UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

____________________

 

FormFORM 10-Q

 

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTEXCHANGEACT OF 1934

For the quarterly period ended September 30, 2005 orMarch 31, 2008

  

[   ]

TRANSITION REPORT PURSUANT TOUNDER SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  
 

For the transition period from _________________ to__________________from______________________ to _______________________

 

Commission File Number001-08568

____________________

 

IGI Laboratories, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

01-0355758

(State or other Jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

105 Lincoln Avenue

Buena, New Jersey

08310

(Address of Principal Executive Offices)

(Zip Code)

(856)697-1441

(Registrant's telephone number, including area code)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)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]      No [ Yes[X]      No[   ]

      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 Exchange Act)Act). Yes[   ]      No[X]

Yes [   ]      No [X]

      The number of shares outstanding of the issuer's classcommon stock is 14,880,478 shares, net of commontreasury stock, as of the latest practicable date:May 4, 2008.

<PAGE>

PART I

FINANCIAL INFORMATION

 

Common Shares Outstanding at November 2, 2005 was 12,118,780.

<PAGE>

ITEM 1.    Financial Statements

 

PART I   FINANCIAL INFORMATION

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share information)

(Unaudited)

 

Three months ended

Nine months ended

September 30,

September 30,

2005

2004

2005

2004

Revenues:

  Sales, net

$

567 

$

383 

$

1,665 

$

2,023 

  Licensing and royalty income

172 

199 

674 

744 

      Total revenues

739 

582 

2,339 

2,767 

Cost and expenses:

  Cost of sales

572 

244 

1,339 

930 

  Selling, general and administrative expenses

429 

320 

1,202 

1,406 

  Litigation settlement costs

100 

- 

- 

- 

  Product development and research expenses

230 

241 

730 

1,504 

Operating loss

(592)

(223)

(932)

(1,073)

Interest expense, net

3 

6 

8 

21 

Income (loss) on sale of investment securities

5 

(1)

(72)

(1)

Other (loss) income, net

(31)

1 

1 

1 

Loss from operations before provision

 for income taxes

(615)

(217)

(995)

(1,052)

Benefit (provision) for income taxes

- 

(2)

6 

(6)

Net Loss

$

(615)

$

(219)

$

(989)

$

(1,058)

Basic and Diluted Earnings (Loss) per

 Common Share

$

(.05)

$

(.02)

$

(.08)

$

(.09)

Weighted Average of Common Stock and

 Common Stock Equivalents Outstanding

  Basic and diluted

12,113,256 

11,581,780 

11,886,263 

11,536,337 

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

 

Three months ended March 31,

 

 

2008

 

2007

 

 

      

Revenues:

     

    Product sales

$

1,300 

 

$

604 

    Research and development income

 

65 

  

77 

    Licensing and royalty income

 

135 

  

140 

 

 

        Total revenues

 

1,500 

  

821 

      

Costs and expenses:

     

    Cost of sales

 

681 

  

516 

    Selling, general and administrative expenses

 

663 

  

585 

    Product development and research expenses

 

113 

  

111 

 

 

Operatingincome (loss)

 

43 

  

(391)

Interest expense, net

 

(3)

  

(19)

 

 

      
      

Net income (loss)

$

40 

 

$

(410)

 

 

      
      

Basicincome (loss) per share

$

.00 

 

$

(.03)

Dilutedincome (loss) per share

$

.00 

 

$

(.03)

      

Weighted AverageShares of Common Stock and Common Stock Equivalents Outstanding:

     
      

Basic

 

14,831,880 

  

12,632,604 

Diluted

 

15,731,303 

  

12,632,604 

      

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

<PAGE>  2

IGI, INC. AND SUBSIDIARIES

IGILABORATORIES, INC. AND SUBSIDIARIES

IGILABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

(in thousands, except share and per share information)

(in thousands, except share and per share information)

September

December

30, 2005

31, 2004

March 31,
2008

 

December 31,
2007*

(unaudited)

  

(unaudited)

 

    

ASSETS

    

Current assets:

    

Cash and cash equivalents

$

196 

$

380 

 

$      603 

 

$      914 

Restricted cash

50 

50 

Marketable securities

- 

377 

Accounts receivable, less allowance for doubtful accounts

    

of $11 and $10 in 2005 and 2004, respectively

339 

306 

of $28 and $48 in 2008 and 2007, respectively

 

875 

 

666 

Licensing and royalty income receivable

113 

155 

 

126 

 

356 

Inventories

218 

247 

 

531 

 

376 

Prepaid expenses and other current assets

46 

8 

 

129 

 

93 

 

 

Total current assets

962 

1,523 

 

2,264 

 

2,405 

Property, plant and equipment, net

3,136 

3,168 

 

2,355 

 

2,410 

Other assets

28 

39 

Restricted cash - long term

 

50 

 

50 

Other assets - long term

 

18 

 

- 

License fee, net

 

775 

 

800 

 

 

Total assets

$

4,126 

$

4,730 

 

$   5,462 

 

$   5,665 

 

 

    

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

    

Note payable - related party

 

$      250 

 

$      500 

Accounts payable

$

255 

$

157 

 

486 

 

282 

Accrued payroll

13 

16 

Other accrued expenses

281 

243 

Income taxes payable

- 

5 

Deferred income

112 

180 

Accrued expenses

 

345 

 

419 

Deferred income, current

 

8 

 

219 

 

 

Total current liabilities

661 

601 

 

1,089 

 

1,420 

Deferred income

73 

121 

Deferred income, long term

 

43 

 

45 

Other long term liabilities

 

31 

 

60 

 

 

Total liabilities

734 

722 

 

1,163 

 

1,525 

 

 

    

Commitments and contingencies

Stockholders' equity:

    

Common stock $.01 par value, 50,000,000 shares

authorized; 14,084,520 and 13,547,520 shares issued

in 2005 and 2004, respectively

141 

135 

Accumulated other comprehensive loss

- 

(32)

Series A Convertible Preferred stock, $.01 par value,

    

100 shares authorized; 50 shares issued and outstandingas of

    

March 31, 2008 and December 31, 2007, respectively;

    

Liquidation preference- $500,000

 

500 

 

500 

Common stock, $.01 par value, 50,000,000 shares

    

authorized; 16,799,202 and 16,795,202 shares issued

    

and outstanding as of March 31, 2008 and

    

December 31, 2007, respectively

 

168 

 

168 

Additional paid-in capital

24,802 

24,467 

 

27,530 

 

27,411 

Accumulated deficit

(20,156)

(19,167)

 

(22,504)

 

(22,544)

Less treasury stock at cost, 1,965,740 shares

in 2005 and 2004

(1,395)

(1,395)

Less treasury stock, 1,965,740 shares at cost

 

(1,395)

 

(1,395)

 

 

Total stockholders' equity

3,392 

4,008 

 

4,299 

 

4,140 

 

 

Total liabilities and stockholders' equity

$

4,126 

$

4,730 

 

$   5,462 

 

$   5,665 

 

 

    

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

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

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

* Derived from the audited December 31, 2007 financial statements

* Derived from the audited December 31, 2007 financial statements

<PAGE>  3

IGI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

Nine months ended

September 30,

2005

2004

Cash flows from operating activities:

Net (loss)

$

(989)

$

(1,058)

Reconciliation of net (loss) to net cash used in operating activities:

  Provision for loss on accounts receivable and inventory

1 

- 

  Depreciation and amortization

225 

206 

  Loss on sale of investment securities

72 

1 

  Recognition of deferred income

(126)

(119)

  Stock option compensation expense

2 

537 

Changes in operating assets and liabilities:

  Accounts receivable

(34)

148 

  Inventories

29 

(12)

  Licensing and royalty income receivable

42 

(142)

  Prepaid expenses and other assets

(38)

66 

  Accounts payable and accrued expenses

18 

(38)

  Income taxes payable

(5)

2 

  Deferred revenue

10 

- 

Net cash used in operating activities

(793)

(409)

Cash flows from investing activities:

  Capital expenditures

(68)

(581)

  Purchase of marketable securities

- 

(110)

  Proceeds from sale of marketable securities

337 

300 

Net cash provided by (used in) investing activities

269 

(391)

Cash flows from financing activities:

  Proceeds from exercise of common stock options and purchase

   of common stock

340 

222 

Net cash provided by financing activities

340 

222 

Net (decrease) in cash and cash equivalents

(184)

(578)

Cash and cash equivalents at beginning of period

380 

821 

Cash and cash equivalents at end of period

$

196 

$

243 

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

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

  
 

Three months ended March 31,

 

 

2008

 

2007

 

 

      

Cash flows from operating activities:

     

    Netincome (loss)

$

40 

 

$

(410)

    Reconciliation of net income (loss) to net cash used in operating

     

      activities:

     

      Depreciation and amortization

 

61 

  

57 

      Amortization of license fee

 

25 

  

25 

      Stock based compensation expense

 

115 

  

81 

    Changes in operating assets and liabilities:

     

      Accounts receivable

 

(209)

  

(236)

      Inventories

 

(155)

  

13 

      Deferred income

 

(213)

  

(15)

      Licensing and royalty income receivable

 

230 

  

8 

      Prepaid expenses and other assets

 

(55)

  

(67)

      Accounts payable and accrued expenses

 

103 

  

(185)

 

 

      

        Net cash used in operating activities

 

(58)

  

(729)

 

 

      

Cash flows from investing activities:

     

    Capital expenditures

 

(6)

  

(94)

    Proceeds from deposit on sale of assets of discontinued operations

 

- 

  

130 

 

 

      

        Net cash (used in) provided by investing activities

 

(6)

  

36 

 

 

      

Cash flows from financing activities:

     

    Borrowing from note payable - related party

 

- 

  

500 

    Repayment of notes payable - related party

 

(250)

  

(1,145)

    Repayment of note payable

 

- 

  

(306)

    Proceeds from exercise of common stock options

 

3 

  

- 

    Proceeds from private placement of common stock, net of expenses

 

- 

  

1,378 

 

 

      

        Net cash (used in) provided by financing activities

 

(247)

  

427 

 

 

      

Net decrease in cash and equivalents

 

(311)

  

(266)

Cash and equivalents at beginning of period

 

914 

  

619 

 

 

Cash and equivalents at end of period

$

603 

 

$

353 

 

 

      

Supplemental cash flow information:

     

    Cash payments for interest

$

10 

 

$

169 

    Cash payment for taxes

 

3 

  

- 

      

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

<PAGE>  4

IGILABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

      The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Article8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principals for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. The condensed consolidated balance sheet as of Decem ber 31, 2007 has been derived from those audited consolidated financial statements. Operating results for the three month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

1.

Basis of PresentationOrganization

On May 7, 2008, the shareholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc.

IGI Laboratories, Inc. ("IGI", "IGI, Inc." or the "Company"), a Delaware corporation, operating in the State of New Jersey, is primarily engaged in the production and marketingpackaging of cosmetics, and skin care, and consumer products. IGI's Consumer Products business is primarily focused on the continued commercial use of the Novasome® microencapsulationmicro 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.

In the start of the second quarter of 2005, the Company began production in our metal finishing division, utilizing the patented UltraCem technology. However, recently we have been informed by potential new customers of the consumer division, that they are not comfortable with the metal finishing division being housed in the same facility as our consumer products division. In light of this new information, the Company has decided to utilize all the remaining chemistry we have in house for the metal finishing operation and then cease operations at our corporate manufacturing facility. We will continue to perform research and development work for this division at the UCT facility in Florida. Once purchase orders come in for this division, management will decide whether to move the metal finishing division to another facility or sell the division to a potential buyer. The Company does not anticipate havingis alsonowproviding product development and analytical services to record an impairment loss as a result of this recent devel opment.

The accompanying consolidated financial statements have been prepared by IGI without audit, pursuantits customersin addition to the rulesits manufacturing and regulations of the Securities and Exchange Commission ("SEC"), and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 10-K Annual Report"). The results of operations for the nine month period ended September 30, 2005 are not necessarily indicative of the results for the entire year ending December 31, 2005.

2.

Marketable Securities

Marketable securities at December 31, 2004 consist of an investment in a short term bond mutual fund and an investment in securities. The Company currently classifies all marketable securities as available-for-sale, in accordance with Statement of Financial Accounting Standards (SFAS) 115. Securities classified as available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of accumulated other comprehensive loss within stockholders' equity. Realized gains and losses on the sale of securities available-for-sale are determined using the specific-identification method.

The activity of the available-for-sale marketable securities is as follows (amounts in thousands):

Gross

Gross

As of

Amortized

Unrealized

Unrealized

Fair

Carrying

Dec 31, 2004:

Cost

Gains

Losses

Value

Amount

Mutual funds

$297

$  -

$  (4)

$295

$295

Securities

  110

-

  (28)

  82

  82

$407

$  -

$(32)

$377

$377

Sales of available-for-sale securities for the nine months ended September 30, 2005 were as follows:

Proceeds from sales

$337 

Gross realized gains

- 

Gross realized losses

(72)

<PAGE>  5

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

In accordance with SFAS 115 and EITF 03-1, for individual securities classified as available-for-sale, a company shall determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings (or accounted for as a realized loss). In the second quarter 2005 we recorded an impairment loss of $77,000 on an investment in securities. In the third quarter 2005 we sold this security and recorded a realized gain of $10,000.

3.

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Inventories at September 30, 2005 and December 31, 2004 consist of:

September 30, 2005

December 31, 2004

(amounts in thousands)

Finished goods

$  11

$  42

Raw materials

  207

  205

Total

$218

$247

4.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised)Share-Based Payment("SFAS No. 123R"), which is a revision of Statement No. 123,Accounting for Stock-Based Compensation("SFAS No. 123"). SFAS No. 123R supersedes APB No. 25,Accounting for Stock Issued to Employees ("APB No. 25"), and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123R must be adopted in the first annual financial reporting period beginning after December 15, 2005. The Company will adopt SFAS No. 123R on January 1, 20 06.

SFAS No. 123R permits public companies to adopt its requirements using one of two methods:

A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.

Or a "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either for (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company plans to adopt SFAS No. 123R using the modified prospective method.

The Company currently accounts for share-based payments to employees using the intrinsic value method permitted by APB No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R's fair value method will have a significant impact on the Company's results of operations, although it will have no impact on the Company's overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share below. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather t han as an operating cash flow as required under current literature.

<PAGE>  6

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.

If the Company applied the fair value principles of SFAS No. 123, for its options, its net loss for the nine months ending September 30, 2005 and 2004 would have increased as follows:

Three months

Nine months ended

ended September 30,

September 30,

2005

2004

2005

2004

(in thousands, except per share information)

Net (loss) - as reported

$

(615)

$

(219)

$

(989)

$

(1,058)

Deduct: Total stock-based employee

 compensation expense determined

 under the fair-value based method

 (net of tax $0)

(31)

(34)

(105)

(136)

Net (loss) - pro forma

$

(646)

$

(253)

$

(1,094)

$

(1,194)

(Loss) per share - as reported

  Basic and diluted

$

(.05)

$

(.02)

$

(.08)

$

(.09)

(Loss) per share - pro forma

  Basic and diluted

$

(.05)

$

(.02)

$

(.09)

$

(.10)

5.

Legal and U.S. Regulatory Proceedings

Gallo Matter

As previously reported by the Company in its historical filings with the 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, th e 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 invest igation 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.

<PAGE>  7

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

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 and Chairman, Frank Gerardi, in a continued effort to initiate settlement discussions. As of September 30, 2005, 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

<PAGE>  8

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

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.

On July 8, 2004, Novavax filed a motion for summary judgment on all claims asserted under Gallo's First Amended Complaint (referred to as "the SJ Motion"). As of the filing date hereof, the SJ Motion is pending subject to filing of Gallo's opposition and any reply thereto by Novavax. The court has not yet scheduled a hearing date for the SJ Motion. In the event the court denies the SJ Motion, the Company believes that there is a substantial likelihood that Novavax will re-file its Third Party Complaint against IGI for which coverage was previously denied by its insurance carriers.

As of November 8, 2005, the Third Party Complaint against IGI has not been re-filed.

Other Matters

On April 6, 2000, officials of the New Jersey Department of Environmental Protection ("DEP") inspected the Company's storage site in Buena, New Jersey, and issued Notices of Violation ("NOV") 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. In September 2005, the DEP reached a settlement with the Company's Storage site owner, Brunozzi Transfer & Truck Rental Inc ("Brunozzi"), for $30,000 for which the Company agreed to indemnify them for any fees incurred as a result of their litigation. This amount was accrued as of the September 30, 2005 balance sheet. The Company has not reached a settlement with the DEP and our NOV accrual remains on our books.

On March 2, 2001, the Company discovered the presence of environmental contamination resulting from an unknown heating oil leak at its Companion Pet Products manufacturing site. The Company immediately notified the DEP 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 originally estimated the cost for the cleanup 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, 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 through 2009. 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 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. In October 2005, IGI offered a settlement of $70,000 to Mr. Borz, which he accepted. This amount has been accrued in our September 2005 balance sheet.

6.

License Agreements

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 technology for the Company and the Company has had capital expenditures of approximately $307,000 in building improvements and $606,000 in machinery and equipment through September 30, 2005, in order to set up the operations. The Company hired two employees to oversee the facility operations, in which these costs were expensed in costs of goods sold. The Company has an exclusive license within a 150 mile radius of its facility for commercial and military applications.

However, recently we have been informed by potential new customers of the consumer division, that they are not comfortable with the metal finishing division being housed in the same facility as our consumer products division. In light of this new information, the Company has decided to utilize all the remaining chemistry we have in house for the metal finishing operation and then cease operations at our corporate manufacturing facility. We will continue to perform research and development work for this division at the UCT facility in Florida. Once purchase orders come in for this division, management will decide whether to move the metal finishing division to another facility or sell the division to a potential buyer. The Company does not anticipate having to record an impairment loss as a result of this recent development.

<PAGE>  9

IGI, INC. AND SUBSIDIARIES

 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Thefollowing discussion and analysis may contain forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed below or in the Company's 2004 10-K Annual Report that could cause actual results to differ materially from the Company's expectations. See "Factors Which May Affect Future Results" below and in the 2004 10-K Annual Report. Readers are cautioned not to place undue reliance on any forward-looking statements, as they reflect management's analysis as of the date hereof. The Company undertakes no obligation to release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated events.

 

Recent Events

 

On August 10, 2005, the Company granted Frank Gerardi, the Company's Chairman and Chief Executive Officer a Severance Agreement (the "Agreement") should he be terminated from the Company. Upon the occurrence of a Termination Event (as defined in the Agreement), the Company will pay to Mr. Gerardi: (i) $150,000, payable in a lump sum, or in regular payroll payments until paid in full; (ii) a lump sum payment for any unused accrued vacation days for that calendar year; and (iii) continued coverage under the Company's existing health and benefit plans for a one (1) year period from the date that written notice of terminationis given.

 

Results of Operations

 

Three months ended September 30, 2005 compared to September 30, 2004

 

Revenues (in thousands):

 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Product Sales

 

$567

 

$383

 

$184

 

 48%

Royalty Revenue

 

  172

 

  199

 

    (27)

 

-14%

  

 

 

 

    Total Revenues

 

$739

 

$582

 

$157

 

 27%

  

 

 

 

 

The increase in product sales relates to an increase in sales to Vetoquinol, USA, Genesis, Chattem, and shipments made to Infusion Biotechnologies, a new customer, offset by a decrease in product sales from Estee Lauder. The decrease in royalty revenue was related to a decline in royalties from J&J in 2005 offset by an increase in Estee Lauder royalty.

 

Costs and expenses (in thousands):

 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Cost of sales

 

$   572

 

$244

 

$328

 

134%

 

Selling, general and administrative

 

     429

 

  320

 

  109

 

34%

 

Litigation settlement fees

 

     100

 

-

 

  100

 

100%

 

Product development and research

 

     230

 

  241

 

    (11)

 

-5%

 
  

 

 

 

    Total costs and expenses

 

$1,331

 

$805

 

$526

 

65%

 
  

 

 

 

 

As a percentage of product sales, cost of sales was 101% for the quarter ended September 30, 2005 and 64% for the quarter ended September 30, 2004. In the third quarter of 2005, the Company had sales of a product with a negative gross margin that resulted from unforeseen changes from a third-party contractor of the product. We also had a low overhead absorption from low sales volumes for the quarter. In addition, batches have been completed for the metal finishings division, however, no sales have been generated to offset the costs related to that division and those costs are included with costs of goods sold. The costs related to the metal finishing division amounted to $55,000 for operations and $26,000 in materials costs for the quarter ended September 30, 2005. All of these factors together created a higher cost of sales for the quarter ended September 30, 2005.

 

As a percentage of revenues, selling, general and administrative expenses were 72% of revenues in the third quarter of 2005 compared to 55% for the third quarter of 2004. The increase in expenses was a result of higher legal fees of $55,000 and sales & marketing expenses of $50,000 relating to the metal finishing divisions in the third quarter 2005 that were not included in third quarter of 2004.

<PAGE>  10

IGI, INC. AND SUBSIDIARIES

 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
               (Continued)

 

Litigation settlement fees were fees related to the law suit with Mr. Ted Borz, who owns the property adjacent to the property on which the oil spill occurred, in which we offered a $70,000 settlement which he accepted and a fees related to $30,000 settlement offered by the DEP to Brunozzi, which IGI will indemnify Brunozzi for that amount in full. Both of these amounts were accrued as of September 30, 2005.

 

Net loss (in thousands):

 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Net loss

 

$(615)

 

$(219)

 

$(396)

 

-180%

Net loss per share

 

   (.05)

 

   (.02)

 

   (.03)

 

-150%

  

 

 

 

         

The increase in net loss related to higher cost of sales and higher selling, general and administration costs for the quarter ended September 30, 2005.

 

Nine months ended September 30, 2005 compared to September 30, 2004

 

Revenues (in thousands):

 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Product Sales

 

$1,665

 

$2,023

 

$(358)

 

-18%

Royalty Revenue

 

     674

 

     744

 

    (70)

 

  -9%

  

 

 

 

    Total Revenues

 

$2,339

 

$2,767

 

$(428)

 

-15%

  

 

 

 

         

The decrease in product sales is primarily due to the decrease in product sales to Estee Lauder offset by an increase in sales to Chattem, Infusion Biotechnologies, a new customer, and Albrian. The decrease in royalty revenues is due to the decrease in revenue from J&J offset by the royalty revenue from Estee Lauder in 2005 and a $300,000 royalty payment received from Tarpan Therapeutics (now Manhattan Pharmaceuticals) in 2004.

 

Costs and expenses (in thousands):

 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Cost of sales

 

$1,339

 

$   930

 

$ 409 

 

 44%

Selling, general and administrative

 

  1,202

 

  1,406

 

  (204)

 

-15%

Product development and research

 

     730

 

  1,504

 

  (774)

 

-51%

  

 

 

 

    Totals costs and expenses

 

$3,271

 

$3,840

 

$(569)

 

-15%

  

 

 

 

 

As a percentage of product sales, cost of sales was 80% for the nine months ended September 30, 2005 and 46% for the nine months ended September 30, 2004. The increase in cost of sales is due to sales of lower gross margin products in 2005, sales of a negative gross margin product and low overhead absorption. In addition, sample batches have been completed for the metal finishing division; however, no significant sales have been generated to offset the costs related to that division. The costs related to the metal finishing division amounted to $181,000 for the nine month period ended September 30, 2005.

 

As a percentage of revenues, selling, general and administrative expenses were 51% of revenues for the nine months ended September 30, 2005 compared to 51% for the nine months ended September 30, 2004. Overall, expenses decreased primarily due to a severance accrual of $203,000 recorded in the second quarter 2004.

 

The decrease in product development and research expenses was a result of the Company recording a $548,000 non cash expense related to the SFAS 123 value of 325,000 stock options granted to Dr. Holick and a $232,000 cash expense paid to Dr. Holick in accordance with his agreement in the second quarter of 2004.

<PAGE>  11

IGI, INC. AND SUBSIDIARIES

 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
               (Continued)

 

Net loss (in thousands):

 
 
  

2005

 

2004

 

$ Change

 

% Change

  

 

 

 

         

Net loss

 

$(989)

 

$(1,058)

 

69

 

  7%

Net loss per share

 

   (.08)

 

      (.09)

 

.01

 

11%

  

 

 

 

 

The decrease in net loss relates to the stock option expenses recorded in 2004 offset by the increase cost of sales for 2005.

 

Liquidity and Capital Resources

 

The Company's operating activities used $793,000 of cash during the nine months ended September 30, 2005 compared to $409,000 used in the comparable period of 2004. This use of cash is directly related to the net loss for the Company.

 

The Company investing activities provided $269,000 of cash in the nine months ended September 30, 2005 compared to $391,000 used in investing activities in the first nine months of 2004. The money used represents capital expenditures to purchase machinery and equipment related to the electroless nickel boride finishing operations in 2004 and proceeds were provided from sales of investment securities in 2005.

 

The Company's financing activities provided $340,000 of cash in the nine months ended September 30, 2005 compared to $222,000 provided by financing activities in the nine months ended September 30, 2004. The cash provided in 2005 and 2004 represents proceeds from the exercise of stock options.

 

The Company's principal sources of liquidity are cash from operations, cash and cash equivalents and marketable securities. Management believes that existing cash and cash equivalents and cash flows from operations will be sufficient to meet the Company's foreseeable cash needs for at least the next year. In addition, two shareholders of the Company have agreed to loan the Company up to $500,000 each, if necessary, to fund the Company's deficit through December 31, 2005. The Company has filed an application with the American Stock Exchange for the listing of additional shares of common stock. We are expecting to raise capital through a private placement however, there can be no assurance we can raise the capital needed on acceptable terms, if at all. There may also be other acquisition and other growth opportunities; however that require additional external financing. Management may, from time to time, seek to obtain additional funds from the public or private is suances of equity or debt securities. There can be no assurance that such financings will be available or available on terms acceptable to the Company.

 

The Company has an option, which is exercisable by December 13, 2005, to extend its exclusive license for the use of the technologies in the IGI Field, as defined in the license agreement, for an additional ten-year term in exchange for a $1,000,000 cash payment. Management fully intends to exercise that option and is currently negotiating a sale-leaseback of our manufacturing facility to acquire the additional funding necessary to exercise our option to extend our license agreement with Novavax.

 

There have been no material changes to the Company's contractual commitments as reflected in the 2004 10-K Annual Report other than those disclosed in this Form 10-Q.

 

Off Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements as of the date of this report.

<PAGE>  12

IGI, INC. AND SUBSIDIARIESpackaging services.

 

ITEM 2. Management's DiscussionIGI's mission is to be a premier provider of topical liquid and Analysis of Financial Condition and Results of Operations
               (Continued)semi-solid products using its encapsulation technology.

 

Factors Which May Affect Future Results

 

The industry segments in which the Company competes are subject to intense competitive pressures. The following sets forth some of the risks which the Company faces.

Intense Competition in Consumer Products Business

The Company's Consumer Products business competes with large, well-financed cosmetics 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 or that it can develop and market new products that will be favorably received in the marketplace. In addition, certain of the Company's customers that use the Company's Novasome® 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 manufacture 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 Contract with Estee Lauder

In 2004, the Company renegotiated its agreement with Estee Lauder. The Company will no longer manufacture products for Estee Lauder. Estee will manufacture all products in house and pay the Company $5.00 per kilogram produced, up to $2 million, and then $2.00 per kilogram. 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 guarantee that it will occur.

Licensing Agreement with Universal Chemical Technologies, Inc.

In February 2004, the Company signed a license agreement with UCT to utilize their patented technology for an electroless nickel boride metal finishing process. This is a new technology for the Company and the Company has had capital expenditures of approximately $307,000 in building improvements and $606,000 in machinery and equipment through September 30, 2005, in order to set up the operations. The Company has an exclusive license within a 150 mile radius of its facility for commercial and military applications. Frank Gerardi, the Company's Chairman and Chief Executive Officer, as well as a major IGI shareholder, has personally invested $350,000 in UCT, which represents less than a 1% ownership interest by Mr. Gerardi in UCT. 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.

However, recently we have been informed by potential new customers of the consumer division, that they are not comfortable with the metal finishing division being housed in the same facility as our consumer products division. In light of this new information, the Company has decided to utilize all the remaining chemistry we have in house for the metal finishing operation and then cease operations at our corporate manufacturing facility. We will continue to perform research and development work for this division at the UCT facility in Florida. Once purchase orders come in for this division, management will decide whether to move the metal finishing division to another facility or sell the division to a potential buyer. The Company does not anticipate having to record an impairment loss as a result of this recent development.

American Stock Exchange (AMEX) Continuing Listing Standards

On March 28, 2002,May 6, 2008, 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 andand/or net income for 2002in one of its five most recent fiscal years and a minimum of $4,000,000$6,000,000 in stockholders' equity by Decemberto remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007 fiscal years. The Company's stockholders' equity at March 31, 2002 in2008 was $4.3 million.

In order to remain listed.maintain its AMEX listing, the Company must submit a plan by June 8, 2008 advising the Exchange of action it has taken, or will take, that would bring it into compliance with the continued listing standards of AMEX within 12 months. AMEX has 45 days to review the plan and notify the Company whether they will accept the plan or if the Company will be subject to delisting procedures. If the plan is accepted, the Company may be able to continue its listing during the plan period, during which time it will be subject to periodic review to determine whether it is making progress consistent with the plan. If we were to be delisted from AMEX, such delisting could have an adverse effect on the price of our common stock and cause your investment in our common stock to lose value.

The Company fully intends to submit a compliance plan to the AMEX staff in a timely manner which will outline its intended actions to regain compliance.

Major Customers

The Company has successfully broadened its customer base to fuel its revenue growth. Major customers of the Company are defined as having revenue for the latest fiscal year equal to or greater than 10% of that years total gross product. For the three months ended March 31, 2008 and the three months ended March 31, 2007, four of our customers accounted for 86% and 71% of our revenue, respectively. Theloss of one or more of these customers could have a significant impacton our revenues and harm our business and results of operations.

2.

Summary of Significant Accounting Policies

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.

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.

<PAGE>  5

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.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations, 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.

In December 2007, the FASB issued SFAS No. 160, 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 oni tsconsolidated 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 or financial position.

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 in the process of evaluating the impact, if any, of adopting EITF 07-1 onits financial statements but believes the adoption of EITF 07-1 will not have a material effect on its results of operations or financial position.

In March 2008, Financial Accounting Standards Board ("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 in the process of evaluating the impact of the adoption of SFAS 161 on its financial statements but believes the adoption of SFAS 161 will not have a material effect onitsresults of operations or financial position.

<PAGE>  136

3.

Earnings Per Share

  
 

SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted earnings per share on the face of the Company's consolidated statement of operations and a reconciliation of the computation of basic earnings per share to diluted earnings per share. Basic earnings per share excludes the dilutive impact of common stock equivalents and is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Dilutedearningspershare includes the effect of potential dilution from the exercise of outstanding common stock equivalents into common stock using the treasury stock method;however,such items would not be considered for diluted loss per share due to their anti-dilutive effects. Earnings per share amou nts for all periods presented have been calculated in accordance with the requirements of SFAS No. 128. A reconciliation of the Company's basic anddilutedearningspershare follows:

  
 

Three months ended March 31,

 

  

2008

  

2007

 

 

      
 

Numerator:

     
      
 

Netincome (loss)

$

40,000 

 

$

(410,000)

      
 

Denominator:

     
 

Weighted average common shares outstanding

 

14,831,880 

  

12,632,604 

      
 

Effect of dilutive stock options

 

282,028 

  

- 

 

Effect of dilutive warrants

 

117,395

  

- 

 

Effect of dilutive convertible preferred stock

 

500,000 

  

- 

 

 

 

Shares used in calculating diluted earnings per share

 

15,731,303 

  

12,632,604 

 

 

      
 

Basicincome/(loss) per share

$

.00 

 

$

(.03)

 

Dilutedincome/(loss)pershare

 

.00 

  

(.03)

      
 

The number of anti-dilutive shares under option that have been excluded in the computation ofdilutedearningspershare for the three months ended March 31,2008was 1,105,447 due to their anti-dilutive effect.

  

4.

Inventories

  
 

Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Inventories at March 31, 2008 and December 31, 2007 consist of:

  
 

March 31,

 

December 31,

 

2008

 

2007

 

 

 

(amounts in thousands)

 

Raw materials

$

396

 

$

258

 

Work in progress

 

20

  

8

 

Finished goods

 

115

  

110

 

 

 

Total

$

531

 

$

376

 

 

    

5.

Stock-Based Compensation

  
 

Stock Incentive Plans

  
 

The Company currently has a stock-based compensation plan for its Board of Directors, the 1999 Director Stock Option Plan (the "Director Plan"). In accordance with the Director Plan, each non-employee member of the Board is granted an option once a year as compensation for services rendered to the Company for that year. The options vest over a 12-month period. Each Director receivesannuallyan optionto purchase 15,000 shares with an additionalannual grant to each committee Chairman.

<PAGE>  7

 

The Company also provides each director withadditional sharesof our common stock as compensation for each board meeting they attend throughout the year in accordance with the 1998 Director Stock Plan.

  
 

The Company also has a stock-based incentive plan in place for its eligible employees, officers, consultants, independent advisors and non-employee directors, the 1999 Stock Incentive Plan (the "Plan"). The Plan permits the grant of share options and shares for up to 3,200,000 shares ofthe Company's common stock.There are no restricted shareawards outstanding under the Plan and the outstanding options are summarized in the table below. Option awards are granted with an exercise price equal to or greater than the closing sale price per share of the Company's common stock on theAmerican Stock Exchange on the option grant date. Although the terms of any award vary, options awards generally vest based upon four years of continuous service an d have 10-year contractual life.

  
 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.

  
  

For the three months ended

  

March 31, 2008

  

   
 

Expected volatility

75.08%

 

Expected term (in years)

7 years

 

Risk-free rate

4.99%

 

Expected dividends

0%

   
 

A summary of option activity under the Plan and the Director Plan as of March 31, 2008 and changes during the period are presented below

  
    

Weighted

    

Average

  

Number of

 

Exercise

  

Options

 

Price

  

 

 

Outstanding as of 1/1/2008

 

2,274,548

 

$

1.42

 

Issued

 

570,000

 

$

1.66

 

Exercised

 

4,000

 

$

1.02

 

Forfeited

 

-

  

-

  

 

 

Outstanding as of 3/31/2008

 

2,840,548

 

$

1.47

  

 

 

Exercisable as of 3/31/2008

 

2,075,548

 

$

1.47

       
 

Based upon application of the Black-Scholes option-pricing formula described above, the weighted-average grant-date fair value of options granted during the three months ended March 31, 2008 was $1.22.

  
 

The following table summarizes information regarding options outstanding and exercisable at March 31, 2008:

  
 

Outstanding:

  
       

Weighted

 

Weighted

       

Average

 

Average

     

Stock options

 

Exercise

 

Remaining

 

Range of Exercise Prices

   

Outstanding

 

Price

 

Contractual Life

 

   

 

 

 

$0.50 to $1.00

   

304,250

 

$0.73

 

6.12

 

$1.01 to $2.00

   

2,124,298

 

$1.41

 

6.93

 

$2.01 to $3.00

   

412,000

 

$2.31

 

4.44

     

 

 

 

Total

   

2,840,548

 

$1.47

 

6.48

     

 

 

<PAGE>  8

 

Exercisable:

  
       

Weighted

  
       

Average

  
     

Stock options

 

Exercise

  
 

Range of Exercise Prices

   

Exercisable

 

Price

  
 

   

 

  
 

$0.50 to $1.00

   

289,250

 

$0.73

  
 

$1.01 to $2.00

   

1,374,298

 

$1.38

  
 

$2.01 to $3.00

   

412,000

 

$2.31

  
     

 

  
 

Total

   

2,075,548

 

$1.47

  
     

 

  
          
 

As of March 31, 2008, the intrinsic value of the options outstanding is $1,875,375 and the intrinsic value of the options exercisable is $1,388,525. As of March 31, 2008, there was $686,000 of total unrecognized compensation cost through December 2009 related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over the remaining vesting periods of the options granted.

  

6.

Income Taxes

  
 

Effective January 1, 2007, the Company adopted Financial Interpretation ("FIN") No. 48,
Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on derecognition, classification, interest and penalties, and other matters. The adoption did not have an eff ect on the consolidated financial statements.

  
 

As a result ofthe Company's history of continuing tax losses,the Company has not paid income taxes andhas recorded a full valuation allowance againstits net deferred tax asset. Therefore,the Company has not recorded a liability for unrecognized tax benefits prior to adoption of FIN 48 and there was no adjustment from the implementation. There continues to be no liability related to unrecognized tax benefits at March 31, 2008. The tax years 2004-2007 remain open to examination by the major taxing jurisdictions to which the Company is subject.

  
 

There was no accrued interest related to unrecognized tax benefits at March 31, 2008.

  

7.

Contractual Agreements

  
 

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 Novasome® 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") thru 2015. This payment is being amortized ratably over the ten-year period. The Compa ny recorded amortization expenseof $25,000 related to this agreement for each of the three-month periods ended March 31, 2008 and 2007.

<PAGE>  9

IGI, INC. AND SUBSIDIARIES8.

Note Payable

On January 31, 2007,the Companyentered 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 of the Company,for a term of eighteen months. Loans under the Credit Agreement bear interest at prime (5.25% at March 31, 2008 and8.25% at March 31, 2007), 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 and repaid $250,000 of that balance on March 31, 2008. The interest expense related to this note payable was $9,000 an d $8,000 for the three months ended March 31, 2008 and 2007, respectively.

9.

Related 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.

For the threemonth period ended March 31, 2008, the Company recognized $63,000 of Research and development revenues from Pharmachem and has a $56,000 accounts receivable balance at March 31, 2008 that will be received in the normal course of business.

For a description of the Company's Credit Agreement with a related party, see footnote 8 above.

<PAGE>  10

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

 

This"Management's Discussion and Analysis of Financial Condition and Results of Operations" section andothersectionsof this Quarterly Report on Form 10Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, andthe Private Securities Litigation Reform Act of1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by o r on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not guarantees of futureperformance,and involve certain risks, uncertainties and assumptions, which are difficult to predict.These risks and uncertaintiesinclude, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described inthe Company'sfilings with the Securities and Exchange Commissi on, including the "Risk Factors" section as set forth below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.The Company undertakes no obligation toupdate publicly anyforward-looking statements,whether as a result of new information, future events or otherwise.

  

Company Overview

  

On May 7, 2008, the shareholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc.

 

IGI is engaged in the development, manufacturing, filling and packaging of topical, semi solid and liquid products for pharmaceutical, cosmeceutical and cosmetic companies primarily using its licensed Novasome® encapsulation technology. The Company believes that the Novasome based products developed and manufactured by it are unique in the industry and give its customers a competitive advantage in the market place.

  

IGI's mission is to be a premier provider of topical liquid and semi-solid products using 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.

   

The Company's business plan for 2008 includes the continued upgrading ofits manufacturing and expandingits production services. The Company will also continue to marketits other capabilities to customers, such as product development services and analytical services, all together or separately. In addition to this,the Company will be exploring ways to expandits intellectual property portfolio and increaseits R&D product pipeline.

 

On May 6, 2008, the Company was notified by AMEX that it was below certain of the Exchanges' continuing listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6,000,000 in stockholder's equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007 fiscal years. The Company's stockholders' equity at March 31, 2008 was $4.3 million.

 

In order to maintain its AMEX listing, the Company must submit a plan by June 8, 2008 advising the Exchange of action it has taken, or will take, that would bring it into compliance with the continued listing standards of AMEX within 12 months. AMEX has 45 days to review the plan and notify the Company whether they will accept the plan or if the Company will be subject to delisting procedures. If the plan is accepted, the Company may be able to continue its listing during the plan period, during which time it will be subject to periodic review to determine whether it is making progress consistent with the plan. If we were to be delisted from AMEX, such delisting could have an adverse effect on the price of our common stock and cause your investment in our common stock to lose value.

 

The Company fully intends to submit a compliance plan to the AMEX staff in a timely manner which will outline its intended actions to regain compliance.

 

Results of Operations

 

Three months ended March 31, 2008 compared to March 31, 2007

  

The Company had operating income attributable to common stockholders of $40,000, or $0.00 per share, for the three months ended March 31, 2008, compared to a net loss of $410,000, or $(0.03) per share, in the comparable period for 2007, which resulted from the following:

 

Revenues (in thousands):

 
 

Components of Revenue:

 

2008

 

2007

 

$ Change

 

% Change

   

 

 

 

 

Product Sales

 

$  1,300

 

$    604

 

$    696 

 

115 %

 

Research and developement income

 

65

 

77

 

(12)

 

(16)%

 

Licensing and Royalty Income

 

135

 

140

 

(5)

 

(4)%

   

 

 

 

 

      Total Revenues

 

$  1,500

 

$    821

 

$    679 

 

83 %

   

 

 

 

<PAGE>  11

The increase in product sales relates to sales to three customers for the three months ended March 31, 2008 that did not exist for the three months ended March 31, 2007. Research and development income for the three month period ended March 31, 2008 was for services provided to Pharmachem (see Note 9) and were related to a different customer for the comparable period in 2007. The products developed for that customer in 2007 were manufactured and filled in the first quarter of 2008 so the research and development income was then converted to product sales.

Licensing and royalty income decreased slighty as a result of a decrease in production of our royalty bearing products by Estee Lauder.

Costs and expenses (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   

 

 

 

 

Cost of sales

 

$    681

 

$    516

 

$    165

 

32%

 

Selling, general and administrative

 

663

 

585

 

78

 

13%

 

Product development and research

 

113

 

111

 

2

 

2%

   

 

 

 

 

      Totals costs and expenditures

 

$  1,457

 

$  1,212

 

$    245

 

20%

   

 

 

 

          

Cost of sales increased for the period ended March 31, 2008 as a result of the increase in product sales offset by the change in the product mix for the period ended March 31, 2008. Products sold in 2008 had higher gross margin than those products sold in the comparable period in 2007; this also allowed for a higher gross margin percentage for the three month period ended March 31, 2008. Gross margin as a percent of total revenues was 55% for the three month period ended March 31, 2008 compared to 37% for the comparable period in 2007.

Selling, general and administrative expenses for the period ended March 31, 2008 increased as a result of higher stock based compensation expense of $46,000 from the issuance of stock options to our CEO, higher consulting fees of $28,000 from the Sarbanes Oxley compliance consultants which we did not engage until second quarter last year, and higher employer match contribution in our 401k plan of $12,000 as a result of changing our 401k plan.

Interest Expense, net (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   

 

 

 

 

Interest Expense

 

$   (10)

 

$   (26)

 

$     16

 

62%

 

Interest Income

 

$      7 

 

$      7 

 

$       0

 

0%

          

Interest expense decreased in 2008 as a result of a decrease in the Company's short-term notes payable principal balance and a reduction in the Company's average interest rate on its short-term notes payable in 2008.

Net income (loss) (in thousands, except per share numbers):

   

2008

 

2007

 

$ Change

 

% Change

   

 

 

 

 

Net income (loss)

 

$     40

 

$  (410)

 

$    450

 

110%

 

Net income (loss) per share

 

.00

 

(.03)

 

.03

 

100%

          

The decrease in net income (loss) related to the increase in revenues for the period ended March 31, 2008. The Company's basic and diluted income (loss) per share were equal for the three month period ended March 31, 2008 and 2007.

 

ITEM 2. Management's DiscussionLiquidity and Analysis of Financial Condition and Results of Operations
               (Continued)Capital Resources

 

On April 25, 2002,The Company's operating activities used $58,000 of cash during the Company submittedthree months ended March 31, 2008 compared to $729,000 used in the comparable period of 2007.The use of cash in 2008 is substantially a planresult of compliance to AMEX. On June 12, 2002, AMEX notified the Company that it had accepted the Company's planpurchase of complianceinventory 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 reviewuncollected accounts receivable offset by the AMEX staff duringcollection of royalties from Manhattan Pharmaceuticals in the extension period. Basedthree month period ended March 31, 2008. The use of cash in the comparable period of 2007 was for the pay down of accounts payable, uncollected accounts receivable due to the increase of sales and the net loss.

<PAGE>  12

The Company's investing activities used $6,000 of cash in the three months ended March 31, 2008 compared to $36,000ofcash provided by investing activities in the first three months of 2007. The funds used in 2008 were for additional equipment for the packaging and filling lines. The money provided in 2007 represents a deposit of $130,000 on the Company's reported resultsmetal plating equipment being sold to UCT less $94,000 in capital expenditures 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 reviews of the Company's SEC filings. Based on the Company's 2003 year-end results, the Company was not in compliance with the AMEX requirement for reporting income from continuing operations and net incomeequipment for the year ended December 31, 2003packaging and still is notfilling operations in compliance.2007.

 

AsThe Company's financing activities used $247,000 of cash in the three months ended March 31, 2008 compared to $427,000 provided by financing activities in the three months ended March 31, 2007. The cash used for the period ended March 31, 2008 represents a pay down of the datenote payable balance. For the same period in 2007 cash provided represents borrowings from the note payable and proceeds from the issuance of shares pursuant to a private placement of common stock, net of repayment of note payable.

The Company's principal sources of liquidity are cash and cash equivalents of approximately $603,000 at March 31, 2008, future cash from operations, and $750,000 unused balance on our line of credit from Pinnacle Mountain Partners, LLC; this line of credit will expire on July 31, 2008. The Company is currently applying for an additional line of credit to use as working capital to continue the filingexpansion of our production facility in 2008. The Company had working capital of $1,175,000 at March 31, 2008.

We believe that in 2008 our operating cash flow along with our existing capital resources will be sufficient to support our current business plan through at least the Form 10-Q fornext 12 months. The Company may, however, require additional funding. This funding will depend on the quarter ended September 30, 2005,timing and structure of potential business arrangements. If necessary, we may continue to seek to raise additional capital through the Company has not been contacted by AMEX concerning the Company's non-compliancesale of our equity. We may accomplish this via a strategic alliance with the AMEX requirements. While as of this date, the Company has not received any notification of non-compliance from AMEX, the Company hasa third party. There may be additional acquisition and growth opportunities that may require external financing. There can be no knowledge of nor can it predict whether AMEX shall at any time hereafter issue formal notificationassurance that such financing will be available or available on terms acceptable 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.

 

Critical Accounting Policies

There have been no material changes to the Company's critical accounting policies as reflected in the 2004 10-K Annual Report.

ITEM 3. Quantitative and Qualitative Disclosures about 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.Off Balance Sheet Arrangements

 

The Company does not use derivativeshave any off balance sheet arrangements as of the date of this report.

Critical Accounting Policies and Estimates

IGI's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principals ("GAAP"), which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.

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 any hedging or speculative strategies. Accordingly, at September 30, 2005,third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company is not a party to any derivative transactions.utilizes, different revenue recognition policies for each.

Product Sales: The Company classifiesrecognizes revenue when title transfers to its investmentscustomers, 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.

<PAGE>  13

Product Development Services: The Company establishes agreed upon product development agreements with its marketable securities portfolio as available-for-salecustomers 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 records them at fair value. The securities unrealized holding gains and losseswhen 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 excluded from incomegenerally non-refundable and are recorded directlyreported 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.

Please refer to stockholders' equity in accumulated other comprehensive income. Changes in interest rates are not expected to have an adverse effect on the Company's financial condition or results2007 10-KSB for a complete list of operations.all Critical Accounting Policies and Estimates.

ITEM 3.    Quantitative and Qualitative Disclosures aboutMarket Risk

      Not applicable.

 

ITEM 4.4(T).      Controls and Procedures

 

(a)

Management's Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that information required to be disclosed by the Company is accumulated and communicated to management, including the Company's President and Chief Executive Officer and Vice President of Finance, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of certain members ofits management, including the Company's management, including thePresident and Chief Executive Officer and Vice President of Finance, the Company completedcarried out an evaluation of the effectiveness of the design and operation of itsthe Company's disclosure controls and procedures (as defined in Rulespursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) to the Securities Exchange Actas of 1934, as amended (the "Exchange Act")).March 31, 2008. Based on thisupon that evaluation, the Company's President and Chief Executive Officer and Vice President of Finance believeconcluded that, because of the material weaknesses described in the Company's internal control over financial reporting as described in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007,the Company's disclosure controls and procedures were ineffectivenot effective as ofMarch 31, 2008. To compensate for the endmaterial weaknesses in the Company's internal control over financial reporting describe d in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, the Company performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this report. As a result of these expanded procedures, the Company believes that the consolidated financial statements contained in this report fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the period covered by this reporthereby in conformity with respectgenerally accepted accounting principles.

(b)

Changes to timely communicatingInternal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended March 31, 2008 that have materially affected, or are reasonably likely 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 tomaterially affect, the Company and its consolidated subsidiaries for the reasons more fully described below which were identified during our fiscal 2004 evaluation ofCompany's internal controlscontrol over financial reporting.

 

In a reportorder to addressthe Audit Committeematerial weakness noted above, in April 2008, the Company hired an additional qualified accountant to assist with various accounting and finance functions within the organization. The Company believes this new personnel will reduce the risk associated with its lack of our Boardsegregation of Directorsduties and managementthus enhance its system of internalcontrol over financial reporting.

Management believes that the actions described above, when fully implemented will be effective in remediation 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 end December 31, 2004, two items were identified asspecific material weaknesses in our internal controls. Those material weaknesses were identified as insufficient resources and administrative support in the accounting department and an unreliable accounting software package. Management of the Company took steps as soon as possible to remedy these weaknesses. On January 1, 2005, the Company installed a new accounting/manufacturing software package. The Company also hired an outside consulting firm that is familiar with this software package to assist us in implementing it throughout the Company. In addition, we have hired an administrative support person for the accounting department. This measure will enable us to prov ideweakness discussed above.

<PAGE>  14

IGI, INC. AND SUBSIDIARIES(c)

Limitations of Effectiveness of Controls

 

ITEM 4. Controls and Procedures (Continued)

 

greater resources to the accounting department. We are also developing a plan to utilize our SEC consultant on a more frequent basis as partAs of the Company's closing procedure. We believedate of this filing, the Company is satisfied that these actions implemented to date and those in progress will help to begin improving ourremediate the material weaknesses with respect to ourand deficiencies in the internal controls over financial reportingand information systems that were identified during our fiscal 2004 evaluation.

It should be notedhave been identified. The Company notes that, like other companies, any system of internal controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the internal control system arewill be met. The design of any control system is based, in part, upon the benefits of the control system relative to its 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 that controls can be circumvented by the individual acts of some per sons, by collusion of two or more people or by management override of control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future certain events. Given theseBecause of the limitations inherent in a cost-effective control system, misstatements due to error or fraud may occur and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.

Other than the changes in internal controls discussed above, there were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.may not be detected.

<PAGE>  15

IGI, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

 

ITEM 1.    Legal Proceedings

 

Gallo MatterNone.

ITEM 1A.    Risk Factors

 

As previously reportedOur 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 Company in its historical filings with the Securitiesonly risks and Exchange Commission ("SEC"), including without limitation its Form 10-K for the year ending December 31, 1999, for most of 1997uncertainties we face. Additional risks and 1998 the Company was subjectuncertainties not currently known 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")us or that we currently deem immaterial also may impair our business operations. If any of the United States Departmentfollowing risks actually occur, our business, results of Agriculture ("USDA") thatoperations 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 Company had shipped quantities of some of its poultry vaccineconsumer 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 stat ements 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.business.

 

Based uponOur 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 our customers that use our Novasome® lipid vesicles in their products may decide to reduce their purchases from us or shift their business to other 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 events,technologies. However, if our competitors develop new and improved technologies that are superior to our technologies, our technologies could be less acceptable in the Boardmarketplace and our business could be harmed.

We may need to raise additional capital that may 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 Directors caused an immediateour 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 thorough investigationoperating plans based on available funding, if any, which would harm our ability to grow our 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 factsthree months ended March 31, 2008 and circumstancesthe three months ended March 31, 2007, four of our customers accounted for 86% and 71% of our revenue, respectively. 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 alleged violationsinaccurate 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.

<PAGE>  16

We are subject to be undertaken by independent counsel. The Company continuedstringent regulatory requirements. Failure to refineadhere to such requirements could harm our business and strengthen its regulatory programsresults of operations.

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

We are also subject to regulation under the Occupational Safety and enforcement policies,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 service group uses certain hazardous materials and chemicals in limited and controlled quantities. We have implemented safety procedures for handling and disposing 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 cooperatesuch materials, however, such procedures may not comply with the USDAstandards prescribed by federal, state and SEC in all aspectslocal regulations. Even if we follow such safety procedures for handling and disposing of their investigationhazardous materials and regulatory activities. On March 13, 2002,chemicals and such procedures comply with applicable law, the Company reachedrisk 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 liab ility could exceed 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 settlementproprietary position with the staff of the SECregard to resolve matters arisingour own technology, products and business. We have obtained 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 invest igationfollowing:

•

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;

•

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 were 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, consultants, 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 the event of any unauthorized use or disclosure.

<PAGE>  17

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 testing, government regulation, formulation and manufacturing and sales and marketing. 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.

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 Company. Underlast five years, and no net income has been available to common shareholders during each of these years. As of March 31, 2008, our shareholders' equity was $4.3 million and we had an accumulated deficit of $22.5 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 settlement, the Company neither admitted nor denied that the Company violated the financial reporting and record-keeping requirements of Section 13obligations of the Securities and Exchange Act of 1934 as amended, forand Section 404 of the three years ended December 31, 1997. Further, the Company agreedSarbanes-Oxley Act of 2002, or if we fail to the entryachieve and maintain adequate disclosure controls and procedures and internal control over financial reporting, our business results of an order to ceaseoperations and desist from any such violationfinancial condition, and investors' confidence in the future. No monetary penalty was assessed.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 March 31, 2008, and our management concluded that our disclosure controls and procedures were not effective as of March 31, 2008 due to the material weakness described in our annual report on Form 10-KSB for the period ending December 31, 2007.

We expect to dedicate significant management, financial and other resources in 2008 in connection with complying with Section 404 of the Sarbanes-Oxley Act of 2002. We expect these efforts to include a review of our existing disclosure controls and procedures and internal control structure. As a result of itsthis review, we may either hire or outsource additional personnel to expand and strengthen our finance function. If we fail to achieve and maintain the adequacy of our disclosure controls and procedures and internal investigation,control, 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 November 1997,accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective disclosure controls and procedures and internal control 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 Sarba nes-Oxley Act of 2002 on a timely basis could result in the 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 approximately 50% of our common stock. 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.

<PAGE>  18

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 $.81 in the first quarter of 2006 to a high of $2.29 in the first quarter of 2008. The volatile 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;

•

regulatory developments in the United States and foreign countries;

•

economic or other crises 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 often 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 quarterly period ended March 31, 2008, the average daily trading volume of our common stock on the American Stock Exchange was approximately 13,100 shares. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies with broader 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 American Stock Exchange our common stock could be delisted and our stock price could suffer.

On May 6, 2008, the Company terminatedwas notified by AMEX that it was below certain of the employment of John P. Gallo as President and Chief Operating Officer for willful misconduct. On April 21, 1998,Exchange's continuing listing standards. Specifically, the Company instituted a lawsuit against Mr. Gallowas required to reflect income from continuing operations and/or net income 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 twoone of its Directors, Edward Hager, M.D.five most recent fiscal years and Constantine Hampers, M.D., alleging that hea minimum of $6,000,000 in stockholders' equity to remain listed on the exchange. The Company had been wrongfully terminatednet income from employmentcontinuing operations in its 2002 fiscal year, but had net losses and further alleging wrongdoings by the two Directors (referred to as the "Gallo Action").losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007 fiscal years. The Court subsequently ordered the consolidation of the IGI Action and the Gallo Action (collectively referred to as the "Consolidated Action").Company's stockholders' equity at March 31, 2008 was $4.3 million.

 

In responseorder to these allegations,maintain its AMEX listing, the Company instituted an investigationmust submit a plan by June 8, 2008 advising the Exchange 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 cooperatedaction it has taken, or will take, that would bring it into compliance with the continued listing standards of AMEX within 12 months. AMEX has 45 days to review the plan and notify the Company and awhether they will accept the plan or if the Company will be subject to delisting procedures. If the plan is accepted, the Company may be able to continue its listing during the plan period, during which time it will be subject to periodic review of certain records and documents. The Company also requested an interviewto determine whether it is making progress consistent 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 Actionplan. If we were to be without merit. The Company did not reserve any amount relating todelisted from AMEX, 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.

<PAGE>  16

IGI, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION, Continued

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. Gallodelisting could 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 and 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.

On July 8, 2004, Novavax filed a motion for summary judgment on all claims asserted under Gallo's First Amended Complaint (referred to as "the SJ Motion"). As of the filing date hereof, the SJ Motion is pending subject to filing of Gallo's opposition and any reply thereto by Novavax. The court has not yet scheduled a hearing date for the SJ Motion. In the event the court denies the SJ Motion, the Company believes that there is a substantial likelihood that Novavax will re-file its Third Party Complaint against IGI for which coverage was previously denied by its insurance carriers.

As of November 8, 2005, the Third Party Complaint against IGI has not been filed.

Other Matters

On April 6, 2000, officials of the New Jersey Department of Environmental Protection ("DEP") inspected the Company's storage site in Buena, New Jersey, and issued Notices of Violation ("NOV") 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. In September 2005, the DEP reached a settlement with the Company's Storage site owner, Brunozzi Transfer & Truck Rental Inc ("Brunozzi"), for $30,000 for which the Company agreed to indemnify them for any fees incurred as a result of their litigation. This amount was accrued as of the September 30, 2005 balance sheet. The Company has not reached a settlement with the DEP and our NOV accrual remains on our books.

<PAGE>  17

IGI, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION, Continued

On March 2, 2001, the Company discovered the presence of environmental contamination resulting from an unknown heating oil leak at its Companion Pet Products manufacturing site. The Company immediately notified the DEP and the local authorities, and hired a certified environmental contractor to assess the exposure and required clean up. Basedadverse effect on the initial information from the contractor, the Company originally estimated the cost for the cleanupprice of our common stock 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, 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 through 2009. 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 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. In October 2005, IGI has offered a settlement of $70,000 to Mr. Borz which he accepted. This amount has also been accruedcause your investment in our September 2005 balance sheet.common stock to lose value.

 

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

None.None.

 

ITEM 3.    Defaults Upon Senior Securities

 

None.

 

ITEM 4.    Submission of Matters to a Vote of Security Holders

 

None.

 

ITEM 5.    Other Information

 

On August 10, 2005, the Company granted Frank Gerardi, the Company's Chairman and Chief Executive Officer a Severance Agreement (the "Agreement") should he be terminated from the Company. Upon the occurrence of a Termination Event (as defined in the Agreement), the Company will pay to Mr. Gerardi: (i) $150,000, payable in a lump sum, or in regular payroll payments until paid in full; (ii) a lump sum payment for any unused accrued vacation days for that calendar year; and (iii) continued coverage under the Company's existing health and benefit plans for a one (1) year period from the date that written notice of terminationis given.None.

<PAGE>  19

ITEM 6.    Exhibits

 

10.1Exhibit

Number

Severance Agreement between IGI, Inc. and Frank Gerardi dated August 10, 2005 [IncorporatedDescription

3.1

Certificate of Designation of the Company's Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for8-K filed January 3, 2008).

3.2

IGI, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the quarter ended June 30, 2005,Company's Form 8-K filed August 15, 2005.]March 26, 2008).

10.1#

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).

31.1

Certification of thePresident 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 thePresident and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, asadopted 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, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

#

Indicates management contract or compensatory plan.

<PAGE>  20

SIGNATURES

Pursuant to the requirements 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.

IGI Laboratories, Inc.

Date: May 7, 2008

By:

/s/ Rajiv Mathur

Rajiv Mathur

President and Chief Executive Officer

Date: May 7, 2008

By

/s/ Carlene Lloyd

Carlene Lloyd

Vice President, Finance

<PAGE>  21

Exhibit Index

Exhibit

Number

Description

  

31.1

Certification of the ChairmanPresident 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 ChairmanPresident and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted underadopted 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 enacted underadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

<PAGE>  1822

IGI, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements 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.

IGI, Inc.

(Registrant)

Date: November 14, 2005

By:  /s/ Frank Gerardi

Frank Gerardi

Chairman and Chief Executive Officer

Date: November 14, 2005

By:  /s/ Carlene Lloyd

Carlene Lloyd

Vice President, Finance

<PAGE>  19