agreement dated March 1, 2007 between Univest and the Company re: Univest Note (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on March 7, 2007).
(10.25) 
Form of Common Stock Purchase Warrants with Respect to Unit Subscription Agreement entered into on December 15, 2005 (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed on December 21, 2005).
(10.26)
License Agreement dated October 11, 2006 between IGI, Inc. and Dermworx Inc. (incorporated by reference to Exhibit 10.51 to the Company’s Form 10-KSB filed on April 2, 2007).
(10.27)
Employment Agreement dated November 7, 2006, between Rajiv Mathur and IGI, Inc. (incorporated by reference to Exhibit 10.52 to the Company’s Form 10-KSB filed on April, 2007).
(10.28)
Loan and Security Agreement dated, January 29, 2007, in favor of Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.54 to the Company’s Form 10-KSB filed on April 2, 2007).
(10.29)
Form of Common Stock Purchase Warrant issued to Landmark Financial Corporation with respect to Unit Subscription Agreement entered into February 6, 2007 (incorporated by reference to Exhibit 10.56 to the Company’s Form 10-KSB filed on April 2, 2007).
(10.30)+
Agreement dated August 21, 2007 between Pharmachem Laboratories and IGI, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form-10QSB filed on November 14, 2007).
(10.31)+
Agreement dated August 23, 2007 between Dermworx, Inc. and IGI, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Form-10QSB filed on November 14, 2007).
(10.32)#
IGI, Inc. 2008 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed February 12, 2008).


21


(10.33)
First Amendment to Loan and Security Agreement, dated July 29, 2008, between IGI, Laboratories, Inc. and Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K filed August 1, 2008).
(10.34)#
Separation Agreement and Release dated September 16, 2008 between IGI Laboratories, Inc. and Carlene Lloyd (incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 8-K filed September 22, 2008).
(10.35)
Form of Stock Option Award Agreement under the 1999 Stock Incentive Plan. (incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 10-Q filed November 14, 2008).
(10.36)
Second Amendment to Loan and Security Agreement, dated January 2, 2009, between IGI, Laboratories, Inc. and Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K filed January 29, 2009).
(10.37)
Second Amended and Restated Revolving Note, dated January 26, 2009, of IGI Laboratories, Inc., made in favor of Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K filed January 29, 2009).
(10.38)
Securities Purchase Agreement, by and among IGI Laboratories, Inc. and the purchasers set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.1 to the March 2009
8-K).
(10.39)
Voting Agreement by and among IGI Laboratories, Inc., Signet Healthcare Partners, G.P. and the stockholders of the Company set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.2 to the March 2009 8-K).
(10.40)
Registration Rights Agreement by and among IGI Laboratories, Inc., the purchasers set forth on Schedule A thereto and the placement agent set forth on Schedule B thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.3 to the March 2009 8-K).
(10.41)
Guaranty Agreement by Immunogenetics, Inc. in favor of the parties listed on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.4 to the March 2009 8-K).
(10.42)
Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.5 to the March 2009 8-K).
(10.43)
Intellectual Property Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.6 to the March 2009 8-K).
(10.44)
Intercreditor Agreement by and among Life Sciences Opportunities Fund II, L.P., Life Sciences Opportunities Fund (Institutional) II, L.P., Pinnacle Mountain Partners, LLC and IGI Laboratories, Inc., dated March 13, 2009 (incorporated by reference to Exhibit 10.7 to the March 2009 8-K).
(10.45)
Third Amendment to Loan and Security Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.8 to the March 2009 8-K).
(10.46)
Note Conversion Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.9 to the March 2009 8-K).
(10.47)
Indemnification Agreement by and between IGI Laboratories, Inc. and Joyce Erony, dated March 13, 1999 (incorporated by reference to Exhibit 10.10 to the March 2009 8-K).
(10.48)
Form of Indemnification Agreement for Certain Directors (incorporated by reference to Exhibit 10.11 to the March 2009 8-K).
(10.49)
IGI, Inc. 1999 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-79333), filed April 25, 2006).
(21)
List of Subsidiaries (incorporated by reference to Exhibit 21 to the 1999 Form 10-K.).
(23.1)
Consent of Amper, Politziner & Mattia, LLP
(31.1)*
Certification of the President and Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)*
Certification of the Acting Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)*
Certification of the President and Chief Executive Officer Pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)*
Certification of the Acting Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*
Filed herewith.
#
Indicates management contract or compensatory plan.
+
Portions of Independent Registered Public Accounting Firm

            Report of Independent Registered Public Accounting Firm

            Consolidated Balance Sheets, December 31, 2004this Exhibit were omitted and 2003

            Consolidated Statements of Operations forfiled separately with the years ended
            December 31, 2004, 2003 and 2002

            Consolidated Statements of Cash Flows for the years ended
            December 31, 2004, 2003 and 2002

            Consolidated Statements of Stockholders' Equity (Deficit) and
            Comprehensive Income (Loss) for the years ended December 31,
            2004, 2003 and 2002

            Notes to Consolidated Financial Statements

      (2)   Financial Statement Schedules:

            Schedule II. Valuation and Qualifying Accounts and Reserves

            Schedules other than those listed above are omitted for the
            reason that they are either not applicable or not required or
            because the information required is contained in the financial
            statements or notes thereto.

            Condensed financial informationSecretary of the Registrant is omitted
            since there are no substantial amounts of "restricted net
            assets" applicableSEC pursuant to a request for confidential treatment that has been filed with the Company's consolidated subsidiaries.

      (3)   Exhibits Required to be Filed by Item 601 of Regulation S-K:

            The exhibits listed in the Exhibit Index immediately preceding
            such exhibits are filed as part of this Annual Report on Form
            10-K unless incorporated by reference as indicated.


  20


                                 SEC.


22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date:  April 12, 2005                 IGI, Inc.

                                       By:  /s/Frank Gerardi
                                            -------------------------------
                                            Frank Gerardi
                                            Chairman and Chief Executive
                                            Officer

      


Date:
IGI Laboratories, Inc.
March 31, 2009
By:
/s/ Rajiv Mathur
Rajiv Mathur
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacity and on the dates indicated.


Signatures
Title
Date
- ----------                               -----                          ----


/s/Frank Gerardi          Chairman
/s/  Rajiv Mathur
Director, President and Chief Executive Officer     April 12, 2005
   Frank Gerardi

/s/Carlene A. Lloyd       Vice President of Finance                April 12, 2005
   Carlene A.Lloyd

/s/
March 31, 2009
Rajiv Mathur
(Principal Executive Officer)
/s/  Justine Kostka
Assistant Controller (Acting Principal
March 31, 2009
Justine Kostka
Financial Officer)
/s/  Stephen J. Morris
Director                                 April 12, 2005
   
March 31, 2009
Stephen J. Morris

/s/
/s/  Terrence O'Donnell     O’Donnell
Director                                 April 12, 2005
   
March 31, 2009
Terrence O'Donnell

/s/Donald W. Joseph       O’Donnell
/s/  Jane E. Hager
Director                                 April 12, 2005
   Donald W. Joseph
March 31, 2009
Jane E. Hager
  21


           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The 



23

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2008 and 2007
F-3
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007
F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008 and 2007
F-6
Notes to Consolidated Financial Statements
F-7



F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
IGI Laboratories, Inc.:

 and Subsidiaries

We have audited the accompanying consolidated balance sheetsheets of IGI Laboratories, Inc. and subsidiariesSubsidiaries as of December 31, 20032008 and 2007, and the related consolidated statements of operations, cash flows, and stockholders'stockholders’ equity (deficit) and
comprehensive income (loss) for each of the years in the two year period
ended December 31, 2003.  In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule for the years ended December 31, 2003 and 2002.then ended. These consolidated financial statements and the financial statement schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IGI Laboratories, Inc. and subsidiariesSubsidiaries as of December 31, 2003,2008 and 2007, and the results of their operations and their cash flows for each of the years in the two year periodthen ended, December 31, 2003, in conformity with U.S. generally accepted accounting
principles.  Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.

As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, relating to
the classification of losses from the extinguishment of debt in 2003.


                                       /s/ KPMG LLP

Philadelphia, Pennsylvania
April 7, 2004


  22


           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
IGI, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of IGI, Inc.
and Subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, cash flows, and stockholders' equity (deficit) and
comprehensive income (loss) for the year then ended.  These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis for
our opinion.

In our opinion, the 2004 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
IGI, Inc. and Subsidiaries as of December 31, 2004, and the results of
its operations and its cash flows for the year ended December 31, 2004, in conformity with U.S generally accepted accounting principles.

In connection with our audit of the consolidated financial statements
referred to above, we audited Schedule II - Valuation and Qualifying
Accounts. In our opinion, this financial schedule, when considered in
relation to the consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information stated therein.


                                       /s/


/s/ AMPER, POLITZINER & MATTIA, P.C.

LLP

March 30, 2005
31, 2009
Edison, New Jersey  23


                         



F-2

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
                         December 31, 2004 and 2003
           (in
(in thousands, except share and per share information)

                                                         2004          2003
                                                         ----          ----


ASSETS
Current assets:
  Cash and cash equivalents                            $    380      $    821
  Restricted cash                                            50            50
  Marketable securities                                     377           800
  Accounts receivable, less allowance for doubtful
   accounts of $10 and $16 in 2004 and 2003,
   respectively                                             306           350
  Licensing and royalty income receivable                   155            17
  Inventories                                               247           192
  Prepaid expenses and other current assets                   8           133
                                                       --------      --------
      Total current assets                                1,523         2,363
Property, plant and equipment, net                        3,168         2,607
Other assets                                                 39            54
                                                       --------      --------
      Total assets                                     $  4,730      $  5,024
                                                       ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                          157           105
  Accrued payroll                                            16            75
  Other accrued expenses                                    243           301
  Income taxes payable                                        5             7
  Deferred income                                           180           165
                                                       --------      --------
      Total current liabilities                             601           653
Deferred income                                             121           205
                                                       --------      --------
      Total liabilities                                     722           858
                                                       --------      --------

Commitments and contingencies (Notes 13 and 14)

Stockholders' equity:
  Common stock, $.01 par value, 50,000,000 shares
   authorized; 13,547,520 and 13,351,237 shares
   issued in 2004 and 2003, respectively                    135           134
  Additional paid-in capital                             24,467        23,702
  Accumulated other comprehensive loss                      (32)            -
  Accumulated deficit                                   (19,167)      (18,275)
  Less treasury stock, 1,965,740 shares at cost
   in 2004 and 2003                                      (1,395)       (1,395)
                                                       --------      --------
      Total stockholders' equity                          4,008         4,166
                                                       --------      --------
      Total liabilities and stockholders' equity       $  4,730      $  5,024
                                                       ========      ========

 
 
December 31,
2008
 
 
December 31,
2007
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
     Cash and cash equivalents
$
    171 
 
$
      914 
     Accounts receivable, less allowance for doubtful accounts
 
 
 
 
 
       of $75 and $48 in 2008 and 2007, respectively
 
481 
 
 
666 
     Licensing and royalty income receivable
 
74 
 
 
356 
     Inventories
 
562 
 
 
376 
     Prepaid expenses and other current assets
 
82 
 
 
93 
          Total current assets
 
1,370 
 
 
2,405 
Property, plant and equipment, net
 
2,280 
 
 
2,410 
Restricted cash – long term
 
50 
 
 
50 
License fee, net
 
700 
 
 
800 
Other
 
20 
 
 
— 
          Total assets
$
     4,420 
 
$
      5,665 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
     Note payable – related party
$
      500 
 
$
        500 
     Accounts payable
 
559 
 
 
282 
     Accrued expenses
 
312 
 
 
419 
     Deferred income, current
 
56 
 
 
219 
          Total current liabilities
 
1,427 
 
 
1,420 
     Deferred income, long term
 
40 
 
 
45 
     Other long term liabilities
 
— 
 
 
60 
          Total liabilities
 
1,467 
 
 
1,525 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
     Series A Convertible Preferred stock, $.01 par value, 100
       shares authorized; 50 shares issuedas of December 31, 2008
       and 2007, respectively; liquidation preference- $500,000
 



500 
 
 



500 
     Common stock, $.01 par value, 50,000,000 shares authorized;
       16,873,218 and 16,795,202 shares issued as of  December 31,
       2008 and 2007, respectively
 


168 
 
 


168 
     Additional paid-in capital
 
28,076 
 
 
27,411 
     Accumulated deficit
 
(24,396)
 
 
(22,544)
     Less treasury stock, 1,965,740 shares at cost
 
(1,395)
 
 
(1,395)
          Total stockholders’ equity
 
2,953 
 
 
4,140 
             Total liabilities and stockholders' equity
$
   4,420 
 
$
  5,665 

The accompanying notes are an integral part of the consolidated financial statements.  24


                         



F-3

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2004, 20032008 and 2002
           (in2007
(in thousands, except shareshares and per share information)

                                                         2004           2003           2002
                                                         ----           ----           ----


Revenues:
  Sales, net                                           $  2,551       $  2,901       $  3,513
  Licensing and royalty income                            1,007            656            851
                                                       --------       --------       --------
      Total revenues                                      3,558          3,557          4,364

Costs and Expenses:
  Cost of sales                                           1,253          1,345          1,378
  Selling, general and administrative expenses            1,798          2,422          2,358
  Product development and research expenses               1,727            762            549
                                                       --------       --------       --------
Operating profit (loss)                                  (1,220)          (972)            79
Interest income (expense), net                               25              7           (283)
Other income, net                                            13              -             58
Loss on early extinguishment of debt                          -              -         (2,654)
                                                       --------       --------       --------

Loss from continuing operations before
 provision (benefit) for income taxes                    (1,182)          (965)        (2,800)
Provision (benefit) for income taxes                       (290)          (208)           330
                                                       --------       --------       --------

Loss from continuing operations                            (892)          (757)        (3,130)

Discontinued operations:
  Loss from operations of discontinued businesses             -              -           (523)
  Gain on disposal of discontinued businesses                 -            435         12,433
                                                       --------       --------       --------
Net income (loss)                                          (892)          (322)         8,780

Mark to market for detachable stock warrants                  -              -           (133)
                                                       --------       --------       --------
Net income (loss) attributable to common
 stockholders                                          $   (892)      $   (322)      $  8,647
                                                       ========       ========       ========

Basic and Diluted Earnings (Loss) Per Common Share
 Continued operations                                  $   (.08)      $   (.07)      $   (.28)
  Discontinued operations                                     -            .04           1.04
                                                       --------       --------       --------
  Net income (loss) per share                          $   (.08)      $   (.03)      $    .76
                                                       ========       ========       ========

Weighted average of common stock outstanding
  Basic and diluted                                  11,547,791     11,373,952     11,429,978
                                                     ==========     ==========     ==========

 
 
2008
 
 
2007
Revenues:
 
 
 
 
 
     Product sales, net
$
3,376 
 
$
2,904 
     Licensing and royalty income
 
420 
 
 
841 
     Research and development income
 
273 
 
 
836 
          Total revenues
 
4,069 
 
 
4,581 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
     Cost of sales
 
2,851 
 
 
2,476 
     Selling, general and administrative expenses
 
2,777 
 
 
2,430 
     Product development and research expenses
 
502 
 
 
481 
Operating (loss)
 
(2,061)
 
 
(806)
Interest (expense), net
 
(15)
 
 
(48)
Other income, net
 
28 
 
 
64 
Loss before benefit from income taxes
 
(2,048)
 
 
(790)
Benefit from income taxes
 
196 
 
 
453 
 
 
 
 
 
 
Loss from continuing operations
 
(1,852)
 
 
(337)
Discontinued operations:
 
 
 
 
 
   Gain from discontinued operations
 
— 
 
 
5 
 
 
 
 
 
 
Net loss
 
(1,852)
 
 
(332)
 
 
 
 
 
 
Dividend accreted to preferred stock for beneficial conversion feature
 
— 
 
 
80 
 
 
 
 
 
 
Net Loss Attributable to Common Stockholders
$
(1,852)
 
$
(412)
 
 
 
 
 
 
Basic and Diluted (Loss) per Common Share
 
 
 
 
 
   Continuing operations
$
(.12)
 
$
(.03)
   Discontinued operations
 
(.00)
 
 
(.00)
 
$
(.12)
 
$
(.03)
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
 
 
 
 
  Basic and diluted
 
14,881,399 
 
 
14,308,583 

The accompanying notes are an integral part of the consolidated financial statements.  25


                          


F-4

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
            for
For the years ended December 31, 2004, 20032008 and 2002
                               (in2007
(in thousands)

                                                                 2004          2003          2002
                                                                 ----          ----          ----


Cash flows from operating activities:
  Net income (loss)                                            $   (892)     $   (322)     $  8,780
  Reconciliation of net income (loss) to net cash used in
   operating activities:
    Gain on disposal of discontinued operations                       -          (435)      (12,433)
    Proceeds from insurance settlement, net of expenses
     related to discontinued operations                               -           147             -
    Depreciation and amortization                                   271           269           306
    Amortization of deferred financing costs and debt
     discount                                                         -             -           275
    Loss on early extinguishment of debt                              -             -         2,654
    Impairment of property, plant and equipment                       -             -           630
    Loss (gain) on sale of marketable securities                      1             -           (58)
    Provision for accounts and notes receivable and
     inventories                                                      7            11            23
    Recognition of deferred income                                 (169)         (135)         (135)
    Interest expense related to subordinated note agreement           -             -            41
    Stock-based compensation expense                                545            55            48
  Changes in operating assets and liabilities:
    Restricted cash                                                   -           (50)            -
    Accounts receivable                                              43           128          (177)
    Inventories                                                     (61)            8          (140)
    Licensing and royalty income receivable                        (138)          149            89
    Prepaid expenses and other assets                               125             6            12
    Accounts payable and accrued expenses                           (65)         (290)         (986)
    Deferred income                                                 100             -             -
    Income taxes payable                                             (2)           (9)            4
    Discontinued operations - working capital changes and
     non-cash charges                                                 -             -           343
                                                               --------     ---------     ---------
Net cash used in operating activities                              (235)         (468)         (724)
                                                               --------     ---------     ---------
Cash flows from investing activities:
  Capital expenditures                                             (817)          (99)         (104)
  Proceeds from sale of property, plant and equipment                 -           450           550
  Increase in other assets                                            -            (3)          (33)
  Proceeds from sale of marketable securities                       500             -            58
  Purchase of marketable securities                                (110)         (800)            -
  Discontinued operations - other investing activities                -             -            (8)
  Proceeds from sale of discontinued operations, net of
   direct costs                                                       -             -        15,462
                                                               --------     ---------     ---------
Net cash provided by (used in) investing activities                (427)         (452)       15,925
                                                               --------     ---------     ---------
Cash flows from financing activities:
  Borrowings under revolving credit agreement                         -             -         5,958
  Repayment of revolving credit agreement                             -             -        (8,284)
  Repayment of debt                                                   -             -        (9,516)
  Payment of deferred financing costs                                 -             -          (273)
  Repayment of EDA loan                                               -          (227)          (15)
  Borrowings under EDA loan                                           -            45           197
  Proceeds from exercise of common stock options
   and purchase of common stock                                     221             4            36
  Purchase of treasury shares                                         -           (80)       (1,315)
                                                               --------     ---------     ---------
Net cash provided by (used in) financing activities                 221          (258)      (13,212)
                                                               --------     ---------     ---------
Net increase (decrease) in cash and cash equivalents               (441)       (1,178)        1,989
Cash and cash equivalents at beginning of year                      821         1,999            10
                                                               --------     ---------     ---------
Cash and cash equivalents at end of year                       $    380     $     821     $   1,999
                                                               ========     =========     =========

Supplemental cash flow information:

  Cash payments for interest                                   $      -     $      10     $     507
  Cash payment (receipt) for taxes                                 (288)         (199)          328

 
 
2008
 
 
2007

Cash flows from operating activities:
 
 
 
 
 
     Net (loss)
$
(1,852)
 
$
(332)
     Reconciliation of net (loss) to net cash used in operating activities:
 
 
 
 
 
         Gain on sale of discontinued operations
 
— 
 
 
(5)
         Depreciation
 
249 
 
 
236 
         Bad debt expense
 
72 
 
 
16 
         Provision for write down of inventory
 
139 
 
 
(20)
         Stock-based compensation expense
 
566 
 
 
296 
         Directors’ stock issuance
 
— 
 
 
66 
         Amortization of license fee
 
100 
 
 
100 
     Changes in operating assets and liabilities:
 
 
 
 
 
          Accounts receivable
 
113 
 
 
(485)
          Licensing and royalty income receivable
 
282 
 
 
(265)
          Inventories
 
(325)
 
 
129 
          Prepaid expenses and other current assets
 
(9)
 
 
(48)
          Accounts payable and accrued expenses
 
111 
 
 
(161)
          Deferred income
 
(168)
 
 
(195)
Net cash used in operating activities
 
(722)
 
 
(668)
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
     Capital expenditures
 
(119)
 
 
(263)
     Proceeds from sale of assets
 
— 
 
 
260 
Net cash used in investing activities
 
(119)
 
 
(3)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
     Sale of Series A Convertible preferred stock and associated
      warrants, net of expenses
 
— 
 
 
486 
     Proceeds from exercise of common stock options and warrants
 
98 
 
 
— 
     Proceeds from private placement of common stock, net of expenses
 
— 
 
 
1,431 
     Borrowings from note payable-related party
 
250 
 
 
500 
     Repayment of note payable- related party
 
(250)
 
 
(1,145)
     Repayment of note payable
 
— 
 
 
(306)
Net cash provided by financing activities
 
98 
 
 
966 
Net increase (decrease) in cash and cash equivalents
 
(743)
 
 
295 
Cash and cash equivalents at beginning of year
 
914 
 
 
619 
Cash and cash equivalents at end of year
$
171 
 
$
914 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
 
  Cash payments for interest
$
26 
 
$
186 
  Cash (receipt) from taxes
 
(196)
 
 
(463)
Non cash transactions:
 
 
 
 
 
  Beneficial conversion dividend
 
— 
 
 
80 
  Discontinued operations offset of liabilities
 
— 
 
 
118 
 
 
 
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.  26


                         IGI,


F-5




IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY (DEFICIT)
                       AND COMPREHENSIVE INCOME (LOSS)
            for
For the years ended December 31, 2004, 20032008 and 2002
                  (in2007
(in thousands, except share information)

                                                              Accumulated
                                                 Additional      Other                                                 Total
                                Common  Stock     Paid-In    Comprehensive  Comprehensive  Accumulated  Treasury   Stockholders'
                               Shares    Amount   Capital         Loss      Income (Loss)    Deficit     Stock    Equity (Deficit)
                               ------    ------  ----------  -------------  -------------  -----------  --------  -----------------


Balance, January 1, 2002     11,243,720   $112    $22,436        $  -                       $(26,733)    $    -       $(4,185)

Issuance of stock pursuant
 to Directors' Stock Plan        70,322      1         47                                                                  48
Stock options exercised          39,000      1         20                                                                  21
Employee stock purchase plan     30,975                15                                                                  15
Adjustment of detachable
 stock warrants                                      (133)                                                               (133)
Detachable stock warrant
 exercised                    1,878,640     19      1,259                                                               1,278
Buyback of stock                                                                                         (1,315)       (1,315)
Net income                                                                      $8,780         8,780                    8,780
                             ----------   ----    -------        ----           ======      --------     ---------    -------

Balance, December 31, 2002   13,262,657    133     23,644                                    (17,953)    (1,315)        4,509

Issuance of stock pursuant
 to Directors' Stock Plan        79,327      1         54                                                                  55
Employee stock purchase plan      9,253                 4                                                                   4
Buyback of stock                                                                                            (80)          (80)
Net loss                                                                        $ (322)         (322)                    (322)
                             ----------   ----    -------        ----           ======      --------     ---------    -------

Balance, December 31, 2003   13,351,237    134     23,702                                    (18,275)    (1,395)        4,166

Stock options exercised         176,666      1        212                                                                 213
Employee stock purchase plan     19,617                 8                                                                   8
Issuance of stock option to
 non-employee                                         545                                                                 545
Comprehensive Income
  Net loss                                                                      $(892)          (892)                    (892)
  Unrealized loss on
   marketable securities                                          (32)            (32)                                     (32)
                                                                                -----
Comprehensive loss                                                              $(924)
                             ----------   ----    -------        ----           =====       --------     ---------    -------

Balance, December 31, 2004   13,547,520   $135    $24,467        $(32)                      $(19,167)    $  (1,395)   $ 4,008
                             ==========   ====    =======        ====                       ========     =========    =======

 
Series A
 
 
 
 
 
 
Additional
 
 
 
 
 
 
Total
 
Preferred Stock
 
Common  Stock
 
Paid-In
 
Accumulated
 
 
Treasury
 
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
 
Stock
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2006
-
 
$
—
 
15,056,516
 
$
151
 
$
25,569 
 
$
(22,132)
 
$
 (1,395)
 
$
    2,193 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of preferred stock pursuant to
 a private placement net of associated
 fees of $14
50
 
 
500
 
 
 
 
 
 
 
(14)
 
 
 
 
 
 
 
 
486 
Dividend attributable to preferred stock
 beneficial conversion feature and
 associated warrant amortization
 
 
 
 
 
 
 
 
 
 
 
80 
 
 
(80)
 
 
 
 
 
— 
Issuance of common stock pursuant to a
 private placement, net of fees of $ 219
 
 
 
 
 
1,672,123
 
 
16
 
 
1,415 
 
 
 
 
 
 
 
 
1,431 
Issuance of stock as Directors
 compensation
 
 
 
 
 
66,563
 
 
1
 
 
65 
 
 
 
 
 
 
 
 
66 
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
296 
 
 
 
 
 
 
 
 
296 
Net loss
—
 
 
—
 
—
 
 
—
 
 
— 
 
 
(332)
 
 
— 
 
 
(332)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2007
50
 
 
500
 
16,795,202
 
 
168
 
 
27,411 
 
 
(22,544)
 
 
(1,395)
 
 
4,140 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
 
 
 
 
 
53,016
 
 
 
 
 
74 
 
 
 
 
 
 
 
 
74 
Warrants exercised
 
 
 
 
 
25,000
 
 
 
 
 
24 
 
 
 
 
 
 
 
 
24 
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
567 
 
 
 
 
 
 
 
 
567 
Net loss
—
 
 
—
 
—
 
 
—
 
 
— 
 
 
(1,852)
 
 
— 
 
 
(1,852)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2008
50
 
$
  500
 
16,873,218
 
$
   168
 
$
28,076 
 
$
(24,396)
 
$
(1,395)
 
$
      2,953

The accompanying notes are an integral part of the consolidated financial statements.  27


                         


F-6



IGI LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      Summary of Significant Accounting Policies

Nature of the Business

IGI Laboratories, Inc. ("IGI"(“IGI” or the "Company"“Company”), a Delaware corporation, operating in the State of New Jersey, is primarily engaged in the production and marketingpackaging of cosmetics, and skin care, products. During 2002, the Company
sold its Companion Pet Products division, which manufactured and sold
companion pet careconsumer products. Beginning in the first quarter of 2005, the
Company will also be engaged in the metal finishing business, specifically
nickel boride, using the UltraCem technology. IGI's Consumer Products business is primarily focused on the continued commercial use of the Novasome(R) microencapsulationNovasome® micro encapsulation technologies for skin care applications. These efforts have been directed toward the development of high quality skin care and consumer products marketed by the Company or through collaborative arrangements with cosmetic and consumer products companies.

      Estee Lauder, a significant customer, accounted

IGI’s Metal Plating Division has been classified as discontinued operations for $1,248,000, or
35%, of 2004 revenues, $1,812,000, or 51%, of 2003 revenues, and
$2,629,000, or 60%, of 2002 revenues.  In July 2004, the Company amended
its agreement with Estee Lauder.  Estee Lauder is now manufacturing all Novasome(R) and non Novasome(R) products in house and must pay the Company
a royalty per kilogram on all Novasome(R) products they manufacture,
including all new products developed.  In addition, Estee Lauder paid to
the Company a one time payment of $100,000 in connection with the amendment
of the agreement.  The Company's contract manufacturing of Estee Lauder
non-Novasome(R) products, which accounted for $559,000 of the $1,248,000 in
revenues in 2004, terminated contractually on June 30, 2004, without any
required future royalties or other payments to be received by the Company
on any non-Novasome(R) products manufactured by Estee Lauder.

      Vetoquinol USA, a significant customer, accounted for $442,000 or 12%
of 2004 revenues, $523,000, or 15%, of 2003 revenues, and $361,000, or 7%, of
2002 revenues.

      Johnson & Johnson, a significant customer, accounted for $385,000 or
11% of 2004 revenues, $488,000, or 14%, of 2003 revenues, and $714,000, or
16%, of 2002 revenues.

      periods presented. (See Footnote 15)

Principles of Consolidation

The consolidated financial statements include the accounts of IGI Laboratories, Inc. and its wholly-ownedwholly owned and majority-owned subsidiaries. All intercompanyinter-company accounts and transactions have been eliminated.

Cash Equivalents

Cash equivalents consist of short-term investments, which have original maturities of 90 days or less.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, note payable-related party, and other accrued liabilities at December 31, 2008 approximate their fair value because of the short-term maturities of these items.

Accounts Receivable and Allowance for Doubtful Accounts

The Company extends credit to its customers, based upon credit evaluations, in the normal course of business, primarily with 30- day30-day terms. The Company does not require collateral from its customers. Bad debtsdebt provisions are provided for on the allowance method based on historical experience and management'smanagement’s evaluation of outstanding accounts receivable.  The Company charges off uncollectible receivables when the likelihood of collection is remote.

Concentration of Credit Risk

Financial instruments whichthat potentially subject the Company to concentrations of credit risk areconsist principally of cash, cash equivalents and accounts receivable.

The Company limits credit risk associated with cash and cash
equivalents by placingmaintains its cash and cash equivalentsin accounts with one high credit quality financial institution. The Company's cashinstitutions. Although we currently believe that the financial institutions with whom we do business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able to continue to do so.

In 2008, the Company had sales to four customers which individually accounted for more than 10% of the Company’s product sales. These customers had sales of $615,000, $555,000, $555,000 and cash equivalents, at
times, may exceed federally insured limits.  $471,000, respectively, and aggregately represented 65% of revenues from product sales. Accounts receivable related to the Company’s major customer comprised 48% of all account receivables as of December 31, 2008.

The Company has not experienced
any lossesreceived royalty revenue in such accounts.2008 from two customers, which individually accounted for more than 10% of 2008 royalty revenues.  The Company believes it is not exposedreceived $351,000 and $53,000 of royalties respectively from these customers.

In 2007, the Company had sales to any
credit risk on cashone customer which individually accounted for more than 10% of the Company’s product sales. This customer had sales of $1,012,000 representing 35% of revenues from product sales.

The Company received royalty revenue in 2007 from two customers, which individually accounted for more than 10% of 2007 royalty revenues.  The Company received $420,000 and cash equivalents.

      Marketable Securities

      Realized gains and losses are determined using$300,000 of royalties, respectively, from these customers.


F-7



The Company operates in the specific-
identification method.

      United States with a concentration of our customers located in the Northeastern United States

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO"(“FIFO”) method, or market.  28


      

Property, Plant and Equipment

Depreciation of property, plant and equipment is provided for under the straight-line method over the assets'assets’ estimated useful lives as follows:

                                                              Useful Lives
                                                              ------------

      Buildings and improvements                             10 - 30 years
      Machinery and equipment                                 3 - 10 years

      

Useful Lives
Buildings and improvements
10 - 30  years
Machinery and equipment
3 - 10  years

Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. When assets are retired or disposed, the related cost and accumulated depreciation thereon are removed from
the accounts and any gains or losses are included in operating results.

Long-Lived Assets

In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In performing such review for recoverability, the Company compares expected future cash flows of assets to the carrying value of the long-lived assets and related identifiable intangibles. If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying value of the assets and their estimated fair value, with fair values being determined using projected discounted cash flows at the lowest level of cash flows identifiable in relation to the assets being reviewed.  

Accrued Expenses

Accrued expenses represent various obligations of the Company including certain operating expenses and taxes payable. For the fiscal year ended December 31, 2008, the largest component of accrued expenses was the fine and penalties accrued payable to the Department of Environmental Protection of $60,000 and environmental clean-up costs of $50,000. For the fiscal year ended December 31, 2007, the largest component of accrued expenses was the fine and penalties accrued payable to the Department of Environmental Protection of $175,000, environmental clean up costs of $90,000, and accrued severance for our former CEO, Frank Gerardi of $94,000.

License Fee

License fees are amortized on a straight-line basis over the life of the agreement (10 years).

Accounting for Environmental Costs

Accruals for environmental remediation are recorded when it is probable a liability has been incurred and costs are reasonably estimable. The estimated liabilities are recorded at undiscounted amounts. Environmental insurance recoveries are included in the statement of operations in the year in which the issue is resolved through settlement or other appropriate legal process.

Income Taxes

The Company records income taxes in accordance with SFAS No. 109, "Accounting“Accounting for Income Taxes,"” under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to operating loss and tax credit carryforwardscarry forwards and differences between the financial statement carrying amounts and


F-8



the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. A valuation allowance equal to 100% of the net deferred tax assets has been recognized due to uncertainty regarding the future realization of these assets.

In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”, which became effective for the Company on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January&nbs p;1, 2007. There were no unrecognized tax benefits as of the date of adoption.  As such, there are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate.

Revenue Recognition

The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred or contractual services rendered, the sales price is fixed or determinable, and collection is reasonably assured in conformity with SAB No. 104,Revenue Recognition.

The Company derives its revenues from three basic types of transactions: sales of manufactured product, licensing of technology, and research and product development services performed for third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company utilizes, different revenue recognition policies for each.

Product Sales: The Company recognizes revenue when title transfers to its customers, which is generally upon shipment of products. These shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form. The revenues associated with these transactions, net of appropriate cash discounts, product returns and sales reserves, are recorded upon shipment of the products.

Licensing Revenues: Revenues earned under research contractslicensing or sublicensing and supply agreementscontracts are either
recognized when the related contract provisions are met, or, if under such
contracts or agreements the Company has continuing obligations, the revenue
is initially deferred and then recognizedratably over the life of the agreement.

      agreements.  Advance payments by customers are initially recorded as deferred income on the Consolidated Balance Sheet and then recognized ratably over the life of the agreement or as contract obligations are completed.

Product Development Services: The Company establishes agreed upon product development agreements with its customers to perform product development services. Product development revenues are recognized in accordance with the product development agreement upon the completion of the phases of development and when we have no future performance obligations relating to that phase of development. Revenue recognition requires the Company to assess progress against contracted obligations to assure completion of each stage. These payments are generally non-refundable and are reported as deferred until they are recognizable as revenue. If no such arrangement exists, product development fees are recognized ratably over the entire period during which the services are performed.

In making such assessments, judgments are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. Changes in total estimated contract cost and losses, if any, are recognized in the period they are determined. Billings on research and development contracts are typically based upon terms agreed upon by the Company and customer and are stated in the contracts themselves and do not always align with the revenues recognized by the Company.

Stock-Based Compensation

       As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation",

Transactions in which establishes a fair value based method of accounting
forthe Company issues stock-based compensation plans, the Company had elected to follow
Accounting Principles Board ("APB") Opinion No. 25 "Accountingemployees, directors and advisors and for Stock
Issued to Employees"goods or services received from non-employees are accounted for recognizing stock-based compensation expense for
financial statement purposes.  For companies that choose to continue applying
the intrinsic value method, SFAS No. 123 mandates certain pro forma disclosures
as ifbased on the fair value method had been utilized.of the equity instruments issued. The Company accounts for
stock based compensation to consultantsutilizes pricing models in accordance with EITF Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
and SFAS No. 123.


  29


      The following table illustrates the effect on income (loss)
attributable to common stockholders and earnings (loss) per share if the
Company had applieddetermining the fair values of options and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value recognition provisions of SFAS No. 123
to stock-based employee compensation:


                                                     2004         2003        2002
                                                     ----         ----        ----
                                             (in thousands, except per share information)


Net income (loss) attributable to common
 stockholders - as reported                        $  (892)      $(322)      $8,647
Deduct: Total stock-based employee
 compensation expense determined
 under the fair value based method                    (193)       (129)        (496)
                                                   -------       -----       ------
Net income (loss) attributable to
 common stockholders - pro forma                   $(1,085)      $(451)      $8,151
                                                   =======       =====       ======
Income (loss) per share - as reported
  Basic and diluted                                $  (.08)      $(.03)      $  .76
                                                   =======       =====       ======
Income (loss) per share - pro forma
  Basic and diluted                                $  (.09)      $(.04)      $  .71
                                                   =======       =====       ======


      The pro forma information has been determined as ifand volatility factors underlying the Company had
accounted for its employee and director stock options under the fair value
method.  The fair value for these options was estimated at the grant date
using the Black-Scholes option-pricing model with the following assumptions
for 2004, 2003 and 2002:


               Assumptions                   2004             2003              2002
               -----------                   ----             ----              ----

      
      Dividend yield                          0%              0%                0%
      Risk free interest rate            3.59%-4.27%     2.89%-3.62%       3.53%-4.97%
      Estimated volatility factor            88%            176%              176%
      Expected life                        7 years         7 years           7 years
positions.


F-9



Product Development and Research

The Company's research and development costs are expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred. Such expenses for the years ended December 31, 2004, 2003,2008 and 20022007 were $39,000, $60,000$21,000 and $17,000, respectively.

Shipping and Handling Costs

Costs related to shipping and handling areis comprised of outbound and
inbound freight and the associated labor. These costs are recorded in costs of sales.
Net Income (Loss) per Common Share

Basic net income (loss) per share of common stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share of common stock is computed using the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the exercise of options and warrants. Due to the Company's net loss from
continuing operations for the years ended December 31, 2004, 20032008 and 2002,2007, the effect of the Company'sCompany’s potential dilutive common stock equivalents was anti-dilutive for each year; as a result, the basic and diluted weighted average number of common shares outstanding and net income (loss) per common share are the same. Potentially dilutive common stock equivalents which were excluded from the net income (loss) per share calculations due to their anti-dilutive effect amounted to 1,140,3792,933,032 for 2004, 2,550,0002008 and 803,250 for 2003, and 2,852,000 for 2002.

      Comprehensive Income (Loss)

      The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income (loss) and its components.  Comprehensive income (loss)
is defined to include all changes in stockholders' equity during a period
except those resulting from investments by owners and distributions to owners.
Comprehensive income (loss) is the sum of net income (loss) and unrealized
gains (losses) on marketable securities.  Unrealized gains (losses) on
investments are excluded from net income (loss) and are reported in
accumulated other comprehensive loss in the accompanying consolidated
financial statements.


  30


      2007.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related deferred tax asset valuation allowances, stock based compensation and accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.

Effect of Recent Accounting Pronouncements

In April 2002,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.



F-10



In December 2007, the Financial Accounting Standards Board ("FASB"(“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. 145, "Rescission160, 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 i ts 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 Statementsissued Statement of Financial Accounting Standards (“SFAS”) No. 4, 44161,Disclosures about Derivative Instruments and 64,
AmendmentHedging 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 Statementissued FASB Staff Position (FSP) No. 13142-3, “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 Technical Corrections,"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 state ments 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.


F-11



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 May 15, 2002 for provisions
related to SFAS No. 4, effective for all transactions occurring after May
15, 2002 for provisions related to SFAS No. 13 and effective for all
financial statements issued on or after May 15, 2002 for all other
provisions of SFAS No. 145. The Company's loss from early extinguishment
of debt realized in the second quarter of 2002 has been presented within
continuing operations, rather than presented as an extraordinary item, in
accordance with SFAS No. 145.

      In January 2003, FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs").   FIN No.46
is applicable immediately for VIEs created after January 31, 2003 and are
effective for reporting periods ending after December 15, 2003, for VIEs
created prior to February 1, 2003. In December 2003, the FASB published a
revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the
interpretation and to defer the effective date of implementation for certain
entities. Under the guidance of FIN 46R, public companies that have interests
in VIE's that are commonly referred to as special purpose entities are
required to apply the provisions of FIN 46R for periods ending after December
15, 2003. A public company that does2008; earlier application is not have any interests in special purpose
entities but does have a variable interest in a VIE created before February
1, 2003, must apply the provisions of FIN 46R by the end of the first interim
or annual reporting period ending after March 14, 2004. The adoption of FIN 46
has no impact on the financial condition or results of operations since the
Company does not have investments in VIE's.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage).  The
provisions of this statement shall be effective for inventory costs
incurred during the fiscal years beginning after June 15, 2005.permitted. The Company is currently evaluating the effectsimpact that the adoption of this statementEITF 03-6-1 will have, if any, on the Company'sits consolidated financial statements.

In December 2004,June 2008, the FASB issued SFAS No. 123R, "Share-Based
Payment." SFAS No. 123R requires employeeEITF 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock, or EITF 07-5. EITF 07-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock options and rights to
purchase shares under stock participation plans to be accounted for purposes of determining whether the appropriate accounting treatment falls under the fair value method, and eliminates the ability to account for these
instruments under the intrinsic value method prescribed by APB Opinion
No. 25 "Accounting for Stock Issued to Employees," and allowed under the
original provisionsscope of SFAS No. 123. SFAS No. 123R requires the use of an
option-pricing model for estimating fair value, which133, "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 amortized to expense
over the service periods. The requirements of SFAS No. 123R are effective for financial statements issued for fiscal periodsyears beginning after JuneDecember 15, 2005.2008 and early application is not permitted. The Company is currently evaluating the transition methods.

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.

2.      Liquidity

The Company'sCompany’s principal sources of liquidity are cash and cash equivalents and marketable securities of approximately $757,000$171,000 at December 31, 2008 and cash from operations. Management believes that existing cash, cash equivalents,
marketable securitiesThe Company sustained net losses of $1,852,000 and cash flows from operations will be sufficient to
meet$332,000 for the Company's foreseeable operating cash needs for at least the next
year.  In addition, two stockholders of the Company have agreed to loan the
Company up to $500,000 each, if necessary, to help fund the Company's
commitment to Novavax due on December 13, 2005 or to fund the Company's
deficit throughyears ended December 31, 2005.2008 and 2007, respectively, and had negative working capital of $57,000 at December 31, 2008.

The Company’s business operations have been partially funded over the past three years through the exercise of stock options by our directors and officers and through private placements of our stock. 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. There may be additional acquisition and other
growth opportunities however, that may require additional external financing.
Several of the board members have voiced their willingness to exercise
stock options should the need for additional cash arise.  Management may,
from time to time, seek to obtain additional funds from public or private
issuances of equity or debt securities.   There can be no assurance that such additional financingsfinancing will be available or available on terms acceptable to the Company.

3.    Marketable Securities

      Marketable securities at December 31, 2004

On January 29, 2009, the Pinnacle line of credit was amended and 2003 consistextended for a term of an
investmentsix months as more fully described in a short-term bond mutual fund and an investment in stock.Footnote 7. below. The Company currently classifies all marketable securities as available-
for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."  Securities classified as available-for-
sale are required to be reported at fair value with unrealized gains and
losses, nethad an outstanding principal balance of taxes, excluded from operations and shown separately as a
component of accumulated other comprehensive loss within stockholders'
equity.  Realized gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method.


  31


      The amortized cost, gross unrealized gains and losses and fair value
of the available-for-sale marketable securities$500,000 as of December 31, 20042008 and 2003 are as follows (amounts in thousands):



                                       Gross         Gross
                        Amortized    Unrealized    Unrealized    Fair    Carrying
2004                       Cost        Gains         Losses      Value    Amount
- ----                    ---------    ----------    ----------    -----   --------


Mutual funds              $ 299         $ -          $ (4)       $ 295     $ 295
Securities                  110           -           (28)          82        82
                          -----         ---          ----        -----     -----
                          $ 409         $ -          $(32)       $ 377     $ 377
                          =====         ===          ====        =====     =====



                                       Gross         Gross
                        Amortized    Unrealized    Unrealized    Fair    Carrying
2003                       Cost        Gains         Losses      Value    Amount
- ----                    ---------    ----------    ----------    -----   --------


Mutual funds              $ 800         $ -          $  -        $ 800     $ 800
                          =====         ===          ====        =====     =====


      Salesinterest expense related to this line of available-for-sale securitiescredit was $26,000 for the year ended December 31, 2004, 2003, and 2002 were as follows (amounts in thousands):


                                     2004      2003      2002
                                     ----      ----      ----


Proceeds from sales                  $500        -        $58
Gross realized gains                    -        -         58
Gross realized losses                  (1)       -          -


      The increase2008.

As a condition to the consummation of the private placement, resulting in net unrealized holding lossesproceeds of approximately $5,371,000, with Signet Healthcare Partners, on available-for-sale
securities inMarch 13, 2009, 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 $32,000 was recorded directlyall loans and advances made by Pinnacle pursuant to stockholders'
equitythe 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.


F-12



In addition, as of December 31, 2004.

4.    Discontinued Operations

      On May 31, 2002,a condition to the stockholdersconsummation of the Company approved, andprivate placement with Signet Healthcare Partners, the Company consummated,and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the saleprincipal amount under the line of credit into shares of the assets and transferCompany’s common stock at a conversion rate of the liabilities$0.41 per share upon receipt of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet
Products division for the year ended December 31, 2002.  The gain is net of
direct costs incurredstockholder approval by the Company inof such conversion. See Footnote 17. Subsequent Event – Convertible Preferred Stock and Convertible Promissory Notes.

In connection with the sale andprivate placement transaction, certain holders of our capital stock, representing approximately 51.7% of the reductionvoting 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 purchase price resulting from post-closing adjustments.
Forprivate placement transaction if one of our interested stockholders is not able to vote with respect to such matter pursuant to the year ended December 31, 2003,rules and regulations of the Company had a gain on the
disposal of discontinued operations of $435,000 which primarily consisted
of a net gain of $169,000 for an insurance settlement, net of legal costs,
for damages incurred by the CompanyNYSE Alternext as a result of the existence of a heating oil leak attransaction relating to the Companion Pet Products manufacturing siteprivate placement), entered into a voting agreement, pursuant to which these holders agreed to vote or execute and deliver a net gainwritten consent in favor of $288,000 onapproving the saleprivate placement transaction.

3.      License Fee

On December 12, 2005, the Company extended its license agreement for an additional ten years with Novavax, Inc. for $1,000,000. This extension entitles the Company to exclusive use of the former Companion Pet Products manufacturing site landNovasome® lipid vesicle encapsulation and building on December 18, 2003. The Companion Pet Products division incurred
losses of $523,000certain other technologies (“Micro encapsulation Technologies” or collectively the “Technologies”) in the year endedfields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals, and the processes for making the same (collectively, the “IGI Field”) thru 2015. This payment is being amortized ratably over the ten-year period. For the years ende d, December 31, 2002. The results for2008 and 2007, the Company recorded a $100,000 expense in each year ended December 31, 2002 included an impairment charge of $630,000 related to the Companion Pet Products warehouse. Upon the saleamortization of the Companion Pet Products division, the Company paid all of its debt and
interest owed to Fleet Capital Corporation ("Fleet") and American Capital
Strategies, Ltd. ("ACS").  As a result, the Company incurred a $2,654,000
loss from early extinguishment of debt in connection with the prepayment
fees paid to Fleet and ACS and the write-off of the ACS debt discount.

      During 2001, the Company recorded non-recurring charges related to
the cessation and shutdown of the manufacturing operations at the Companion
Pet Products facility. The Company applied to the New Jersey Economic
Development Authority (NJEDA) and the New Jersey Department of
Environmental Protection for a grant and loan to provide partial funding
for the costs of investigation and remediation of the environmental
contamination discovered at the Companion Pet Products facility.  On June
26, 2001, the Company was awarded an $81,000 grant and a $246,000 loan.
The $81,000 grant was received in the third quarter of 2001.  The loan,
which required monthly principal payments, had a term of ten years at a
rate of interest of 5%.  The Company received funding of $45,000 and
$182,000 from the loan during 2003 and 2002, respectively. On December 18,
2003, the loan was paid in full upon the sale of the Companion Pet Products
facility, which had served as the collateral for the loan.

      The activity in 2004 related to the environmental clean up costs is as
follows (amounts in thousands):


                              Net accrual at         Cash          Net accrual at
Description                  December 31, 2003    expenditures    December 31, 2004
- -----------                  -----------------    ------------    -----------------


Environmental cleanup costs        $102              $(20)               $82
                                   ====              ====                ===
  32


5.    Supply and Sublicensing Agreements

      In February 2001, the Company signed a new manufacturing and supply
agreement and an assignment of trademark agreement for the WellSkin(tm)
line of skin care products with Genesis Pharmaceutical, Inc. The
manufacturing and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options.  The Company received a lump sum
payment of $525,000 for the assignment of the trademark, which is being
recognized ratably over the term of the arrangement.  The Company
recognized $105,000 of income related to this agreement in each of the
years ended December 31, 2004, 2003 and 2002.

      The Company entered into a sublicense agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995.  The agreement provided
J&J with a sublicense to produce and sell Novasome(R) microencapsulated
retinoid products and provides for the payment of royalties on net sales of
such products.  J&J began selling such products and making royalty payments
in the first quarter of 1998.  The Company recognized $385,000, $488,000
and $714,000 of royalty income related to this agreement for the years
ended December 31, 2004, 2003 and 2002, respectively.

      In August 1998, the Company granted Johnson & Johnson Medical
("JJM"), a division of Ethicon, Inc., worldwide rights for the use of the
Novasome(R) technology for certain products and distribution channels. The
agreement provided for JJM to pay the Company $300,000 as well as future
royalty payments based on JJM's sales of sublicensed products. The Company
recognized $30,000, $35,000 and $32,000 of royalty income in 2004, 2003 and
2002, respectively, related to the agreement.  In March of 2002, the
agreement between the Company and JJM was amended stating that JJM is no
longer required to make minimum payments and the license has been converted
to a non-exclusive worldwide license with the exception of Japan, which
will remain exclusive.  If the amount of royalties paid by JJM equals or
exceeds $200,000 in any year, the following calendar year will become an
exclusive worldwide agreement and will remain so until royalties fall below
that amount.

      In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Apollo Pharmaceutical (Canada), Inc.
("Apollo"), previously known as Prime Pharmaceutical Corporation. The
purpose of the agreement was to develop a facial lotion, a facial creme and
scalp application for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Apollo. During 2002 and 2003, there was no
activity between the Company and Apollo due to a change in management at
Apollo. In 2004, the Company recognized $137,000 of product sales from
Apollo.

      In November 2002, the Company entered into a Manufacturing Service
Agreement with Desert Whale Jojoba Company, Inc.  The purposelicense. Amortization of this agreement islicense fee will amount to develop and manufacture jojobasomes to be used as a
personal care product.  This project was in a developmental stage through
2002. The Company recognized $7,000 of product sales related to this project
in 2003. The Company is no longer doing business with Desert Whale Jojoba
Company, Inc.

      In July 2004, the Company, in order to allow growth and new business
opportunities, renegotiated its contract with Estee Lauder, a significant
customer.   Estee Lauder is manufacturing all Novasome(R) and non-Novasome(R)
products in house and is paying the Company a royalty per kilo on all
Novasome(R) products manufactured by Estee Lauder, including all new
products developed plus a one time payment of $100,000 per the contract.
The Company's contract manufacturing of Estee Lauder non-Novasome(R)
products, which accountedyear for $559,000 of the $1,248,000 in revenues in 2004,
terminated contractually on June 30, 2004, without any required future
royalties or other payments to be received by the Company on any non-
Novasome(R) products manufactured by Estee Lauder. However, Estee Lauder
may from time to time require the assistance of IGI to manufacture
Novasome(R) and non Novasome(R) products at Estee Lauder's request.  In
addition, during the six month period from January through June 2004, the
Company agreed to provide Estee Lauder's contract manufacturing services at
a reduced price of $2.00 per kilo, as compared to the prior rate of $3.03
per kilo.  The Company received $184,000 in 2004 and $28,000 in 2003 of
royalty income from Estee Lauder pursuant to the Company's agreement with
Estee Lauder for various Novasome(R) vesicles skin care products produced
by Estee Lauder.

      On July 27, 2004, the Company signed an exclusive license agreement
with the University of Massachusetts Medical School (University) for the
patented invention entitled "The Treatment of Skin with Adenosine or
Adenosine Analogs."  The Company intends to encapsulate adenosine or
adenosine analogs in Novasome(R) for use in the skin care field.  As
consideration of the rights granted in this agreement, the Company made
nonrefundable payments of $25,000 upon the execution of this agreement and
$25,000 in September 2004.  Both of these payments were expensed during the
third quarter of 2004 and are included in the product development and
research expenses.  The agreement also calls for minimum royalty payments
of $25,000 per year commencing on July 27, 2007.  If the Company enters
into a sublicense agreement with a third-party entity, which it will
attempt to do, the Company must pay the University 50% of all sublicense
income.


  33


6.    Supplemental Cash Flow Information

      During the years ended December 31, 2004, 2003 and 2002, the Company
had the following non-cash financing and investing activities:


                                                          2004     2003      2002
                                                          ----     ----      ----
                                                               (in thousands)


Mark to market adjustment on warrants                       $-      $-      $(133)
Issuance of stock pursuant to Directors' Stock Plan          -       55        48


7.2009-2015.

4.      Inventories

Inventories as of December 31, 20042008 and 20032007 consisted of:

                                                 2004       2003
                                                 ----       ----
                                                 (in thousands)


Finished goods                                  $  42      $  15
Raw materials                                     205        177
                                                -----      -----
                                                $ 247      $ 192
                                                =====      =====


      The above amounts are net of reserves for obsolete

 
2008
 
2007
 
(in thousands)
 
(in thousands)
 
 
 
 
 
 
Raw materials
$
537
 
$
258
Work in progress
 
1
 
 
8
Finished goods
 
24
 
 
110
 
$
562
 
$
376

Finished goods inventory related to the Miaj product line amounted to $0 and slow moving
inventory of $21,000 and $15,000 as of$106,000 at December 31, 20042008 and 2003,2007, respectively. 8.Since the licensor of the Miaj product line failed to meet certain terms and conditions of their license agreement with the Company, and failed to cure the deficiencies on notice, the Company cancelled the agreement in December 2008. At December 31, 2008, the Company has a valuation allowance of $157,000 or 100% of the Miaj product line.

5.      Property, Plant and Equipment

Property, plant and equipment, at cost, as of December 31, 20042008 and 20032007 consisted of:

                                                2004         2003
                                                ----         ----
                                                 (in thousands)


Land                                          $   257      $   257
Buildings                                       2,695        2,695
Machinery and equipment                         1,635        1,600
Construction in progress                          782            -
                                              -------      -------
                                                5,369        4,552
      Less accumulated depreciation            (2,201)      (1,945)
                                              -------      -------
      Property, plant and equipment, net      $ 3,168      $ 2,607
                                              =======      =======

 
2008
 
2007
 
(in thousands)
 
(in thousands)
 
 
 
 
 
 
Land
$
257 
 
$
257 
Building and improvements
 
3,070 
 
 
3,000 
Machinery and equipment
 
2,116 
 
 
2,068 
 
 
5,443 
 
 
5,325 
Less accumulated depreciation
 
(3,163)
 
 
(2,915)
 
 
 
 
 
 
Property, plant and equipment, net
$
2,280 
 
$
2,410 



F-13



The Company recorded depreciation expense of $249,000, and $226,000 in 2008 and 2007, respectively.

6.      Note Payable

On December 12, 2005, the Company received $1,000,000 in the form of a short-term note payable from Univest Management, LLC, Inc., a company owned by Frank Gerardi, former CEO and Chairman of the Company.   The note was collateralized by mortgage on real property owned by the Company. The Company accrued $18,000 of interest related to continuing
operationsthis note for the year ended December 31, 2007. In March 2007, the Company paid the short-term note payable plus accrued interest with the proceeds from at private placement.

On November 27, 2006, the Company established a $1,000,000 line of $256,000, $254,000 and $268,000 in 2004, 2003 and 2002,
respectively.

9.    Debt

      On May 31, 2002,credit with Pharmachem Laboratories Inc; collateralized by the stockholdersassets of the Company approved, and(other than real property) to assist the Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division.  Upon the sale, the Company paid
all of its debt and interest owed to Fleet and ACS.  As a result, the
Company incurred a $2,654,000 loss from early extinguishment of debt in
connection with the prepayment fees paid to Fleet and ACS and the write-off
of the ACS debt discount.needed cash flow. The Company received a $246,000 loanborrowed $300,000 against this line of credit as of December 31, 2006. The funds could be borrowed and re-borrowed from time to provide partial funding for
the costs of investigating and remediating the environmental contamination
discovered at the Companion Pet Products facility.  The loan required
monthly principal payments over a term of ten yearstime at a rate of 1.5% above Wall Street Prime rate. This line of credit was cancelled and repaid in January of 2007 when Pharmachem Laboratories Inc. agreed to participate in a private placement for 1,500,000 shares for $1,500,000. This transaction was completed in March 2007.

On January 31, 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 shareholders of the Company, and in the case of Mrs. Hager, a director, for a term of eighteen months. Loans under the Credit Agreement bear interest at Wall Street prime (7.5% at December 31, 2007), plus 1.5% and are collateralized by assets of 5%the Company (other than real property). All accrued and unpaid interest is payable monthly in arrears on the first of each month. The Company borrowed $500,000 against this line of credit as of December 31, 2007. Interest expense related to the Pinnacle credit agreement was $43,000 for the year ended December 31, 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 signed the Second Amended and Restated Revolving Note related to the secured line of credit with Pinnacle. This amendment provides for a revolving $500,000 secured line of credit for a term of six months with interest at 8.5%. As in the original agreement, loans under this amendment are collateralized by the assets of the Company (other than real property).  The Company received fundinghas borrowed $500,000 against this line of $45,000credit as of December 31, 2008. Interest expense related to the Pinnacle credit agreement was $26,000 for the year ended December 31, 2008.

As a condition to the consummation of the private placement with Signet Healthcare Partners, on March 13, 2009, the Company and $197,000Pinnacle 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 loan
during 2003line of credit from July 31, 2009 to instead provide that 50% of the amount of all loans and 2002, respectively. 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.

In addition, as a condition to the consummation of the private placement with Signet Healthcare Partners, 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. See Footnote 17. Subsequent Event – Convertible Preferred Stock and Convertible Promissory Notes.

7.      Preferred Stock

On December 18, 2003,5, 2007, pursuant to a subscription agreement entered into with an accredited investor, the loan was paid
in full upon the saleCompany sold (i) 50 shares of Series A Convertible Preferred Stock with a liquidation preference of $10,000 per share, with each share of preferred stock, convertible into 10,000 shares of common stock of the former Companion Pet Products facility, which
served as collateral for the loan.

10.   Stock Warrants

      In connection with the $7,000,000 borrowing from American Capital
Strategies (ACS), the Company, issuedsubject to customary adjustments; and (ii) a warrant to purchase 1,907,543175,000 shares of IGI common stock at an exercise price of $.01$1.25 per share, expiring two years from issuance, for aggregate consideration of $500,000. A summary of significant terms is as follows:



F-14



Dividends- Series A Convertible Preferred Stock holders are not entitled to ACS.


  34


      The warrant issued to ACS was valued at issuance date utilizing the
Black-Scholes model and initially recorded as a liability, due to the
presence of a put right which requireddividend unless the Company declares and pays a cash dividend on the Common Stock. In that event, the holders of shares of Series A Preferred Stock shall be entitled to repurchase the
warrant or underlying commonshare in such dividends on a pro rata basis, as if their shares had been converted into shares of Common Stock.

Conversion- The series A preferred stock under certain circumstances.  The
liability was marked-to-market, based on changes in the value of the
underlying common stock, with the change in market value recognized as a
component of interest expense in the period of change.

      On April 12, 2000, ACS and the Company amended the debt agreement
and the put provision associated with the original warrant was replaced by
a make-whole feature.  The make-whole feature required the Company to
compensate ACS, in either common stock or cash,is convertible, at the option of the Company, inholders, into shares of our common stock at a conversion price of $1.00 per share. Based on the event that ACS ultimately realized proceeds fromoriginal purchase price of $10,000 per share of preferred, each share of series A preferred is convertible into 10,000 shares of common. The series A preferred also contains an automatic conversion wherein the saleshares will automatically convert into common shares when the closing price of the Company’s common stock obtained upon exerciseis $2.50 for ten (10) consecutive trading days.

Liquidation preference- The liquidation preference is $10,000 per share for a total of its$500,000.

The Company has accounted for the Series A Preferred Stock in accordance with the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios”. The Company has allocated the value received between the preferred stock and the related warrants. The allocated value for the preferred stock and the related warrants was approximately $475,000 and $25,000, respectively. In addition, the Company evaluated the shares and determined a beneficial conversion feature existed within this transaction, which totaled $55,000; the preferred stock was further discounted by this amount. The beneficial conversion amount related to the value of the preferred stock and the associated warrant that were less
thanwas then accreted back to the preferred stock in accordance with the conversion provision, which allowed for 100% to be converted immediately. The accretion was reflected as a dividend expense.

The fair value of the commonwarrants issued in connection with the 2007 Series A Preferred Convertible stock upon exercisesale was approximately $26,000 at issue date using Black-Scholes option-pricing model with the following assumptions:

Assumptions
Dividend yield
0%
Risk free interest rate
4.98%
Estimated volatility factor
47%
Expected life
1 year

See Footnote 17. Subsequent Event – Convertible Preferred Stock and Convertible Promissory Notes for 2009 preferred stock issuance.

8.      Common Stock

Pursuant to a Private Placement Memorandum (“Private Placement”) dated February 5, 2007; the Company issued 1,500,000 shares to an accredited investor, Pharmachem Laboratories, Inc (“Pharmachem”) for gross proceeds of such warrant.
Fair value$1,500,000.  The Company granted Pharmachem the right to have its shares included in one registration (except in the case it suffers a cutback of its shares) of the common stock upon exercise was defined as the 30-day
average value priorcompany securities (“piggyback registration rights) until January 1, 2010, with certain exception and subject to noticecertain rights of intent to sell.  ACS was required to
exercise reasonable effort to sell or place its shares in the marketplace
over a 180-day period, beginning with the date of notice by ACS, before it
could invoke the make-whole provision.

      As noted above, the make-whole feature required the Company to compensate ACS for any decreasecutback shares to be included in value between the date that ACS notifiedregistration. The aforementioned securities were sold in reliance upon the exemption afforded by the provisions of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), and/or Section 4(2) of the Act.

In connection with this transaction the Company that they intendedpaid $112,500 to sell some Landmark Financial Corporation, issued 22,123 shares to Landmark and issued a warrant to purchase 150,000 shares at $1.00 per share expiring February 5, 2009. The aforementioned securities were sold in reliance upon the exemption afforded by the provisions of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), and/or allSection 4(2) of the stockAct.

Pursuant to a Private Placement Memorandum dated December 10, 2007, the Company entered into a subscription agreement with Univest Management, Inc. EPSP, an entity controlled by Frank Gerardi, our former Chief Executive Officer and the
date that ACS ultimately disposedChairman of the underlying stock, assuming that
such disposition occurred in an orderly fashionBoard of Directors and a beneficial owner of over a period10% of not more
than 180 days.  The shortfall could be paid using either cash or shares of
the Company'sour common stock, at the option of the Company.  Based on
accounting guidance that waspursuant to which we issued in September 2000, the Company
reflected the detachable stock warrant outside of stockholders' equity
(deficit), since the ability to satisfy the make-whole obligation using
shares of the Company's common stock was not totally within the Company's
control.

      On June 26, 2002, the Company received notice from ACS that it was
exercising the warrant. ACS opted to satisfy payment of the exercise price
through the use of the cashless exercise provisions of the warrant. The
Company issued 1,878,640 fully paid upUnivest 150,000 shares of common stock to ACS on
July 7, 2002. Based on the provisions of the make-whole feature, the fair
value of the common stock was $.67 per share as of the notification date.
On July 19, 2002, the Company's Board of Directors approved the purchase of
the 1,878,640 shares from ACS for $.70 per share. The Company completed the
purchase on July 29, 2002 for $1,315,000 and classified the shares as
treasury shares.

      In February 1999, the Company granted a warrant to purchase 270,00052,500 shares of common stock withat an exercise price of $2.00$1.25 per share.share, expiring two years from issuance, for aggregate consideration of $150,000. The warrant expiredclosing of the transaction occurred on JanuaryDecember 31, 2004.

11.2007.



F-15



9.      Stock Options and Common Stock

      In October 1998, the Company adoptedBased Compensation

Under the 1998 Directors Stock Plan.
Under this plan, 200,000Plan, 600,000 shares of the Company'sCompany’s common stock are authorized under the plan and reserved for issuance to non-employee directors, in lieu of payment of directors'directors’ fees in cash. In 2002, 70,011The Company issued 15,929 shares of common stock were issuedin 2009 as consideration for directors' fees. In 2003 and 2002,directors’ fees for 2008. Directors’ fees for 2008 were accrued on the Company’s financial statements as of December 31, 2008. The Company issued 79,318 and 31166,563 shares of common stockin 2007 as consideration for directors'directors’ fees underfor the years 2004-2007.

The 1999 Stock Incentive Plan ("(“1999 Plan"Plan”).  The Company did not
issue any shares as consideration for directors' fees in 2004.  The Company
recognized $24,000, $55,000 and $48,000 of expense related to shares issued
to directors during the years ended December 31, 2004, 2003 and 2002,
respectively.  The amount related to 2004 remains in accrued expenses until
the shares are issued.

      In December 1998, the Company's Board of Directors adopted the 1999
Employee Stock Purchase Plan ("ESPP").  An aggregate of 300,000 shares of
common stock may be issued pursuant to the ESPP.  All employees of the
Company and its subsidiaries, including officers or directors who are also
an employee, are eligible to participate in the ESPP.  Shares under this
plan are available for purchase at 85% of the fair market value of the
Company's stock on the first or last day of the offering period, whichever
is lower. The Company issued 19,617, 9,253 and 30,975 shares in 2004, 2003
and 2002, respectively, under the ESPP.

      In March 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan ("1999 Plan"). The 1999 Plan replaced all previously authorized stock option plans, and no additional options may be granted under those plans. Under the 1999 Plan, options or stock awards may be granted to all of the Company's employees, officers, directors, consultants and advisors to purchase a maximum of 1,200,0002,500,000 shares of common stock. In May 2002,2007, the Company'sCompany’s stockholders approved an increase in the maximum amount of shares to be granted by 800,000,700,000, for a total of 2,000,0003,200,000 shares available for grant. A total of 1,335,9162,392,500 options, (net of cancellations), having a maximum term of ten years, have been granted at 100% of the fair market value of the Company's common stock at the time of grant. Options outstanding under the 1999 Plan are generally exercisable in cumulative increments over four years commencing one year from date of grant. In
addition, as noted above, 79,629 stock awards have been granted under the
1999 Plan.

      In September 1999, the Company's Board of Directors approved the 1999
Director Stock Option Plan.  
The 1999 Director Stock Option Plan provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. An aggregate of 675,0001,675,000 shares have been approved and authorized for issuance   35


pursuant to this plan. In May 2001,2007, an additional 800,000300,000 shares were approved for issuance under this plan, bringing the total to 1,475,0001,975,000 available for issue under this plan. A total of 1,111,0481,589,798 options, (net of
cancellations) have been granted to non-employee directors through December 31, 2004.2008. The options granted under the 1999 Director Stock Option Plan vest in full one year after their respective grant dates and have a maximum term of ten years.

The fair value for options granted was estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for 2008 and 2007:

Assumptions
2008
2007
 
 
 
Dividend yield
0%
0%
Risk free interest rate
2.87%
4.59%
Estimated volatility factor
69%
74%
Expected life
  5.5 years
5.5 years

Estimated volatility was calculated using the historical volatility of the Company’s stock over the expected life of the options. The expected life of the options was estimated using the safe harbor transition method and the forfeiture rates are estimated based on historical employment/directorship termination experience. The risk free interest rate is based on US Treasury yields for securities with terms approximating the terms of the grants. The assumptions used in the Black-Scholes option valuation model are highly subjective, and can materially affect the resulting valuation.  



F-16



Stock option transactions in each of the past threetwo years under the aforementioned plans in total were:  

                                              1999 Plan
                              ---------------------------------------------
                                                                Weighted
                               Shares      Price Per Share    Average Price
                               ------      ---------------    -------------


January  1, 2002 shares
  Under option                2,703,000     $ .50 - $8.58        $2.30
  Granted                       280,000       .53 -   .70          .67
  Exercised                     (39,000)      .50 -   .56          .53
  Cancelled                    (362,000)      .50 -  8.25         2.50
                              ---------
December 31, 2002 shares
  Under option                2,582,000       .50 -  8.58         2.12
  Granted                       290,000       .55 -  1.07          .82
  Exercised                           -           -                  -
  Cancelled                    (592,000)      .52 -  7.61         1.53
                              ---------
December 31, 2003 shares
  Under option                2,280,000       .50 -  8.58         2.03
  Granted                       618,048      1.05 -  2.25         1.74
  Exercised                    (176,666)      .55 -  1.94         1.21
  Expired                      (100,000)     5.59 -  8.58         7.77
  Cancelled                     (33,334)         .85               .85
                              ---------
December 31, 2004
  Under option                2,588,048       .50 -  8.25         1.85
                              =========
Exercisable options at:
  December 31, 2002           2,454,398                          $2.19
                              =========                          =====
  December 31, 2003           2,019,252                          $2.24
                              =========                          =====
  December 31, 2004           2,320,001                          $1.92
                              =========                          =====


      The Company uses the intrinsic value method to account for stock
options issued to employees and to directors. The Company uses the fair
value method to account for stock options issued to non-employee
consultants. No options were granted to consultants in 2002.  The Company
granted 300,000 and 25,000 options in 2004 and 2003, respectively, to a
consultant. The expense related to such options, which amounted to
$545,000 in 2004 was recorded in product development and research expense.

      

 

Shares
Exercise
Price Per  Share
 
Weighted Average
Exercise Price
 
 
 
 
 
January 1, 2007 shares
 
 
 
 
      Under option
1,818,548 
$.50-$3.75
 
$1.56
      Granted
573,750 
.81-1.17
 
  1.04
      Exercised
— 
 
 
 
      Expired
(30,000)
3.75
 
  3.75
      Forfeited
(87,750)
.76-3.00
 
  1.06
December 31, 2007 shares
 
 
 
 
      Under option      
2,274,548 
.50-3.75
 
  1.42
      Granted
620,000 
1.37-1.70
 
  1.64
      Exercised
(53,016)
.76-1.56
 
  1.41
      Expired
(136,000)
1.94-2.44
 
  2.33
      Forfeited
— 
 
 
 
December 31, 2008 shares
 
 
 
 
      Under option
2,705,532 
.50-2.75
 
  1.43
Exercisable options at:
 
 
 
 
      December 31, 2008
2,155,532 
 
 
$1.44
      December 31, 2007
1,700,798 
 
 
$1.55

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2004:


                            Options Outstanding              Options Exercisable
                   -------------------------------------    ---------------------
                                  Weighted      Weighted                 Weighted
                                  Average       Average                  Average
   Range of        Number of     Remaining      Exercise    Number of    Exercise
Exercise Price      Options     Life (Years)     Price       Options      Price
- --------------     ---------    ------------    --------    ---------    --------


$ .50 to $1.00       800,500        6.79         $ .65       800,500      $ .65
 1.01 to  2.00     1,097,798        6.45          1.52       829,751       1.60
 2.01 to  3.00       419,750        7.61          2.32       419,750       2.32
 3.01 to  4.00        50,000        3.00          3.75        50,000       3.75
 5.01 to  6.00        90,000        1.91          5.81        90,000       5.81
 6.01 to  7.00       100,000        1.47          6.69       100,000       6.69
 8.01 to  8.25        30,000        0.99          8.25        30,000       8.25
                   ---------                               ---------

$ .50 to $8.25     2,588,048        6.25         $1.85     2,320,001      $1.92
                   =========                               =========
  36


12.2008:

 
Options Outstanding
 
Options Exercisable


Range of
Exercise Price


Number of
Options
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
 


Number of
Options
Weighted
Average
Exercise
Price
 
 
 
 
 
 
 
$.50 to $1.00
   303,250
5.36
$  .73
 
   303,250
$  .73
  1.01 to 2.00
2,095,282
6.31
  1.40
 
1,545,282
  1.42
  2.01 to 3.00
   307,000
4.91
  2.26
 
   307,000
  2.26
 
 
 
 
 
 
 
$  .50 to $3.00
2,705,532
6.04
$1.43
 
2,155,532
$1.44

The Company has recorded $566,000 and $296,000 related to its shared-based expenses in selling, general and administrative expenses on the accompanying Statement of Operations for the year ended December 31, 2008 and 2007, respectively. As part of the Separation Agreement dated September 16, 2008 with the former Vice President of Finance, the Company extended the time period for exercising options for an additional 90 days. Because of this modification, the Company recorded incremental compensation of $5,300.

The aggregate intrinsic value for options outstanding at December 31, 2008 was $0. The aggregate intrinsic value of the options exercisable at December 31, 2008 was $0. The total intrinsic value of the options exercised during 2008 was $3,000; no options were exercised in 2007.



F-17



A summary of non-vested options at December 31, 2008 and changes during the year ended December 31, 2008 is presented below:

 
 
 
 
Weighted Average
 
 
Options
 
Grant Date Fair Value
 
 
 
 
 
Non-vested option at January 1, 2008
 
573,750
 
$  .81
      Granted
 
620,000
 
  1.02
      Vested
 
(643,750)
 
  1.30
      Forfeited
 
—
 
  —
Non-vested options at December 31, 2008
 
550,000
 
$  .81

As of December 31, 2008, there was $279,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Plan. The costs will be recognized monthly through December 2009.

10.      Stock Warrants

In connection with Private Placement Memorandum dated December 4, 2007, the Company entered into a subscription agreement which granted a warrant to purchase 175,000 shares of common stock at an exercise price of $1.25 per share, expiring two years from issuance.

In connection witha Private Placement Memorandum dated December 10, 2007, the Company entered into a subscription agreement with Univest Management, Inc. EPSP (see Note 9), which granted Univest a warrant to purchase 52,500 shares of common stock at an exercise price of $1.25 per share, expiring two years from issuance.

In connection with the Private Placement transaction executed with Pharmachem, (see Footnote 8), the Company issued a warrant to purchase 150,000 shares at $1.00 per share to Landmark Financial which expired March 7, 2009 as commission on this transaction. During the quarter ended June 30, 2008, Landmark Financial Corporation exercised a portion of the warrant to acquire 25,000 shares of common stock.

11.      Income Taxes  

The provision (benefit) forfrom income taxes attributable to loss from continuing operations before provision (benefit) forfrom income taxes for the years ended December 31, 2004, 20032008 and 20022007 is as follows:

                                                 2004       2003       2002
                                                 ----       ----       ----
                                                      (in thousands)


Current tax expense (benefit):
  Federal                                       $   -      $   -      $   -
  State and local                                (290)      (208)       330
                                                -----      -----      -----

Total current tax expense (benefit)              (290)      (208)       330
                                                -----      -----      -----

Deferred tax expense
  Federal                                           -          -          -
  State and local                                   -          -          -
                                                -----      -----      -----
Total deferred tax expense                          -          -          -
                                                -----      -----      -----
  Total expense (benefit) for income taxes      $(290)     $(208)     $ 330
                                                =====      =====      =====

 
2008
 
2007
 
(in thousands)
Current tax expense (benefit):
 
 
 
 
 
     Federal
$
— 
 
$
— 
     State and local
 
(196)
 
 
(453)
Total current tax expense (benefit)
 
(196)
 
 
(453)
Deferred tax expense
 
 
 
 
 
     Federal
 
— 
 
 
— 
     State and local
 
— 
 
 
— 
Total deferred tax expense
 
— 
 
 
— 
     Total expense (benefit) from income taxes
$
(196)
 
$
(453)

The Company sold some of its New Jersey operating loss carryforwardscarry forwards in exchange for net proceeds of $298,000, $224,000$201,000 and $249,000$463,000 in 2004,
20032008 and 2002,2007 respectively.  During the year ended December 31, 2002, the
Company paid $558,000 to purchase some New Jersey operating loss
carryforwards.

      



F-18



The provision (benefit) forfrom income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax loss from continuing operations as a result of the following:

                                                      2004       2003       2002
                                                      ----       ----       ----
                                                            (in thousands)


Statutory benefit                                    $(405)     $(328)     $(952)
Other non-deductible expenses                            1         25         16
State income taxes, net of valuation allowance        (191)      (137)       330
Increase in Federal valuation allowance                305        234        936
Other, net                                               -         (2)         -
                                                     -----      -----      -----
                                                     $(290)     $(208)     $ 330
                                                     =====      =====      =====

 
2008
 
2007
 
(in thousands)
 
 
 
 
 
 
Statutory benefit
$
(697)
 
$
(267)
Other non-deductible expenses
 
4 
 
 
63 
State income taxes, net of valuation allowance
 
(129)
 
 
(299)
Increase in Federal valuation allowance
 
626 
 
 
49 
Other, net
 
— 
 
 
1 
 
$
(196)
 
$
(453)

Deferred tax assets included in the Consolidated Balance Sheets as of December 31, 20042008 and 20032007 consisted of the following:

                                                    2004         2003
                                                    ----         ----
                                                     (in thousands)


Property, plant and equipment                     $    67      $    52
Prepaid license agreement                             202          402
Deferred royalty payments                             121          149
Tax operating loss carryforwards                    5,978        5,349
Tax credit carryforwards                              666          691
Reserves                                               15            6
Inventory                                              31           16
Non-employee stock options                            394          177
Other future deductible temporary differences          33           41
Other future taxable temporary differences            (16)         (21)
                                                  -------      -------
                                                    7,491        6,862

Less:  valuation allowance                         (7,491)      (6,862)
                                                  -------      -------

Deferred taxes, net                               $     -      $     -
                                                  =======      =======

 
2008
 
2007
 
(in thousands)
 
(in thousands)
Current Assets (Liabilities)
 
 
 
 
 
      Allowance for doubtful accounts
$
31 
 
$
19 
      Inventory reserve
 
75 
 
 
30 
      Accrued severance
 
— 
 
 
22 
      Accrued environmental clean-up costs
 
— 
 
 
37 
      Other
 
22 
 
 
— 
Total Current Assets (Liabilities)
 
128 
 
 
108 
 
 
 
 
 
 
Long Term Assets (Liabilities)
 
 
 
 
 
      Property, plant and equipment
 
117 
 
 
94 
      Deferred royalty payments
 
18 
 
 
107 
      Tax operating loss carry forwards
 
6,516 
 
 
6,109 
      Capital loss carryforwards
 
25 
 
 
25 
      Tax credit carry forwards
 
674 
 
 
705 
      Non-employee stock options
 
771 
 
 
535 
      Other
 
(7)
 
 
— 
Total Long Term Assets (Liabilities)
 
8,114 
 
 
7,575 
Gross Deferred Tax Asset (Liability)
 
8,242 
 
 
7,683 
Less:  valuation allowance
 
(8,242)
 
 
(7,683)
Deferred taxes, net
$
— 
 
$
— 

The Company evaluates the recoverability of its deferred tax assets based on its history of operating earnings, its plan to sell the benefit of certain state net operating loss carryforwards,carry forwards, its expectations for the future, and the expiration dates of the net operating loss carryforwards.carry forwards. The Company has concluded that it is more likely than not that it will be unable to realize the gross deferred tax assets in the foreseeable future and has established a valuation reserveallowance for all such deferred tax assets.  37


      

Operating loss and tax credit carryforwardscarry forwards for tax reporting purposes as of December 31, 20042008 were as follows:


                                                             (in
(in thousands)
Federal:
     Operating losses (expiring through 2024)                      2028)
$ 13,72218,390
     Capital losses (expiring in the year 2010)
74
     Research tax credits (expiring through 2020)                       5512025)
615
     Alternative minimum tax credits (available without expiration)
28
State:
     Net operating losses - New Jersey (expiring through 2012)       13,7152015)
1,982
     Research tax credits - New Jersey (expiring through 2010)           582012)
2
     Alternative minimum assessment -– New Jersey (available without expiration)
29



F-19



Federal net operating loss carryforwardscarry forwards that expire through 20242028 have significant components expiring in 2018 (15%(11%), 2019 (15%(11%), 2020 (53%(39%), and 2021 (9%2025 (11%).  13.

The Company’s ability to use net operating loss carry forwards may be subject to substantial limitation in future periods under certain provisions of the Internal Revenue Code, including but not limited to Section 382 which applies to corporations that undergo an “ownership change”. Internal Revenue Code Section 382 rules limit the utilization of net operating losses upon a more than 50% change in ownership of a company (such change refers to a shift in value).

The Company adopted FIN 48 on January 1, 2007. FIN 48 had no effect on the Company’s consolidated financial position and results of operations. Additionally, as a result of the adoption of FIN 48, the Company did not record an adjustment to the January 1, 2007 balance of retained earnings and did not record any reserve for unrecognized tax benefits in 2008 and 2007. Accordingly, there is no interest and penalties recorded on the balance sheet for such reserves. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the appropriate state income taxing authorities for the tax years 2005 to 2008 due to the net loss carryforwards from those years.

12.      Commitments and Contingencies

 The Company leases machineryCompany’s commitments and equipment under non-cancelable
operating lease agreements expiring at various dates in the future.  Rental
expense aggregated approximately $42,000 in 2004, $44,000 in 2003, and
$70,000 in 2002.  Future minimum rental commitments under non-cancelablecontingencies consisted of operating leases asfor equipment of $75,000 for 2009, $57,000 for 2010, $49,000 for 2011 and $3,000 for 2012. Rent expense was $47,300 and $33,700 for the years ended December 31, 2004 are as follows:


            Year          (in thousands)
            ----          --------------

            
            2005               $ 34
            2006                 25
            2007                 22
            2008                 22
            2009                 22
            Thereafter            -
                               ----
            Total              $125
                               ====


      The Company has an option, which is exercisable on December 13, 2005,
to extend its exclusive license for the use of the Novasome(R)
microencapsulation technologies in certain specific fields for an
additional ten-year term in exchange for a $1,000,000 cash payment.

14.2008 and 2007, respectively.

13.      Legal and U.S. Regulatory Proceedings

      Gallo Matter

      As previously reported by the Company in its historical filings with
the Securities and Exchange Commission ("SEC"), including, without
limitation, its Form 10-K for the year ending December 31, 1999, for most
of 1997 and 1998 the Company was subject to intensive government regulatory
scrutiny by the U.S. Departments of Justice, Treasury and Agriculture.  In
June 1997, the Company was advised by the Animal and Plant Health
Inspection Service ("APHIS") of the United States Department of Agriculture
("USDA") that the Company had shipped quantities of some of its poultry
vaccine products without complying with certain regulatory and record
keeping requirements.  The USDA subsequently issued an order that the
Company stop shipment of certain of its products.  Shortly thereafter, in
July 1997, the Company was advised that the USDA's Office of Inspector
General had commenced an investigation into possible violations of the
Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company voluntarily provided to the SEC.

      Based upon these events, the Board of Directors caused an immediate
and thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel.  The Company continued
to refine and strengthen its regulatory programs with the adoption of a
series of compliance and enforcement policies, the addition of new managers
of Production and Quality Control and a new Senior Vice President and
General Counsel.  At the instruction of the Board of Directors, the
Company's General Counsel established and oversaw a comprehensive employee
training program, designated in writing a Regulatory Compliance Officer,
and established a fraud detection program, as well as an employee
"hotline."  The Company continued to cooperate with the USDA and SEC in all
aspects of their investigation and regulatory activities.  On March 13,
2002, the Company reached a settlement with the staff of the SEC to resolve
matters arising with respect to the investigation of the Company.  Under
the settlement, the Company neither admitted nor denied that the Company
violated the financial reporting and record-keeping requirements of Section
13 of the Securities and Exchange Act of 1934, as amended, for the three
years ended December 31, 1997.


  38


Further, the Company agreed to the entry of an order to cease and desist
from any such violation in the future.  No monetary penalty was assessed.

      As a result of its internal investigation, in November 1997, the
Company terminated the employment of John P. Gallo as President and Chief
Operating Officer for willful misconduct.  On April 21, 1998, the Company
instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court.
The lawsuit alleged willful misconduct and malfeasance in office, as well
as embezzlement and related claims (referred to as the "IGI Action").  On
April 28, 1998, Mr. Gallo instituted a separate action against the Company
and two of its Directors, Edward Hager, M.D. and Constantine Hampers, M.D.,
alleging that he had been wrongfully  terminated  from employment and
further alleging wrongdoings by the two Directors (referred to as the
"Gallo Action").  The Court subsequently ordered the consolidation of the
IGI Action and the Gallo Action (collectively referred to as the
"Consolidated Action").

      In response to these allegations, the Company instituted an
investigation of the two Directors by an independent committee
("Independent Committee") of the Board assisted by the Company's General
Counsel.  The investigation included a series of interviews of the
Directors, both of whom cooperated with the Company, and a review of
certain records and documents.  The Company also requested an interview
with Mr. Gallo who, through his counsel, declined to cooperate.  In
September 1998, the Independent Committee reported to the Board that it had
found no credible evidence to support Mr. Gallo's claims and allegations
and recommended no further action.  The Board adopted the recommendation.

      The Company denied all allegations plead in the Gallo Action and
asserted all claims in the Gallo Action to be without merit.  The Company
did not reserve any amount relating to such claims.  The Company tendered
the claim to its insurance carriers, but was denied insurance coverage for
both defense and indemnity of the Gallo Action.

      In July 1998, the Company sought to depose Mr. Gallo in connection
with the Consolidated Action.  Through his counsel, Mr. Gallo asserted his
Fifth Amendment privilege against self-incrimination and advised that he
would not participate in the discovery process until such time as a federal
grand jury investigation, in which he was a target, was concluded.  In
January 1999, at the suggestion of the Court, the Company and Mr. Gallo
agreed to a voluntary dismissal without prejudice of the Consolidated
Action, with the understanding that the statute of limitations was tolled
for all parties and all claims, and that the Company and Mr. Gallo were
free to reinstate their suits against each other at a later date, with each
party reserving all of their rights and remedies against the other.

      As of the date hereof, neither the Company nor Mr. Gallo have filed
suit against each other in the Superior Court of New Jersey or any other
court of competent jurisdiction to reinstitute the claims, in whole or
part, previously at issue in the Consolidated Action, and pursuant to the
previous order of dismissal entered in the Consolidated Action, the statute
of limitation on all claims and defenses continues to be tolled as to both
parties.  However, the Company did receive a letter dated November 21, 2003
from Mr. Gallo's attorneys seeking to reach a settlement of the claims
asserted against IGI in the Gallo Action without further resort to the
courts.  The letter provides a general description of Mr. Gallo's claims
and a calculation of damages allegedly sustained by Mr. Gallo relative
thereto.  The letter states that Mr. Gallo's damages are calculated to be
in the range of $3,400,000 to $5,100,000.  The Company denies liability for
the claims and damages alleged in the letter from Mr. Gallo's counsel dated
November 21, 2003, and as such, the Company did not make any formal
response thereto. Mr. Gallo has contacted the Company's Chief Executive
Officer & Chairman, Frank Gerardi, in a continued effort to initiate
settlement discussions.  As of the present date, the Company continues to
deny any merit and/or liability for the claims alleged by Mr. Gallo and has
not engaged in any formal settlement discussions with either Mr. Gallo or
his attorneys.

      On December 8, 2003, Mr.  Gallo filed suit against Novavax, Inc. in
the Superior Court of New Jersey, Law Division, Atlantic County, docket no.
ATL-L-3388-03, asserting claims under seven counts for damages allegedly
sustained as a result of the cancellation of certain Novavax stock options
held by Mr. Gallo due to his termination from IGI in November 1997 for
willful misconduct (referred to as the "Novavax Action").

      On March 5, 2004, Novavax filed an Answer denying the allegations
asserted by Mr. Gallo in his First Amended Complaint.  In addition, while
denying any liability under the First Amended Complaint, Novavax also filed
a Third Party Complaint in the Novavax Action against the Company for
contribution and indemnification, alleging that if liability for Mr.
Gallo's claims is found, the Company has primary liability for any and all
such damages sustained.

      IGI has been notified by its insurance carriers that coverage is not
afforded under their respective policies of insurance for defense and/or
indemnification of the claims alleged by the Third Party Complaint.  After
IGI was notified of the foregoing, but prior to IGI's filing of any
responsive pleading, the Third Party Complaint against IGI was voluntarily
dismissed without prejudice by Novavax on June 30, 2004.  Novavax may at
any time pursuant to the rules of court re-file its Third Party Complaint
against IGI.

      In July 2004, Novavax filed a motion for summary judgment on all
claims asserted under Gallo's First Amended Complaint (referred to as "the
SJ Motion").  Gallo filed in opposition to the SJ Motion contesting all
relief sought thereunder.  In August 2004, the Court held a hearing on the
SJ Motion and denied without prejudice the relief sought by the motion for
dismissal of Gallo's First


  39


Amended Complaint.  Upon information and belief, the parties are currently
proceeding with discovery in the Novavax Action.  The Company, as a non-
party witness in the Novavax Action, was recently served by counsel for
Gallo with a subpoena for the production of documents as responsive
thereto.

      As of the date hereof, Novavax has not sought to re-file its Third
Party Complaint against IGI for which coverage was previously denied by its
insurance carriers, Novavax is not precluded from doing so and may seek to
do so in the future.

      Other Matters

      

On April 6, 2000, officials of the New Jersey Department of Environmental Protection (“DEP”) inspected the Company'sCompany’s leased storage site in Buena, New Jersey, and issued Notices of Violation (“NOV’s”) relating to the storage of waste materials in a number of trailers at the site. The Company established a disposal and cleanup schedule and completed the removal of materials from the site. In March 2006, the Company received a judge’s decision from the Office of Administrative Law (“OAL”) of a fine in the amount of $35,000 in respect to the NOV’s the Company received form the DEP. Due to the criminal settlement that was reached between the Company and the DEP in 2002, the Company had a credit of $40,000 to be used against any fines determined as a result of the civil matter, therefore, the Company did not have to pay any money to the DEP for the settlement amount. The DEP subsequently issued a final decision, which accept ed the violation findings but rejected the OAL Judge’s penalty recommendation, reinstituting a previously proposed penalty by the DEP of $215,000, less the $40,000 credit previously mentioned or $175,000. The Company continuesappealed this to discussthe Superior Court of the NJ Appellate Division who determined that the Commission’s decision was reasonable thus affirming the DEP Commissioner’s decision. This amount of $175,000 was accrued for in the fourth quarter of 2007. The Company reached a settlement with DEP Commissioner and agreed to pay the authorities a
resolution of any potential assessment under the NOV's and has accrued the
estimated penalties related to such NOV's.

      above amount in six equal installments. The final installment is due on June 30, 2009.

On March 2, 2001, the Company discovered the presencebecame aware of environmental contamination resulting from an unknown heating oil leak at its Companion Pet Products manufacturing site.facility. The Company immediately notified the New Jersey Department of Environmental Protection and the local authorities, and hired a certified environmental contractor to assess the exposure and required clean up. Based on the initial information from
the contractor, the Company originallyThe total estimated the costcosts for the cleanupclean up and remediation to be $310,000.  In September 2001, the contractor updated
the estimated total cost for the cleanup and remediation to be $550,000.  A
further update was performed in December 2002 and the final estimated cost
was increased to $620,000,is $652,000, of which $82,000$50,000 remains accrued as of December 31, 2004. 2008. Based on information provided to the Company from its environmental consultant and what is known to date, the Company believes the reserve is sufficient for the remaining remediation of the environmental contamination. There is a possibility, however, that the remediation costs may exceed the Company’s estimates.

The $50,000 of restricted cash on the Consolidated Balance Sheet as of December 31, 2008 and 2007 represents a restricted escrow account set up on the requirement of the NJ Department of Environmental Protection (“DEP”) for the soil remediation was completed by September 30, 2003. Therework. These funds will be periodic testing and removal performed, which is projected to span over
the next five years.  The estimated cost of the monitoring is included in
the accrual.

      This contamination also spreadreleased to the property adjacent toCompany upon the manufacturing facility andDEP approval when the Companyremediation is currently involved in a lawsuit
with the owner of that property, Ted Borz.  Mr. Borz runs a business on
that property and he seeking remuneration for loss of income and the
reduction in his property value from IGI as a result of the oil spill.  IGI
believes that it has performed all the necessary tasks required to properly
decontaminate Mr. Borz's property.  Management does not feel that it is
possible to estimate the outcome of this case at this date.

      The Company's common stock is listed on the American Stock Exchange
("AMEX"). Based on the Company's 2004 results, the Company is not in
compliance with the AMEX requirement for reporting income from continuing
operations and net income for the year ended December 31, 2004 which could
subject it to potentially being delisted from AMEX. As of March 15, 2005,
the Company has not been contacted by AMEX concerning the Company's non-
compliance with the AMEX requirements.

15.completed.


F-20



14.      Employee Benefits

The Company has a 401(k) contribution plan, pursuant to which employees who have completed six months of employment with the Company or
its subsidiaries as of specified dates, may elect to contribute to the plan, in whole percentages, up to 18% of compensation. Employees'Employees’ contributions are subject to a minimum contribution by participants of 1% of compensation and a maximum contribution of $13,000$15,500 for 20042008 and $12,000
for 2003.2007, plus a catch-up contribution of up to $5,000 if a participant qualifies. The plan was amended on January 1, 2008. Beginning in 2008, the Company matches 100% of the first 3% of compensation contributed by participants and 50% of the next 2% of compensation contributed by participants. For 2007, the Company matched 25% of the first 5% of compensation contributed by participants and contributes,contributed, on behalf of each participant, $4 per week of employment during the year. The Company contribution is in the form of either common stock or cash, which is vested immediately. The Company has recorded charges to expense related to this plan of approximately $ 8,000, $15,000$36,000 and $23,000$13,000 in 2004, 20032008 and 2002,2007, respectively.

15.      Discontinued Operations

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.

16.      LicenseRelated Party Transactions

The Company has signed an agreement with Pharmachem on August 22, 2007, a significant shareholder, to develop Novasome® based products for Pharmachem to market to third party customers. The agreement was completed on August 21, 2008, and all the development work for Pharmachem has ended.

For the year ended December 31, 2008, the Company recognized $131,000 of research and development revenues from Pharmachem and has a $0 accounts receivable balance at December 31, 2008. For the year ended December 31, 2007, the Company recognized $160,000 of research and development revenues from Pharmachem and had an accounts receivable balance of $35,000 at December 31, 2007 that was received in the normal course of business.

For a description of the Company’s Credit Agreement with Dr. Michael Holick

      a related party, see Footnote 6 above.

17.      Subsequent Event – Convertible Preferred Stock and Convertible Promissory Notes

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 their Note Payable with Pinnacle. The Company has incurred placement and legal fees of $629,000, resulting in estimated net proceeds of $5,371,000.

The Series B Preferred Stock has a par value of $0.01 per share and the holders are entitled to quarterly dividends at an annual rate of 5%, when and if declared by the Board of Directors. Furthermore, each share of the Series B Preferred Stock is convertible into 14,634 shares of common stock for an implied common stock conversion price of $0.41 per share, subject to certain adjustments and any accrued and unpaid dividends. At the time of issuance, the market price of the common stock into which the Series B Preferred Stock is convertible into was greater than the conversion price. The embedded beneficial conversion feature will be accounted for in accordance with Emerging Issue Task Force (“EITF”) Issue No. 98-5Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios(“EITF 98-5”) and EITF Issue No. 00-27Application of Issue No. 98-5 to Certain Convertible Instruments. A ccordingly, the beneficial conversion feature on the Series B Preferred Stock is approximately $475,000 which represents the amount by which the estimated fair value of the common stock issuable upon conversion exceed the proceeds from such issuance and will be treated as a deemed dividend on the date of the Offering.


F-21



The Promissory Notes bear interest at an annual rate of 5% and mature on July 31, 2009. Furthermore, the Company has entered into Guaranty and Security Agreements to guarantee repayment of the Promissory Notes upon maturity. They are collateralized by the assets of the Company. However, upon approval by the Company’s stockholders of the Offering or an earlier liquidation event of the Company, the Promissory Notes and any accrued interest 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 bringing the Offering up for approval at the Company’s 2009 annual meeting of stockholders to take place in May 2009. The beneficial conversion feature of the Promissory Notes is approximately $1,866,000 and will be treated as interest expense, using the effective yield method. The Company believes the interest expense on the beneficial conversion feature will be charged to operations during the first and second quarters of 2009. 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, this Common Stock Warrant shall be exercisable for no more than 88,550 shares. This warrant expires on March 13, 2012. The fair value of the warrant will be determined using the Black Scholes Method and the beneficial conversion feature of the warrant that is attributable to the Promissory Notes will be charged to interest expense using the effective yield method. The Company believes the interest expense will be charged to operations during the first and second quarters of 2009.

The Company and Pinnacle entered into a Third Amendment to the Loan and Security Agreement. Pinnacle agreed to change the terms of repayment such that 50% of the Note payable, $500,000 as of December 24, 2003,31, 2008 (see Note 7) will be payable on July 31, 2010 and the remaining balance will be payable on July 31, 2011. Furthermore, the Company and Pinnacle entered into a Note Conversion Agreement for which Pinnacle agreed to automatically convert the principal amount due under the Note Payable into shares of the Company’s Common Stock at a conversion rate of $0.41 per share upon stockholder approval of the Conversion Agreement. The beneficial conversion feature of the Note Payable is approximately $195,000 and will be treated as interest expense, using the effective yield method. The Company believes the interest expense on the beneficial conversion feature will be charged to operations during the first and second quarters of 2009.

As part of the Offering, the Company entered into a License Agreementintercreditor agreement with Dr. Holick and A&D Bioscience, Inc., a Massachusetts corporation
wholly owned by Dr. Holick (collectively referred to as "Holick"), whereby
Holick granted an exclusive license to the Company to all his rights to the
parathyroid hormone related peptide technologiesPinnacle and the glycoside
technologies (referred to as "PTH Technologies" and "Glycoside
Technologies", respectively) that he developed for various clinical usages
including treatment of psoriasis, hair loss and other skin disorders. In
consideration for entering into the License Agreement, Holick received up-
front a $50,000 non-refundable payment from the Company. He also received a
grant of 300,000 stock options under the Company's authorized stock option
plans. Holick was also entitled to receive a $236,000 milestone payment
that was contingent on the execution of a sublicense agreement between the
Company and a third-party for the licensed technology.


  40


      On April 19, 2004, IGI signed a sublicense agreement with Tarpan
Therapeutics, Inc. ("Tarpan") for the PTH (1-34) technology under which the
third-party will be obligated at its sole cost and expense to develop and
bring the PTH (1-34) technology to market as timely and efficiently as
possible, which includes its sole responsibility for the cost of
preclinical and clinical development, research and development,
manufacturing, laboratory and clinical testing and trials and marketing of
products. In addition, the sublicense agreement calls for various payments
to IGI throughout the term. IGI was paid a lump sum sublicense fee of
$300,000, from which amount IGI paid the sum of $232,000 to Dr. Holick,
representing the $236,000 payment due to Dr. Holick in accordance with the
terms of his License Agreement with the Company, net of $4,000 of additional
legal fees. Certain subsequent royalty payments received by the Company under
the sublicense agreement will be shared with Holick after the Company has
recovered any payments previously made to Holick under the License
Agreement and an amount equal to the valuePromissory Noteholders. As part of the options received by
Holick underintercreditor agreement, the License Agreement. The Company is responsible for anyPromissory Noteholders agreed to certain terms setting forth debt repayment, security positions and all costs, fees and expenses for the prosecution and oversight of any
intellectual property rights related to the licensed technologies.  The
term of the License Agreement is the longer of twenty (20) years or the
life of each of the patents thereunder.  The License Agreement, however,
granted Holick the right to terminate the Company's license to (i) the
Glycoside Technologies if the Company did not sublicense the Glycoside
Technologies within 90 days of the effective date of the License Agreement,
and (ii) the PTH Technologies if the Company did not sublicense the PTH
Technologies within 90 days of the effective date of the License Agreement.
As noted above, the Company entered into a sublicense agreement for the PTH
Technologies on April 19, 2004.  The Company did not, however, sublicense
the Glycoside Technologies within the 90 day period.  As a result, Holick
terminated the Company's license to the Glycoside Technologies on April 5,
2004.  The Company is engaged in discussions with the same third-party
entity for a similar sublicense for the PTH (7-34) technology.

      The $50,000 payment to Holick was expensed in the third quarter of
2003 and the $236,000 payment to Holick was expensed in the second quarter
of 2004 because the PTH Technologies are in a preliminary development phase
and do not have any readily determinable alternative future use. The other
consideration called for under the License Agreement, such as amounts
advanced for the prosecution and oversight of any intellectual property
rights related to the licensed technologies which amounted to $27,500 and
the fair value of the 300,000 stock options granted to Holick, which
amounted to $520,000, was also expensed by the Company in the second
quarter of 2004 (included in product development and research expenses in
the Consolidated Statement of Operations), when the sublicense agreement
with Tarpan was executed and Holick could no longer terminate the license
agreement as it relates to the PTH Technologies and the options became
fully vested.  The fair value of the stock options was calculated under
SFAS No. 123 using the Black-Scholes model.


  41


17.   Quarterly Consolidated Financial Data (Unaudited)

      Following is a summary of the Company's quarterly results for each of
the quarters in the years ended December 31, 2004 and 2003 (in thousands,
except per share information).


                                     March        June      September   December
                                    31, 2004    30, 2004    30, 2004    31, 2004
                                    --------    --------    ---------   ---------


Total revenues                      $   987     $ 1,198     $   582     $   791
Operating loss                           (4)       (846)       (223)       (147)
Income (loss) from continuing
 operations                               3        (842)       (219)        166
Net income (loss)                         3        (842)       (219)        166
                                    =======     =======     =======     =======
Basic income (loss) per share       $   .00     $  (.07)    $  (.02)    $   .01
Diluted income (loss) per share         .00        (.07)       (.02)        .01



                                     March        June      September   December
                                    31, 2003    30, 2003    30, 2003    31, 2003
                                    --------    --------    ---------   ---------


Total revenues                     $ 1,008      $   844     $   899     $   806
Operating profit (loss)                 32         (520)       (241)       (243)
Income (loss) from continuing
 operations                             36         (518)       (242)        (33)
Net income (loss)                       36         (349)       (257)        248
                                   =======      =======     =======     =======
Basic and diluted income
 (loss) per share
  Continuing operations            $   .00      $ (.05)     $  (.02)     $  .00
  Net income (loss)                    .00        (.03)        (.02)        .02


      The fourth quarter of 2004 and 2003 include $298,000 and $224,000
respectively of tax benefit from the sale of New Jersey state net operating
loss carryforwards.


  42


                         IGI, INC. AND SUBSIDIARIES

               SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                           (amounts in thousands)


   COL. A                                      COL. B            COL. C              COL. D       COL. E
   ------                                      ------            ------              ------       ------
                                                                Additions
                                               Balance    -----------------------
                                                  at      Charged to   Charged to                 Balance
                                              beginning   costs and      other                    at end
Description                                   of period    expenses     accounts    Deductions   of period
- -----------                                   ---------   ----------   ----------   ----------   ---------


December 31, 2002:

Allowance for doubtful accounts                  $122       $  3        $ 24(C)       $114(A)       $35
Obsolete and slow moving inventory reserve          5         20           -            15(B)        10

December 31, 2003

Allowance for doubtful accounts                  $ 35       $  1        $(20)(D)      $  -          $16
Obsolete and slow moving inventory reserve         10          9           -             4(B)        15

December 31, 2004

Allowance for doubtful accounts                  $ 16          1                      $  7(A)       $10
Obsolete and slow moving inventory reserve         15          6           -             -           21


(A)   Relates to write-off of uncollectible accounts and recoveries of
      reviously reserved amounts.
(B)   Relates to disposition of obsolete inventory.
(C)   Relates to a credit balance in accounts receivable that was reclassed
      to allowance for doubtful accounts.
(D)   Relates to a reclass to deferred income from allowance for doubtful
      accounts.
  43


                         IGI, INC. AND SUBSIDIARIES
            INDEX TO EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF
                      REGULATION S-K (Section 229.601)

(3)(a)    Certificate of Incorporation of IGI, Inc., as amended.
          [Incorporated by reference to Exhibit 4.1 to the Company's
          Registration Statement on Form S-8, File No. 33-63700, filed June
          2, 1993.]
(3)(b)    By-laws of IGI, Inc., as amended.  [Incorporated by reference to
          Exhibit 2(b) to the Company's Registration Statement on Form S-18,
          File No. 002-72262-B, filed May 12, 1981.]
(4)       Specimen stock certificate for shares of Common Stock, par value
          $.01 per share. [Incorporated by reference to Exhibit 4 to the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 31, 2000, File No. 001-08568, filed March 28, 2001 ("the
          2000 Form 10-K").]
(10.1)    IGI, Inc. 1989 Stock Option Plan.  [Incorporated by reference to
          the Company's Proxy Statement for the Annual Meeting of
          Stockholders held May 11, 1989, File No. 001-08568, filed April
          12, 1989.]
(10.2)    IGI, Inc. Non-Qualified Stock Option Plan.  [Incorporated by
          reference to Exhibit 3(k) to the Company's Annual Report on Form
          10-K for the fiscal year ended December 31, 1991, File No. 001-
          08568, filed March 30, 1992 ("the 1991 Form 10-K").]
(10.3)    Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by
          Board of Directors on March 11, 1993.  [Incorporated by reference
          to Exhibit 10(p) to the Company's Annual Report on Form 10-K for
          the fiscal year ended December 31, 1992 ("the 1992 Form 10-K").]
(10.4)    Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by
          Board of Directors on March 22, 1995.  [Incorporated by reference
          to the Appendix to the Company's Proxy Statement for the Annual
          Meeting of Stockholders held May 9, 1995, filed April 14, 1995.]
(10.5)    Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved by
          Board of Directors on March 19, 1997.  [Incorporated by reference
          to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
          the quarter ended June 30, 1997, File No. 001-08568, filed August
          14, 1997.]
(10.6)    Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved by
          Board of Directors on March 17, 1998.  [Incorporated by reference
          to the Company's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 1998, File No. 001-08568, filed November 6,
          1998.]
(10.7)    Supply Agreement, dated as of January 27, 1997, between IGI, Inc.
          and Glaxo Wellcome Inc. [Incorporated by reference to Exhibit 10.1
          to the Company's Quarterly Report on Form 10-Q/A, Amendment No. 1,
          for the quarter ended March 31, 1997, File No. 001-08568, filed
          June 16, 1997.]
(10.8)    IGI, Inc. 1998 Director Stock Option Plan as approved by the Board
          of Directors on October 19, 1998.  [Incorporated by reference to
          Exhibit 10.38 to the Company's Annual Report on Form 10-K for the
          fiscal year ended December 31, 1998, File No. 001-08568, filed
          April 12, 1999 ("the 1998 Form 10-K").]
(10.9)    Common Stock Purchase Warrant No. 5 to purchase 150,000 shares of
          IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11, 1999.
          [Incorporated by reference to Exhibit 10.40 to the 1998 Form
          10-K.]
(10.10)   IGI, Inc. 1999 Director Stock Option Plan as approved by the Board
          of Directors on September 15, 1999.  [Incorporated by reference to
          Exhibit 99.1 to the Company's Registration on Form S-8, File No.
          333-52312, filed December 20, 2000.]
(10.11)   Common Stock Purchase Warrant No. 7 to purchase 120,000 shares of
          IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March 11,
          1999.  [Incorporated by reference to Exhibit 10.42 to the 1998
          Form 10-K.]
(10.12)   Employment Agreement, dated May 1, 1998, between IGI, Inc. and
          Paul Woitach.  [Incorporated by reference to Exhibit 10.44 to the
          1998 Form 10-K.]
(10.13)   Loan and Security Agreement by and among Fleet Capital Corporation
          and IGI, Inc., together with its subsidiaries, dated October 29,
          1999.  [Incorporated by reference to Exhibit 10.21 to the
          Company's Annual Report for the fiscal year ended December 31,
          1999, File No. 0001-08568, filed April 14, 2000 ("the 1999 Form
          10-K").]
(10.14)   Revolving Credit Note issued by IGI, Inc., together with its
          subsidiaries, to Fleet Capital Corporation, dated October 29,
          1999. [Incorporated by reference to Exhibit 10.22 to the 1999 Form
          10-K.]
(10.15)   Term Loan A Note issued by IGI, Inc., together with its
          subsidiaries, to Fleet Capital Corporation, dated October 29,
          1999.  [Incorporated by reference to Exhibit 10.23 to the 1999
          Form 10-K.]
(10.16)   Term Loan B Note issued by IGI, Inc., together with its
          subsidiaries, to Fleet Capital Corporation, dated October 29,
          1999. [Incorporated by reference to Exhibit 10.24 to the 1999 Form
          10-K.]
(10.17)   Capital Expenditure Loan Note issued by IGI, Inc., together with
          its subsidiaries, to Fleet Capital Corporation, dated October 29,
          1999.  [Incorporated by reference to Exhibit 10.25 to the 1999
          Form 10-K.]


  44


(10.18)   Trademark Security Agreement issued by IGI, Inc. in favor of Fleet
          Capital Corporation, dated October 29, 1999. [Incorporated by
          reference to Exhibit 10.26 to the 1999 Form 10-K.]
(10.19)   Trademark Security Agreement issued by IGEN, Inc. in favor of
          Fleet Capital Corporation, dated October 29, 1999. [Incorporated
          by reference to Exhibit 10.27 to the 1999 Form 10-K.]
(10.20)   Trademark Security Agreement issued by Immunogenetics, Inc. in
          favor of Fleet Capital Corporation, dated October 29, 1999.
          [Incorporated by reference to Exhibit 10.28 to the 1999 Form
          10-K.]
(10.21)   Patent Security Agreement issued by IGI, Inc. in favor of Fleet
          Capital Corporation, dated October 29, 1999. [Incorporated by
          reference to Exhibit 10.29 to the 1999 Form 10-K.]
(10.22)   Patent Security Agreement issued by IGEN, Inc. in favor of Fleet
          Capital Corporation, dated October 29, 1999. [Incorporated by
          reference to Exhibit 10.30 to the 1999 Form 10-K.]
(10.23)   Pledge Agreement by and between Fleet Capital Corporation and
          IGEN, Inc., dated October 29, 1999. [Incorporated by reference to
          Exhibit 10.31 to the 1999 Form 10-K.]
(10.24)   Open-Ended Mortgage, Security Agreement and Assignment of Leases
          and Rents (Atlantic County, New Jersey) issued by IGI, Inc. to
          Fleet Capital Corporation, dated October 29, 1999. [Incorporated
          by reference to Exhibit 10.32 to the 1999 Form 10-K.]
(10.25)   Open-Ended Mortgage, Security Agreement and Assignment of Leases
          and Rents (Cumberland County, New Jersey) issued by IGI, Inc. to
          Fleet Capital Corporation, dated October 29, 1999. [Incorporated
          by reference to Exhibit 10.33 to the 1999 Form 10-K.]
(10.26)   Subordination Agreement by and between Fleet Capital Corporation
          and American Capital Strategies, Ltd., dated October 29, 1999.
          [Incorporated by reference to Exhibit 10.34 to the 1999 Form
          10-K.]
(10.27)   Note and Equity Purchase Agreement by and among American Capital
          Strategies, Ltd. and IGI, Inc., together with its subsidiaries,
          dated as of October 29, 1999. [Incorporated by reference to
          Exhibit 10.35 to the 1999 Form 10-K.]
(10.28)   Series A Senior Secured Subordinated Note issued by IGI, Inc.,
          together with its subsidiaries, to American Capital Strategies,
          Ltd., dated as of October 29, 1999. [Incorporated by reference to
          Exhibit 10.36 to the 1999 Form 10-K.]
(10.29)   Series B Senior Secured Subordinated Note issued by IGI, Inc.,
          together with its subsidiaries, to American Capital Strategies,
          Ltd., dated as of October 29, 1999. [Incorporated by reference to
          Exhibit 10.37 to the 1999 Form 10-K.]
(10.30)   Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock,
          issued to American Capital Strategies, Ltd. on October 29, 1999.
          [Incorporated by reference to Exhibit 10.38 to the 1999 Form
          10-K.]
(10.31)   Security Agreement issued by IGI, Inc., together with its
          subsidiaries, in favor of American Capital Strategies, Ltd., dated
          as of October 29, 1999. [Incorporated by reference to Exhibit
          10.39 to the 1999 Form 10-K.]
(10.32)   Trademark Security Agreement issued by IGI, Inc. in favor of
          American Capital Strategies, Ltd., dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.40 to the 1999 Form
          10-K.]
(10.33)   Trademark Security Agreement issued by Immunogenetics, Inc. in
          favor of American Capital Strategies, Ltd., dated as of October
          29, 1999. [Incorporated by reference to Exhibit 10.41 to the 1999
          Form 10-K.]
(10.34)   Trademark Security Agreement issued by Blood Cells, Inc. in favor
          of American Capital Strategies, Ltd., dated as of October 29,
          1999.  [Incorporated by reference to Exhibit 10.42 to the 1999
          Form 10-K.]
(10.35)   Trademark Security Agreement issued by IGEN, Inc. in favor of
          American Capital Strategies, Ltd., dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.43 to the 1999 Form
          10-K.]
(10.36)   Patent Security Agreement issued by IGI, Inc. in favor of American
          Capital Strategies, Ltd., dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.44 to the 1999 Form
          10-K.]
(10.37)   Patent Security Agreement issued by Immunogenetics, Inc. in favor
          of American Capital Strategies, Ltd., dated as of October 29,
          1999. [Incorporated by reference to Exhibit 10.45 to the 1999 Form
          10-K.]
(10.38)   Patent Security Agreement issued by Blood Cells, Inc. in favor of
          American Capital Strategies, Ltd., dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.46 to the 1999 Form
          10-K.]
(10.39)   Patent Security Agreement issued by IGEN, Inc. in favor of
          American Capital Strategies, Ltd., dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.47 to the 1999 Form
          10-K.]
(10.40)   Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in favor
          of American Capital Strategies, dated as of October 29, 1999.
          [Incorporated by reference to Exhibit 10.48 to the 1999 Form
          10-K.]
(10.41)   Open-Ended Mortgage, Security Agreement and Assignment of Leases
          and Rents (Cumberland County, New Jersey) issued by IGI, Inc. in
          favor of American Capital Strategies, Ltd., dated as of October
          29, 1999. [Incorporated by reference to Exhibit 10.49 to the 1999
          Form 10-K.]
(10.42)   Open-Ended Mortgage, Security Agreement and Assignment of Leases
          and Rents (Atlantic County, New Jersey) issued by IGI, Inc. in
          favor of American Capital Strategies, Ltd., dated as of October
          29, 1999. [Incorporated by reference to Exhibit 10.50 to the 1999
          Form 10-K.]
(10.43)   Pledge and Security Agreement issued by IGI, Inc. and
          Immunogenetics, Inc. in favor of American Capital Strategies,
          Ltd., dated as of October 29, 1999.  [Incorporated by reference to
          Exhibit 10.51 to the 1999 Form 10-K.]
(10.44)   Employment Agreement between IGI, Inc. and Manfred Hanuschek dated
          as of July 26, 1999.  [Incorporated by reference to Exhibit 10.52
          to the 1999 Form 10-K.]
(10.45)   Amendment to Employment Agreement between Manfred Hanuschek and
          IGI, Inc. dated March 9, 2000.  [Incorporated by reference to
          Exhibit 10.53 to the 1999 Form 10-K.]


  45


(10.46)   Employment Agreement between IGI, Inc. and Robert McDaniel dated
          as of September 1, 1999.  [Incorporated by reference to Exhibit
          10.54 to the 1999 Form 10-K.]
(10.47)   Pledge Agreement by and between Fleet Capital Corporation and IGI,
          Inc., dated October 29, 1999.  [Incorporated by reference to
          Exhibit 10.55 to the 1999 Form 10-K.]
(10.48)   Employment Agreement between IGI, Inc., and Rajiv Mathur dated
          February 22, 1999. [Incorporated by reference to Exhibit 10.56 to
          the 1999 Form 10-K.]
(10.49)   Amendment No. 1 to the Note and Equity Purchase Agreement by and
          between American Capital Strategies, Ltd. and IGI, Inc., together
          with its subsidiaries dated as of March 30, 2000.  [Incorporated
          by reference to Exhibit 10.57 to the 1999 Form 10-K.]
(10.50)   Amendment to Loan and Security Agreement by and between Fleet
          Capital Corporation and IGI, Inc., together with its subsidiaries
          dated as of April 12, 2000.  [Incorporated by reference to Exhibit
          10.58 to the 1999 Form 10-K.]
(10.51)   Amendment No. 2 to Note and Equity Purchase Agreement dated as of
          June 26, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
          Inc., Blood Cells, Inc., American Capital Strategies, Ltd. and ACS
          Funding Trust I.  [Incorporated by reference to Exhibit 99.1 to
          the Company's Report on Form 8-K filed July 23, 2000.]
(10.52)   Second Amendment to Loan and Security Agreement dated as of June
          23, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc.,
          Blood Cells, Inc. and Fleet Capital Corporation.  [Incorporated by
          reference to Exhibit 99.2 to the Company's Report on Form 8-K
          filed July 23, 2000.]
(10.53)   Termination Agreement dated December 10, 1998 between the Company
          and Glaxo Wellcome, Inc. [Incorporated by reference to Exhibit
          10.61 to the 1999 Form 10-K.]
(10.54)   Asset Purchase Agreement dated as of June 19, 2000 by and between
          the Buyer and the Company. [Incorporated by reference to Annex A
          to the Company's Definitive Proxy Statement on Schedule 14A
          effective September 1, 2000.]
(10.55)   Amendment and Waiver to Loan and Security Agreement dated as of
          October 31, 2000 between Fleet Capital Corporation and the Company
          and its affiliates.  [Incorporated by reference to Exhibit 10.1 to
          the Company's Quarterly Report on Form 10-Q for the quarter ended
          September 30, 2000, filed November 14, 2000.]
(10.56)   Letter Waiver dated November 9, 2000 between American Capital
          Strategies, Ltd. and the Company and its affiliates. [Incorporated
          by reference to Exhibit 10.2 to the Company's Quarterly Report on
          Form 10-Q for the quarter ended September 30, 2000, filed November
          14, 2000.]
(10.57)   Separation Agreement and General Release dated September 1, 2000
          between the Company and Paul Woitach.  [Incorporated by reference
          to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
          the quarter ended September 30, 2000, filed November 14, 2000.]
(10.58)   Certificate of Release and Termination of Contract dated as of
          March 1, 2001 between Genesis Pharmaceutical, Inc. and Tristrata
          Technology, Inc. [Incorporated by reference to Exhibit 10.58 to
          the 2000 Form 10-K.]
(10.59)   Manufacturing and Supply Agreement dated as of February 14, 2001
          among IGI, Inc., IGEN, Inc., Immunogenetics, Inc. and Genesis
          Pharmaceutical, Inc. [Incorporated by reference to Exhibit 10.59
          to the 2000 Form 10-K.]
(10.60)   Assignment of Trademark dated as of February 14, 2001 among IGI,
          Inc., IGEN, Inc, Immunogenetics, Inc. and Genesis Pharmaceutical,
          Inc. [Incorporated by reference to Exhibit 10.60 to the 2000 Form
          10-K.]
(10.61)   Supply Agreement dated as of March 6, 2001 between Corwood
          Laboratory, Inc. and IGI, Inc.  [Incorporated by reference to
          Exhibit 10.61 to the 2000 Form 10-K.]
(10.62)   License Agreement dated as of March 6, 2001 among IGI, Inc., IGEN,
          Inc., Immunogenetics, Inc. and its division EVSCO Pharmaceutical
          and Corwood Laboratory, Inc. [Incorporated by reference to Exhibit
          10.62 to the 2000 Form 10-K.]
(10.63)   Employment Agreement between IGI, Inc. and Domenic N. Golato dated
          as of August 31, 2000. [Incorporated by reference to Exhibit 10.63
          to the 2000 Form 10-K.]
(10.64)   IGI, Inc. 1991 Stock Option Plan.  [Incorporated by reference to
          the Company's Proxy Statement for the Annual Meeting held May 9,
          1991, File No. 001-08568, filed April 5, 1991.]
(10.65)   Fourth Amendment to Loan and Security Agreement dated as of
          February 28, 2001 by and among IGI, Inc., IGEN, Inc.,
          Immunogenetics, Inc., Blood Cells, Inc., and Fleet Capital
          Corporation.  [Incorporated by reference to Exhibit 99.1 to the
          Company's Report on Form 8-K filed April 20, 2001.]
(10.66)   Amendment No. 4 to Note and Equity Purchase  Agreement dated as of
          February 28, 2001 by and among IGI, Inc., IGEN, Inc.,
          Immunogenetics, Inc., Blood Cells, Inc., American Capital
          Strategies, Ltd. and ACS Funding Trust I.  [Incorporated by
          reference to Exhibit 99.2 to the Company's Report on Form 8-K
          filed April 20, 2001.]
(10.67)   Asset Purchase Agreement dated as of February 6, 2002 by and
          between Vetoquinol, U.S.A., Inc. and IGI, Inc. with Vetoquinol,
          S.A. a party thereto with respect to Article X thereof.
          [Incorporated by reference to Exhibit 99.1 to the Company's Report
          on Form 8-K filed February 7, 2002.]
(10.68)   Research and Development Agreement dated as of January 2, 2001
          between IGI, Inc. and Prime Pharmaceutical Corporation.
          [Incorporated by reference to Exhibit 10.68 on the Company's
          Annual Report on Form 10-K for fiscal year ended December 31,
          2001, File No. 001-08568, filed on March 15, 2002 ("the 2001 Form
          10-K").]
(10.69)   Manufacturing and Supply Agreement dated November 5, 2002 between
          IGI, Inc. and Desert Whale Jojoba Company, Inc. [Incorporated by
          reference to Exhibit 10.69 on the Company's Annual Report on Form
          10-K for the fiscal year ended December 31, 2002, File No.
          001-08568, filed March 10, 2003 ("the 2002 Form 10-K).]
(10.70)   Loan Agreement dated January 10, 2002 between IGI, Inc. and the
          New Jersey Economic Development Authority. [Incorporated by
          reference to Exhibit 10.70 to the 2002 Form 10-K]
(10.71)   Promissory Note dated January 10, 2002 by IGI, Inc. to the New
          Jersey Economic Development Authority. [Incorporated by reference
          to Exhibit 10.71 to the 2002 Form 10-K]


  46


(10.72)   Mortgage and Security Agreement and Fixture Filing dated January
          10, 2002 between IGI, Inc. and the New Jersey Economic
          Development Authority. [Incorporated by reference to Exhibit
          10.72 to the 2002 Form 10-K]
(10.73)   Contract of Sale for Real Estate dated October 21, 2001 between
          IGI, Inc. and Poultry Investors, LLC. [Incorporated by reference
          to Exhibit 10.73 to the 2002 Form 10-K]
(10.74)   Addendum dated November 14, 2001 to Contract of Sale for Real
          Estate dated October 21, 2001 between IGI, Inc. and Poultry
          Investors, LLC. [Incorporated by reference to Exhibit 10.74 to
          the 2002 Form 10-K]
(10.75)   Partial Mortgage Release dated February 20, 2002 by Fleet Capital
          Corporation for real property designated on the municipal tax map
          for the Township of Buena Vista, New Jersey as Lot 23.01, Block
          5501. [Incorporated by reference to Exhibit 10.75 to the 2002
          Form 10-K]
(10.76)   Partial Mortgage Release dated February 22, 2002 by American
          Capital Strategies, Ltd. for real property designated on the
          municipal tax map for the Township of Buena Vista, New Jersey as
          Lot 23.01, Block 5501. [Incorporated by reference to Exhibit
          10.76 to the 2002 Form 10-K]
(10.77)   Amendment No. 5 dated May 30, 2002 to Note and Equity Agreement
          by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc., Blood
          Cells, Inc. and American Capital Strategies, Ltd. [Incorporated
          by reference to Exhibit 10.77 to the 2002 Form 10-K]
(10.78)   Termination and Release of Pledge and Security Agreement dated
          May 31, 2002 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
          Inc., Blood Cells, Inc. and American Capital Strategies, Ltd.
          [Incorporated by reference to Exhibit 10.78 to the 2002 Form
          10-K]
(10.79)   Termination and Release of Patent Security Agreement (United
          States Patents) dated May 30, 2002 between American Capital
          Strategies, Ltd. and IGI, Inc. [Incorporated by reference to
          Exhibit 10.79 to the 2002 Form 10-K]
(10.80)   Termination and Release of Patent Security Agreement (United
          States Patents) dated May 30, 2002 between American Capital
          Strategies, Ltd. and Blood Cells, Inc. [Incorporated by reference
          to Exhibit 10.80 to the 2002 Form 10-K]
(10.81)   Termination and Release of Patent Security Agreement (United
          States Patents) dated May 30, 2002 between American Capital
          Strategies, Ltd. and IGEN, Inc. [Incorporated by reference to
          Exhibit 10.81 to the 2002 Form 10-K]
(10.82)   Termination and Release of Patent Security Agreement (United
          States Patents) dated May 30, 2002 between American Capital
          Strategies, Ltd. and Immunogenetics, Inc. [Incorporated by
          reference to Exhibit 10.82 to the 2002 Form 10-K]
(10.83)   Termination and Release of Trademark Security Agreement dated May
          30, 2002 between American Capital Strategies, Ltd. and IGI, Inc.
          [Incorporated by reference to Exhibit 10.83 to the 2002 Form
          10-K]
(10.84)   Termination and Release of Trademark Security Agreement dated May
          30, 2002 between American Capital Strategies, Ltd. and IGEN, Inc.
          [Incorporated by reference to Exhibit 10.84 to the 2002 Form
          10-K]
(10.85)   Termination and Release of Trademark Security Agreement dated May
          30, 2002 between American Capital Strategies, Ltd. and
          Immunogenetics, Inc. [Incorporated by reference to Exhibit 10.85
          to the 2002 Form 10-K]
(10.86)   Termination and Release of Trademark Security Agreement dated May
          30, 2002 between American Capital Strategies, Ltd. and Blood
          Cells, Inc.[Incorporated by reference to Exhibit 10.86 to the
          2002 Form 10-K]
(10.87)   Termination and Release of Trademark Security Agreement dated May
          31, 2002 by and among Wachovia Bank, N.A. and IGI, Inc., IGEN,
          Inc., Immunogenetics, Inc., Micro-Pak, Inc. and Micro Vescular
          Systems, Inc. [Incorporated by reference to Exhibit 10.87 to the
          2002 Form 10-K]
(10.88)   Termination and Release of Trademark Security Agreement dated May
          31, 2002 between Fleet Capital Corporation and IGI, Inc.
          [Incorporated by reference to Exhibit 10.88 to the 2002 Form
          10-K]
(10.89)   Termination and Release of Trademark Security Agreement dated May
          31, 2002 between Fleet Capital Corporation and Immunogenetics,
          Inc. [Incorporated by reference to Exhibit 10.89 to the 2002 Form
          10-K]
(10.90)   Termination and Release of Trademark Security Agreement dated May
          31, 2002 between Fleet Capital Corporation and IGEN, Inc.
          [Incorporated by reference to Exhibit 10.90 to the 2002 Form
          10-K]
(10.91)   Termination and Release of Patent Security Agreement dated May
          31, 2002 between Fleet Capital Corporation and IGI, Inc.
          [Incorporated by reference to Exhibit 10.91 to the 2002 Form
          10-K]
(10.92)   Termination and Release of Patent Security Agreement dated May
          31, 2002 between Fleet Capital Corporation and IGEN, Inc.
          [Incorporated by reference to Exhibit 10.92 to the 2002 Form
          10-K]
(10.93)   Manufacturing and Supply Agreement dated May 31, 2002 between
          IGI, Inc. and IGEN, Inc. (collectively Suppliers) and Vetoquinol,
          USA, Inc. (Purchaser). [Incorporated by reference to Exhibit
          10.93 to the 2002 Form 10-K]
(10.94)   Technological Rights Agreement dated May 31, 2002 between IGI,
          Inc. and IGEN, Inc. (collectively Sellers) and Vetoquinol, USA,
          Inc. (Purchaser). [Incorporated by reference to Exhibit 10.94 to
          the 2002 Form 10-K]
(10.95)   Supplemental Agreement dated May 31, 2002 between IGI, Inc.
          (Seller) and Vetoquinol, USA, Inc. (Buyer). [Incorporated by
          reference to Exhibit 10.95 to the 2002 Form 10-K]
(10.96)   Discharge of Mortgage dated May 29, 2002 by Fleet Capital
          Corporation. [Incorporated by reference to Exhibit 10.96 to the
          2002 Form 10-K]
(10.97)   Partial Release of Mortgage dated May 31, 2002 by American
          Capital Strategies, Ltd. for real property designated on the
          municipal tax map of the Borough of Buena as Lot 1, Block 205.
          [Incorporated by reference to Exhibit 10.97 to the 2002 Form
          10-K]
(10.98)   Amendment dated March 19, 2002, to License Agreement by and among
          Ethicon, Inc. and IGI, Inc., IGEN, Inc. and Immunogenetics, Inc.
          [Incorporated by reference to Exhibit 10.98 to the 2002 Form
          10-K]
(10.99)   Product Development Agreement dated November 10, 2003, between
          Pure Energy Corporation d/b/a/ Pure Energy of America, Inc. and
          IGI, Inc. [Incorporated by reference to Exhibit 10.99 on the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 31, 2003, File No. 001-08568, filed April 14, 2004 ("the
          2003 Form 10-K).]
(10.100)  Severance Agreement dated effective as of August 15, 2003,
          between John F. Ambrose and IGI, Inc. [Incorporated by reference
          to Exhibit 10.100 to the 2003 Form 10-K]
(10.101)  Employment Agreement dated September 26, 2003, between Michael F.
          Holick, MD, PhD and IGI, Inc. [Incorporated by reference to
          Exhibit 10.101 to the 2003 Form 10-K]
(10.102)  Severance Agreement dated effective as of January 9, 2004,
          between Garry Hardwick and IGI, Inc. [Incorporated by reference
          to Exhibit 10.102 to the 2003 Form 10-K]
(10.103)  License Agreement effective December 24, 2003, by and among
          Michael F. Holick, MD, PhD, A&D Bioscience, Inc. and IGI, Inc.
          [Incorporated by reference to Exhibit 10.103 to the 2003 Form
          10-K]
(10.104)  License Agreement dated February 9, 2004, between Universal
          Chemical Technologies, Inc. and IGI, Inc. [Incorporated by
          reference to Exhibit 10.104 to the 2003 Form 10-K]
(10.105)  Contract for Sale of Real Estate dated October 22, 2003, between
          CPB, Inc. ("Buyer") and IGI, Inc. ("Seller").[Incorporated by
          reference to Exhibit 10.105 to the 2003 Form 10-K]
(10.106)  Cancellation of Mortgage and Security Agreement and Fixture
          Filing dated February 10, 2004 by the New Jersey Economic
          Development Authority for real property real property and
          premises situated, lying and being known as 701 Harding Highway,
          Buena, Atlantic Country, New Jersey, designated on the Municipal
          Tax Map of the Borough of Buena as Block 205, Lot 1.
          [Incorporated by reference to Exhibit 10.106 to the 2003 Form
          10-K]


  47


(10.107)  Agreement for Development Services dated March 27, 2003, between
          Chattem, Inc. and IGI, Inc. [Incorporated by reference to Exhibit
          10.107 to the 2003 Form 10-K]
(10.108)  Material Transfer Agreement dated December 1, 2003, between The
          Procter & Gamble Company and IGI, Inc. [Incorporated by
          reference to Exhibit 10.108 to the 2003 Form 10-K]
(10.109)  Sublicense Agreement between IGI, Inc. and Tarpan Therapeutics,
          Inc. dated April 19, 2004 [Incorporated by reference to Exhibit
          10.109 to the Company's Quarterly Report on Form 10-Q for the
          quarter ended March 31, 2004, filed May 14, 2004]
(10.110)  Severance agreement between IGI, Inc. and Domenic N. Golato,
          Chief Financial Officer dated June 30, 2004. [Incorporated by
          reference to Exhibit 10.110 to the Company's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2004, filed August 13,
          2004.]
(10.111)  Sublicense Agreement between IGI, Inc. and University of
          Massachusetts dated July 27, 2004 [Incorporated by reference to
          Exhibit 10.111 to the Company's Quarterly Report on Form 10-Q for
          the quarter ended June 30, 2004, filed August 13, 2004.]
(10.112)  Amendment of the supply and license agreement between IGI, Inc.
          and Estee Lauder, Inc. [Incorporated by reference to Exhibit 10.1
          to the Company's Report on Form 8-K filed November 24, 2004.]
(21)      List of Subsidiaries. [Incorporated by reference to Exhibit 21 to
          the 1999 Form 10-K.]
*(23.1)   Consent of KPMG LLP.
*(23.2)   Consent of Amper, Politziner & Mattia P.C.
*(31.1)   Certification of the Chairman and Chief Executive Officer
          Pursuant to Rule 13a-14(a) under the Securities Exchange Act of
          1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
          Act of 2002.
*(31.2)   Certification of the Vice President of Finance Pursuant to Rule
          13a-14(a) under the Securities Exchange Act of 1934, as adopted
          pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*(32.1)   Certification of the Chairman and Chief Executive Officer
          Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
          Section 906 of the Sarbanes-Oxley Act of 2002.
*(32.2)   Certification of the Vice President of Finance Pursuant to 18
          U.S.C. Section 1350, as adopted pursuant to Section 906 of the
          Sarbanes-Oxley Act of 2002.

* Filed herewith.


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