PART I

PART I
FINANCIAL INFORMATION

ITEM 1.  Financial Statements

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shareshares and per share information)

(Unaudited)

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

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article8-Article 8-03of 03of Regulation S-XS- X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles 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'sCompany’s Annual Report on Form 10-KSB10-K for the year ended December 31, 2007.2008. The condensed consolidated balance sheet as of December 31, 20072008 has been derived from those audited consolidated financial statements. Operating results for the ninethree month period ended September 30, 2008March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2009.

1.

Liquidity

The Company has sustained a net loss of $1,226,000 for the nine months ended September 30, 2008 and had working capital of $318,000 at September 30, 2008. The Company's principal sources of liquidity for IGI Laboratories, Inc. (“IGI”, “IGI,Inc.” or the “Company”), are cash and cash equivalents of approximately $207,000$4,481,000 at September 30, 2008, futureMarch 31, 2009 and cash from operations. The Company sustained a net loss attributable to common stockholders of $1,902,000 for the three months ended March 31, 2009 and had working capital of $253,000 at March 31, 2009.

The Company’s business operations have been partially funded over the past three years through the exercise of stock options by our directors and a $250,000 unused balance onofficers, through private placements of our $500,000stock, the line of credit from Pinnacle Mountain Partners, LLC. This linedescribed below and issuance of credit will expire on January 31, 2009.

We believe that our operating cash flow along with our existing capital resources will not be sufficient to support our current business plan through November 2009. The Company will require additional funding. This funding will depend, in part, on the timing and structure of potential business arrangements.debt. If necessary, we may continue to seek to raise additional capital through the sale of our equity. We may accomplish this via a strategic alliance with a third party. In addition, thereThere may be additional acquisition and growth opportunities that may require external financing. There can be no assurancesassurance that such financing will be available or available on terms acceptable to the Company.

On January 29, 2009, the secured line of credit agreement (“Credit Agreement”) with Pinnacle Mountain Partners, LLC, (“Pinnacle”), a company owned by Dr. and Mrs. Hager, significant stockholders of the Company, and in the case of Mrs. Hager, a director of the Company, was amended and extended for a term of six months, as more fully described in Footnote 8 below. The Company had an outstanding principal balance with a face value of $500,000 as of March 31, 2009 and interest expense related to this line of credit was $8,825 for the three months ended March 31, 2009.

On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”) as more fully described in Footnote 11 below. As a condition to the consummation of the Offering, on March 13, 2009, the Company and Pinnacle entered into an amendment to the Credit Agreement pursuant to which the parties agreed to change the final payment date of the amounts borrowed under the line of credit from July 31, 2009 to instead provide that 50% of the amount of all loans and advances made by Pinnacle under the Credit Agreement will become due and payable on July 31, 2010 and the remaining outstanding loans and advances, together with interest thereon, will become due and payable on July 31, 2011.

In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the principal amount outstanding under the Credit Agreement into shares of the Company’s common stock at a conversion rate of $0.41 per share upon receipt of stockholder approval by the Company of such conversion (the “Note Conversion”). For additional information relating to the Offering, see Footnote 11 below.

The Company’s common stock is listed on the NYSE Amex exchange and, as a result, the Company is subject to Section 711 and Section 713 of the NYSE Amex Company Guide. Section 711 of the NYSE Amex Company Guide requires stockholder approval for the establishment of an equity compensation arrangement pursuant to which stock may be acquired by a director of an issuer. Section 713 of the NYSE Amex Company Guide, to which the Company is subject, requires stockholder approval for issuances of securities that will (i) involve the issuance of common stock, or securities convertible into common stock, equal to 20% or more of presently outstanding stock of a company for less than the greater of book or market value of the stock and/or (ii) result in a change of control of the issuer. Pursuant to Section 711 and Section 713, both the Offering and the Note Conversion require stockholder approval.

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In connection with the Offering, certain holders of our capital stock, representing approximately 51.7% of the voting power of the outstanding shares of our capital stock entitled to vote to approve the Offering, entered into a voting agreement, pursuant to which these holders agreed to vote or execute and deliver a written consent in favor of approving the Offering. As a result of its interest in the Note Conversion, pursuant to the rules and regulations of the NYSE Amex, Pinnacle and its affiliates, which includes Dr. and Mrs. Hager, significant stockholders of the Company and signatories to the voting agreement, are not permitted to vote to approve the Offering or the Note Conversion so long as the Note Conversion agreement remains in place. As a result of this NYSE Amex voting restriction, holders of our capital stock representing approximately 44.2% of the voting power of the outstanding shares of capital stock of the Company have signed a voting ag reement and are entitled to vote to approve both the Offering and the Note Conversion so long as the Note Conversion remains in place. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering and Note Conversion. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of promissory notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the warrants to purchase shares of the Company’s Series B-2 Preferred Stock issued to these investment funds were terminated. Additionally, the $500,000 principal amount outstanding under the Pinnacle line of credit was converted into 1,219,512 shares of the Company’s common stock.

2.

Organization

On May 7, 2008, the stockholders 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"),The Company, a Delaware corporation, operating in the State of New Jersey, is primarily 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. TheseThe Company has directed its efforts have been directed towardtowards the development of high quality skin care and treatment products marketed through collaborative arrangements with pharmaceutical and consumer products companies.

The Company alsoprovides product development and analytical services to its customers in customersin addition to its manufacturing and packaging services.

IGI's

IGI’s mission is to be a premier provider of topical liquid and semi-solid products to its customers using Novasome® encapsulation technology.

On May 6, 2008, the Company was notified by the American Stock Exchange ("AMEX")NYSE Amex that it was belowfailing to satisfy certain of AMEXNYSE Amex’s continued listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6,000,000 in stockholders'stockholders’ equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007last six fiscal years. The Company's stockholders'Company’s stockholders’ equity at September 30,March 31, 2009 was $3.6 million.

On June 8, 2008, was $3.4 million.

the Company submitted a plan advising NYSE Amex of the actions that it would take to bring it into compliance with the continued listing standards. On July 15, 2008, AMEXNYSE Amex notified the Company that it accepted the Company'sCompany’s plan of compliance and granted the Company an extension until May 6, 2009 to regain compliance with the continued listing standards described above. The Company will bewas subject to periodic review by AMEXNYSE Amex staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from AMEX.NYSE Amex.

Major Customers

Major customers of the Company are defined as having revenue greater than 10% of total gross revenue. For the three months ended September 30,March 31, 2009 and 2008, and 2007, three of our customers accounted for 62% and four of our customers accounted for 71%84% and 86% of our revenue, respectively. ForOne of these customers is the nine months ended September 30, 2008 and 2007, four of our customers accountedsame for 58% and two of our customers accounted for 34% of our revenue, respectively.both periods. Accounts receivable related to the Company's majorCompany’smajor customers comprised 57%66% of all account receivables as of September 30, 2008.March 31, 2009. Theloss of one or more of these customers could have a significant impacton our revenues and harm our business and results of operations.

3.

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 allowance, stock based compensation, and accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.

Earnings Per Share

Basic earnings per common share and diluted earnings per common share are presented in accordance with SFAS No. 128,Earnings per Share.Basic earningsnet (loss) income per share of common share have beenstock is computed usingbased on the weighted average number of shares of common stock outstanding during the period. Diluted earningsnet (loss) income per share of common share incorporatestock is computed using the incrementalweighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the assumed exercise of stock options and warrants, if dilutive.warrants. Due to the net loss for the ninethree months ended September 30, 2008 and 2007 and for the quarters ended September 30, 2008 and 2007,March 31, 2009, the effect of the Company'sCompany’s potential dilutive common stock equivalents was anti-dilutive for each period;anti-dilutive; as a result, the basic and diluted weighted average number of common shares outstanding and net loss(loss) per common share are the same. Potentially dilutive common stock equivalents which were excl uded from the net (loss) income per share calculations due to their anti-dilutive effect amounted to 3,004,332 shares for the three months ended March 31, 2009 and 1,105,447 for the three months ended March 31, 2008.

Revenue Recognition

Revenue Recognition

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

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

Product Sales: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: 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 uponenters into 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 phaseseach phase of development and when we have no future performance obligations relating to thatsuch 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.

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Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 141 (revised 2007),Business Combinations ("(“FAS 141R"”), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. FAS 141R will only have an impact on our financial position or results of operations if we enter into a business combination.

In December 2007, the FASB issued SFAS No. 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 evaluatingWe have evaluated the potential impact, if any, of the adoption of FAS 160 on itsconsolid ated financial position, results of operationsnew statement and cash flows but believes the adoption of FAS 160 willhave determined that it does not have a material effectsignificant impact on its resultsthe determination or reporting of operations orour financial position.results.

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'sCompany’s collaborations existing after January 1, 2009. The Company is currently evaluatingWe have evaluated the impact, if any, of adopting EITF 07-1 on its consolidated financial statements but believes the adoption willnew statement and have determined that it does not have a material effectsignificant impact on its resultsthe determination or reporting of operations orour financial position.results.

In March 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 161,Disclosures about Derivative Instruments and Hedging Activities ("(“SFAS 161"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'sentity’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'sentity’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 NovemberNove mber 15, 2008, with early application encouraged. The Company is currently e valuatingWe have evaluated the impact of the adoption of SFAS 161 on its consolidated financial statements but believes the adoption willnew statement and have determined that it does not have a material effectsignificant impact on itsresultsthe determination or reporting of operations orour financial position.results.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, "Determination“Determination of the Useful Life of Intangible Assets"Assets” (FSP 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets."” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluatingWe have evaluated the impact of the adoption of FSP 142-3 on its consolidated financial statements but believes the adopt ion willnew statement and have determined that it does not have a material effectsignificant impa ct on its resultsthe determination or reporting of operations orour financial position.results.

In May 2008, the FASB issued FASB Staff Position ("FSP"(“FSP”) No. APB 14-1, "Accounting“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement),"” or FSP APB 14-1, which requires separate accounting for the debt and equity components of convertible debt issuances. The requirements for separate accounting must be applied retrospectively to previously issued cash-settleable convertible instruments as well as

prospectively to newly issued instruments, negatively affecting both net income and earnings per share for issuers of the instruments. The Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluatingWe have evaluated the new statement and have determined that it does not have a significant impact thaton the adoptiondetermination or reporting of FSP APB 14-1 will have on its consolidatedour financial statements.results.

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In June 2008, the FASB issued FSP EITF No. 03-6-1, "Determining“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities."” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, "Earnings“Earnings per Share."” The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Company is currently evaluating the impact that the adoption of EITF 03-6-1 will have, if any, on its consolidated financial statements.

In September 2008, the FASB issued FAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees - An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161." The credit derivatives market has expanded significantly over the past few years. Financial statement users and others have expressed concerns that the current disclosure requirements for derivative instruments and certain guarantees do not adequately address the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives and certain guarantees. This FSP amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities",to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45, "Guaranto r's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ", to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Board's intent about the effective date of FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities". The Company is in the process of evaluating the impact of the adoption of FAS 133-1 and FIN 45-4 on its consolidated financial statements but believes the adoption will not have a material effect on itsresults of operations or financial position.

In October 2008, the FASB issued FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FASB Staff Position (FSP) clarifies the application of FASB Statement No. 157, "Fair Value Measurements", in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. We have evaluated the new statement and have determined that it willdoes not have a significant impact on the determination or reporting of our financia l results.

In June 2008, the FASB issued EITF 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock, or EITF 07-5. EITF 07-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, "Accounting For Derivative Instruments and Hedging Activities" and/or EITF 00-19, "Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. We have evaluated the new statement and have determined that it does not have a significant impact on the determination or reporting of our financial results.

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4..

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO"(“FIFO”) method, or market. Inventories at September 30, 2008March 31, 2009 and December 31, 20072008 consist of:

5.

Stock-Based Compensation

Under the 1998 Directors Stock Plan, 600,000 shares of the Company’s common stock are authorized under the plan and reserved for issuance to non-employee directors, in lieu of payment of directors’ fees in cash. The Company issued 16,305 shares in April 2009 as consideration for directors’ fees for the first quarter of 2009. Directors’ fees for the first quarter of 2009 were accrued on the Company’s financial statements as of March 31, 2009. The Company issued 15,929 shares in March 2009 as consideration for directors’ fees for 2008. Directors’ fees for 2008 were accrued on the Company’s financial statements as of December 31, 2008.

The 1999 Stock Incentive Plan (“1999 Plan”) replaced all previously authorized stock option plans, and no additional options may be granted under those plans. Under the 1999 Plan, options or stock awards may be granted to all of the Company's employees, officers, directors, consultants and advisors to purchase a maximum of 2,500,000 shares of common stock. In May 2007, the Company’s stockholders approved an increase in the maximum amount of shares to be granted by 700,000, for a total of 3,200,000 shares available for grant. However, pursuant to the terms of the 1999 Plan, no awards may be granted after March 13, 2009. A total of 2,392,500 options, having a maximum term of ten years, have been granted at 100% of the fair market value of the Company's common stock at the time of grant. Options outstanding under the 1999 Plan are generally exercisable in cumulative increments over four years commencing one year from date of grant.

The 1999 Director Stock Option Plan (the “Director Plan”) provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. An aggregate of 1,675,000 shares have been approved and authorized for issuance pursuant to this plan. In May 2007, an additional 300,000 shares were approved for issuance under this plan, bringing the total to 1,975,000 available for issue under this plan. A total of 1,674,798 options, have been granted to non-employee directors through March 31, 2009. The options granted under the Director Plan vest in full one year after their respective grant dates and have a maximum term of ten years.

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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.

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thruA summary of option activity under the 1999 Plan and the Director Plan as of March 31, 2009 and changes during the period are presented below:

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, 2009 was $0.33.

The following table summarizes information regarding options outstanding and exercisable at March 31, 2009:

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As of March 31, 2009, the intrinsic value of the options outstanding is $14,710 and the intrinsic value of the options exercisable is $4,910. The intrinsic value of the options exercised during the three months ended March 31, 2009 was $380. As of March 31, 2009, there was approximately $231,000 of total unrecognized compensation cost that will be recognized through December 2009 related to non-vested share-based compensation arrangements granted under the Plans.

6.

Income Taxes

As a result of the Company’s history of continuing tax losses, the Company has not paid income taxes and has recorded a full valuation allowance against its net deferred tax asset. The Company has not recorded a liability for unrecognized tax benefits at March 31, 2009 and no significant changes are expected in the next twelve months. The tax years 2005-2008 remain open to examination by the major taxing jurisdictions to which th e Company is subject.

There was no accrued interest related to unrecognized tax benefits at March 31, 2009.

7.

License Fee

On December 12, 2005, the Company extended its license agreement for an additional ten years with Novavax, Inc. for $1,000,000. This extension entitles the Company to exclusive use of the Novasome® lipid vesicle encapsulation and certain other technologies (each a “Microencapsulation Technology”, and 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”) through 2015. This payment is being amortized ratably over the ten-year period. The Company recorded amortization expense of $75,000 $25,000 related to this agreement for each of the nine-monththree month periods ended September 30, 2008March 31, 2009 and 2007.2008.

8.

Note Payable

On January 31, 2007, the CompanyenteredCompanyentered into a revolving $1,000,000 secured line of credit agreement ("(“Credit Agreement"Agreement”) with Pinnacle Mountain Partners, LLC, ("Pinnacle"(“Pinnacle”), a company owned by Dr. and Mrs. Hager, significant shareholdersstockholders 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 bearbore interest at prime (5.00%(5.25% at September 30, 2008 and7.75% at September 30, 2007)March 31, 2008), plus 1.5% and arewere collateralized by assets of the Company (other than real property). All accrued and unpaid interest iswas payable monthly in arrears on the first of each month. The Company borrowed $500,000 against this line of credit and has repaid $250,000 of that balance as of September 30,at March 31, 2008. The interest expense related to the borrowing under this note payableCredit Agreement was $19,000 and $51,000$9,000 for the ninethree months ended September 30, 2008 and 2007, respectively.March 31, 2008.

On July 29, 2008, the Company signed an extension agreement related to the secured line of credit with Pinnacle.Pinnacle (the “Extension Agreement”). The extension provides for a revolvingExtension Agreement reduced the maximum loan amount under the Credit Agreement from $1,000,000 to $500,000 secured line of credit for a term of six months.and extended the maturity date from July 31, 2008 to January 31, 2009. As in the original agreement,Credit Agreement, loans under the extension agreement bearExtension Agreement bore interest at prime plus 1.5% and were collateralized by the assets of the Company (other than real property).

On January 26, 2009, the Company signed the Amended and Restated Credit Agreement, which amended and restated the Credit Agreement (as amended by the Extension Agreement). This amendment and restatement extended the maturity date of the $500,000 maximum loan amount from January 31, 2009 to July 31, 2009, with interest at 8.5% (rather than prime plus 1.5%). As in the original Credit Agreement, loans under this amendment are collateralized by the assets of the Company (other than real property). The Company has borrowed $500,000 under this Amended and Restated Credit Agreement as of March 31, 2009 and incurred associated interest expense of $8,825 for the three months ended March 31, 2009.

On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”) as more fully described in Footnote 11 below. As a condition to the consummation of the Offering, on March 13, 2009, the Company and Pinnacle entered into an amendment to the Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) pursuant to which the parties agreed to change the final payment date of the amounts borrowed under the agreement from July 31, 2009 to instead provide that 50% of the amount of all loans and advances made by Pinnacle under the agreement will become due and payable on July 31, 2010 and the remaining outstanding loans and advances , together with interest thereon, will become due and payable on July 31, 2011.

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In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the principal amount outstanding under the Second Amended and Restated Credit Agreement into shares of the Company’s common stock at a conversion rate of $0.41 per share of common stock (the “conversion shares”) upon receipt of stockholder approval by the Company of such conversion. Upon receipt of the conversion shares, the obligations and liabilities of the Company to repay the principal amount of the note will be deemed satisfied and paid in full. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s Stockholders approved the Note Conversion. Immediately upon stockholder approval, the $500,000 principal amount outstanding under the Pinnacle Note Payable was converted into 1,219,512 shares of the Company’s c ommon stock. For additional information relating to the Offering, see Footnote 11 below.

9.

Related Party Transactions

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

For the ninethree month period ended September 30,March 31, 2008, the Company recognized $133,000$63,000 of research and development revenues from Pharmachem and had a $4,600$56,000 accounts receivable balance at September 30,March 31, 2008 that will bewas received in the normal course of business. For the nine month period ended September 30, 2007, the Company recognized $97,000 of research and development revenues from Pharmachem and had a $51,500 account receivable balance at September 30, 2007.

For a description of the Company'sCompany’s Credit Agreement with Pinnacle, a related party, see footnoteFootnote 8 above. ..

10.

Stock Warrants

In connection with the Private Placementprivate placement transaction with Pharmachem dated February 5, 2007, the Company issued a warrant to purchase 150,000 common shares at $1.00 per share to Landmark Financial which expiresexpired on March 7, 2009 as a commission on this transaction. During the quarter ended June 30, 2008, Landmark Financial Corporation exercised a portion of the warrant to acquire 25,000 shares of common stock.

See Footnote 11 below for a discussion of additional warrants issued by the Company.

11.

Convertible Preferred Stock and Convertible Promissory Notes

On March 13, 2009, the Company completed a $6,000,000 private placement with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”). As part of the Offering, the Company issued 202.9 shares of Series B-1 Convertible Preferred Stock (“Series B Preferred Stock”), $4,782,600 in Secured Convertible Promissory Notes (“Promissory Notes”), a Preferred Stock Purchase Warrant to purchase 797.1 shares of non-voting Series B-2 Preferred Stock (“Preferred Stock Warrant”), a Common Stock Purchase Warrant to purchase 350,000 shares of common stock (“Common Stock Warrant”) and amended their line of credit with Pinnacle. In connection with the Offering, the Company incurred placement and legal fees of approximately $721,000, resulting in net proceeds of $5,279,000. These fees were recorded as debt issuance costs in the amount of $577,000 and paid-in capital in the amount of $144,000.

The Series B Preferred Stock has a par value of $0.01 per share and the holders are entitled to quarterly dividends at an annual rate of 5%, when and if declared by the Board of Directors. Furthermore, each share of the Series B Preferred Stock is convertible into 14,634 shares of common stock for an implied common stock conversion price of $0.41 per share, subject to certain adjustments and any accrued and unpaid dividends. At the time of issuance, the market price of the common stock into which the Series B Preferred Stock is convertible was greater than the conversion price. The embedded beneficial conversion feature is being accounted for in accordance with Emerging Issue Task Force (“EITF”) Issue No. 98-5Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios(“EITF 98-5”) and EITF Issue No. 00-27Application of Issue No. 98-5 to Certain Convertible Instrum ents. Accordingly, the beneficial conversion feature on the Series B-1 Preferred Stock is approximately $505,000, which represents the amount by which the estimated fair value of the common stock issuable upon conversion exceed the proceeds from such issuance and was treated as a deemed dividend on the date of the Offering.

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The Promissory Note bears interest at an annual rate of 5% and matures on July 31, 2009. On the date of issuance, the Promissory Note had a fair value of approximately $4,706,000, resulting in a debt discount of $77,000. Furthermore, the Company has entered into Guaranty and Security Agreements to guarantee repayment of the Promissory Note upon maturity. The note is collateralized by the assets of the Company. However, upon approval by the Company’s stockholders of the Offering or an earlier liquidation event of the Company, the Promissory Note, unamortized discount, and any accrued interest will automatically convert into Series B-1 Preferred Stock for $6,000 per share and the Series B-2 Preferred Stock Warrant will become null and void. The beneficial conversion feature of the Promissory Note is approximately $1,983,000 which is recorded as a deemed dividend from March 14 through May 15, 2009. The dividend recorded through March 31, 2009 is approx imately $465,000, and the remaining dividend of $1,518,000 will be recorded in the second quarter of 2009. The value of the Preferred Stock Warrant was nominal. Under applicable NYSE Amex rules, the Offering required stockholder approval, as more fully described in Footnote 1 above. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of Promissory Notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the Warrants issued to these investment funds were terminated.

The Company granted its placement agent for the Offering a Common Stock Warrant to purchase 350,000 shares of common stock for $0.41 per share. Until stockholder approval of the Offering, this Common Stock Warrant was only exercisable for no more than 88,550 shares. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. This warrant expires on March 13, 2012. The fair value of the warrant of approximately $102,000 was determined using the Black Scholes model. The factors used in the calculation are as follows: expected volatility of 66.8%, expected term of 3 years and risk-free interest rate of 1.36%. Expected volatility and risk-free interest rates are based upon the expected life of the warrant. The interest rates used are the yield of a 3-year U.S. Treasury Note as of March 13, 2009. Of this amount, $82,000 was deemed to be attributable to the issuance of debt and was capi talized as debt issuance costs.

The Company and Pinnacle entered into an amendment to the Amended and Restated Credit Agreement. Pinnacle agreed to change the terms of repayment such that 50% of the amount borrowed under the amended Credit Agreement (the “Note Payable”), $500,000 as of December 31, 2008 (see Footnote 8 above) will be payable on July 31, 2010 and the remaining balance will be payable on July 31, 2011. Furthermore, the Company and Pinnacle entered into a Note Conversion Agreement for which Pinnacle agreed to automatically convert the principal amount due under the Note Payable into shares of the Company’s Common Stock at a conversion rate of $0.41 per share upon stockholder approval of the Conversion Agreement. The beneficial conversion feature of the Note Payable of approximately $207,000 was recorded as a debt discount. The fair value of the Note Payable, as modified, was approximately $460,000, resulting in a debt discount of $40,000. At the Company 6;s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Note Conversion. Immediately upon stockholder approval, the $500,000 principal amount outstanding under the Note Payable was converted into 1,219,512 shares of the Company’s common stock.

Debt discounts and debt issuance costs are amortized using the effective interest method.

As part of the Offering, the Company entered into an intercreditor agreement with Pinnacle and the Promissory Noteholders. As part of the intercreditor agreement, the Promissory Noteholders agreed to certain terms setting forth debt repayment, security positions and rights. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. Immediately upon stockholder approval, the Promissory Notes were converted into shares of the Company’s Series B-1 Preferred Stock. The intercreditor agreement was terminated upon the conversion of the Promissory Notes.

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

This " 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 and other sections of this Quarterly Report on Form 10Q10 Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not gua ranteesguarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, the general economic conditions in the markets in which the Company operates, levels of industry research and development spending, the Company'sCompany’s ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described in the Company'sCompany’ s filings with the Securities and Exchange Commission, including the "Risk Factors"“Risk Factors” section as set forth below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwis e.otherwise ..

Company Overview

On May 7, 2008, the stockholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc. IGI is engaged in the development, manufacturing, filling and packaging of topical, semi solid and liquid products for pharmaceutical, cosmeceutical and cosmetic companies primarily using its licensed Novasome® encapsulation technology. The Company believes that the Novasome based products developed and manufactured by it are unique in the industry and give its customers a competitive advantage in the market place.

IGI's mission is to be a premier provider of topical liquid and semi-solid products using anits encapsulation technology. Over the last two fiscal years the Company has made four major changes to better pursue its mission:

•

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the Company divested the metal plating business to focus on its core business of topical skin care/treatment products;

•·

the Company acquired filling and packaging equipment that broaden and enhance product and service offerings;

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the Company instituted a policy of charging a fee for its Product Development Services; and

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the Company initiated the development of several prescription skin treatment products with possible commercialization in 2011.

The Company'sCompany’s business plan includes the continued upgrading of its manufacturing capabilities and expanding its production services. Theservices.T he Company will also continue to market its other capabilities to customers, such as product development services and analytical services, all togethereither as a comprehensive package or separately.on an individual basis. In addition to this, the Company intends to explore ways to expand its intellectual property portfolio and increase its R&D product pipeline.

On May 6, 2008, the Company was notified by AMEXNYSE Amex that it was belowfailing to satisfy certain of the AMEXNYSE Amex’s continued listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6 million in stockholders'stockholders’ equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007last six fiscal years. The Company's stockholders'Company’s stockholders’ equity at September 30,March 31, 2009 was $3.6 million.

On June 8, 2008, was $3.4 million.

the Company submitted a plan advising NYSE Amex of the actions that it would take to bring the Company into compliance with the continued listing standards. On July 15, 2008, AMEXNYSE Amex notified the Company that it accepted the Company'sCompany’s plan of compliance and granted the Company an extension until May 6, 2009 to regain compliance with the continued listing standards described above. The Company will be subject to periodic review by AMEXNYSE Amex staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from AMEX.NYSE Amex.

The increase in product salesCompany had a net loss attributable to common stockholders of $1,902,000, or $0.13 per share, for the three months ended September 30,March 31, 2009, compared to net income of $40,000, or $0.00 per share, in the comparable period for 2008, which resulted from the following:

Revenues (in thousands):

The decrease in product sales is due to sales to newpoor economic conditions resulting in a decrease in orders from our existing customers for the three months ended March 31, 2009. A portion of the decrease in revenue was offset by reduced salesrevenue from some of the existingnew customers. Research and development income will not be consistent and will vary, from quarter to quarter, depending on the required timeline of each development project.project; the decrease in research and development income during the period ended March 31, 2009 as compared to the same period in 2008 is attributable to this variance. Licensing and royalty income decreased as a result of a decrease in sales of royaltyroyalty- bearing products.

Costs and expenses (in thousands):

Cost of sales increaseddecreased for the three months ended September 30, 2008March 31, 2009 as a result of the increasedecrease in product sales. Cost of sales as a percent of product sales and research and development income was 83% for the three month period ended September 30, 2008 compared to 58% for the comparable period in 2007. The increase in cost of sales percentage is due to a lower gross margin related to sales to a new customer in the three months ended September 30, 2008.

Selling, general and administrative expenses for the period ended September 30, 2008 increased as a result of higher stock based compensation expense of $70,000 from the issuance of stock options to our President and Chief Executive Officer, severance of $51,000 for our former Vice President of Finance as per her separation agreement, consulting fees of $21,000 and higher employer match contribution in our 401k plan of $6,000 due to a plan change.

Interest (Expense) Income (in thousands):

Interest expense decreased for the three months ended September 30, 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 ratecan vary depending on its short-term notes payable in 2008.

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