UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.)

Filed by the Registrantx

Filed by a partyParty other than the Registrant¨

Check the appropriate box:

IGI, INC.

(Name of Registrant as Specified In Itsin its Charter)

(Name of Person(s) Filing Proxy Statement, if other thanOther Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

IGI, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 24, 200423, 2005

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of IGI, Inc., a Delaware corporation (the “Company”), will be held on Monday, May 24, 200423, 2005 at 9:10:00 a.m. at the Embassy Suites Hotel, 4350 PGA Blvd., Palm Beach Gardens, Florida 33410The Ritz-Carlton Club, 115 Eagle Tree Terrace, Jupiter, FL 33477 (the “Meeting”), for the purpose of considering and voting upon the following matters:

The Board of Directors has no knowledge of any other business to be transacted at the Meeting.

The Board of Directors has fixed the close of business on March 26, 2004April 8, 2005 as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting and at any adjournments thereof.

A copy of the Company’s Annual Report to Stockholders for the year ended December 31, 2003,2004, which contains financial statements and other information of interest to stockholders, accompanies this Notice and the enclosed Proxy Statement.

April 27, 2004May 2, 2005

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEEDS TO BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.

IGI, INC.

105 Lincoln Avenue

Buena, New Jersey 08310

PROXY STATEMENT

For Annual Meeting of Stockholders

To Be Held May 24, 200423, 2005

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of IGI, Inc. (the “Company”) for use at the Annual Meeting of Stockholders to be held on Monday, May 24, 200423, 2005 at 9:10:00 a.m. at the Embassy Suites Hotel, 4350 PGA Blvd., Palm Beach Gardens, Florida 33410,The Ritz-Carlton Club, 115 Eagle Tree Terrace, Jupiter, FL 33477, and at any adjournments thereof (the “Meeting”).

All proxies will be voted in accordance with the instructions of the stockholder. If no choice is specified, the proxies will be voted in favor of the proposals set forth in the accompanying Notice of Meeting. Any proxy may be revoked by a stockholder at any time before its exercise by delivery of a written revocation to the Secretary of the Company at 105 Lincoln Avenue, Buena, New Jersey 08310. Attendance at the Meeting will not itself be deemed to revoke a Proxy unless the stockholder gives affirmative notice at the Meeting that the stockholder intends to revoke the Proxy and vote in person.

Only the record holders of shares of common stock, $.01 par value per share, of the Company (the “Common Stock”) at the close of business on March 26, 2004April 8, 2005 may vote at the Meeting. Each share entitles the record holder to one vote on each of the matters to be voted upon at the Meeting. On March 26, 2004,April 8, 2005, there were 11,565,11411,737,980 shares of Common Stock outstanding.

The Notice of Meeting, Proxy Statement, the enclosed Proxy and the Company’s Annual Report for the year ended December 31, 20032004 are being mailed to stockholders on or about April 27, 2004.May 2, 2005.

Beneficial Ownership of Common Stock

The following table sets forth information as of March 26, 2004April 8, 2005 with respect to the beneficial ownership of shares of Common Stock by (i) each person known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) the directors of the Company, (iii) the Chief Executive Officer and the executive officers of the Company listed in the “Summary Compensation Table” below (collectively, the “Named Executive Officers”), and (iv) the directors and executive officers of the Company as a group. Unless otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

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New Jersey, over which Mr. Morris has voting and investment control. Includes 110,000 shares which Mr. Morris may acquire pursuant to stock options exercisable within 60 days after March 26, 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s directors, executive officers and holders of more than 10% of the Company’s Common Stock (“Reporting Persons”) to file with the SEC and the American Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. SEC regulations also require such persons to furnish the Company with copies of all such reports. Based solely on its review of copies of reports filed by Reporting Persons furnished to the Company, the Company believes that, except as set forth below, during 20032004 its officers, directors and holders of more than 10% of the Company’s Common Stock complied with all Section 16(a) filing requirements. Due to administrative oversight and difficulties encountered with electronic EDGAR filing, during 2003,During 2004, Frank Gerardi filed one late Form 4 reporting three transactions and each remaining directortransactions. Terrence O’Donnell filed two late Forms 4 reporting a total of five transactions. Stephen Morris filed two late Form 4s4 reporting three (3) transactions each.a total of six transactions. Donald Joseph filed two late Form 4 reporting six transactions. Earl Lewis, who resigned from the Board of Directors on January 4, 2004, filed two late Forms 4 reporting a total of six transactions. Dr.

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Constantine Hampers, who resigned from the Board of Directors on January 4, 2004, filed two Forms 4 late reporting a total of six transactions

Votes Required

The holders of a majority of the shares of Common Stock outstanding shall constitute a quorum for the transaction of business at the Meeting. Shares of Common Stock present in person or represented by proxy (including shares which abstain or do not vote with respect to one or more of the matters presented for stockholder approval) will be counted for purposes of determining whether a quorum exists at the Meeting.

The affirmative vote of the holders of a plurality of the shares of Common Stock voted at the Meeting is required for the election of directors (Proposal 1). The affirmative vote of the holders of a majority of the shares of Common Stock voted at the Meeting is required to approve the adoption of an Amendment to increase the number of shares by 200,000 authorized and available under the Company’s 1998 Directors Stock Plan (Proposal 2).directors.

Shares which abstain from voting as to a particular matter, and shares held in “street name” by brokers or nominees who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular matter, will not be counted as votes cast in favor of such matter, and also will not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on a matter that requires the affirmative vote of the holders of a certain percentage of the shares of Common Stock voting on a matter.

PROPOSAL 1 - ELECTION OF DIRECTORS

Nominees for Election as Directors

The persons named as proxies in the accompanying Proxy intend (unless authority to vote therefore is specifically withheld) to vote for the election of the persons named below as directors to hold office until the next Annual Meeting of Stockholders and until their respective successors are elected and qualified. Each nominee has consented to being named in this Proxy Statement and to serve if elected. If any of the nominees becomes unavailable to serve as a director, the persons named as proxies in the accompanying Proxy may vote the Proxy for substitute nominees. The Board of Directors has no reason to believe that any of the nominees will be unable to serve if elected. The table below sets forth certain information with respect to the nominees.

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Board Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THE NOMINEES LISTED BELOW.

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For information relating to shares of the Company owned by each of the directors, see “Beneficial Ownership of Common Stock.”

Executive Officers

In addition to Frank Gerardi, the following people serve as executive officers of the Company:

Dr. Michael F. Holick (59) has served as the Company’s Vice President of Research and Development and Chief Scientific Officer since September 2003. Dr. Holick has been a Professor of Medicine, Physiology and Biophysics at Boston University School of Medicine since 1987. Dr. Holick has served as President of A&D Bioscience Inc. since 1989. A&D Bioscience is a company engaged in clinical assay development and in the development of novel pharmaceutical agents. Dr. Holick served as President and CEO of Holtherics Inc. from 1988 through 2002. Holtherics Inc. was engaged in glucoside technology that enhanced drug delivery systemically and to the central nervous system. Dr. Holick served as Vice President of Research and Development for Strakan Life Sciences Inc. from 1999 through 2003. Strakan Life Sciences Inc. has engaged in the development of pharmaceutical agents for skin and bone diseases.

Nadya Lawrence (36) has served as the Company’s Vice President of Operations since 2001. Prior to that, Ms. Lawrence served as the Company’s R&D Technical Director and R&D Manager from 1995 to 2001.

Carlene Lloyd (32) has served as the Company’s Vice President of Finance since July 2004. Prior to that, Ms. Lloyd served as the Company’s Controller and Senior Accountant since from 1998 to 2004.

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Committees of the Board

The Board of Directors has an Executive Committee, an Audit Committee, a Nominating and Corporate Governance Committee, and an Organization and Compensation Committee. The present composition of the committees of the Board of Directors are set forth below. Membership of the committees may change at the time of the Meeting due to the election of new directors. The Board of Directors has determined that each member (i.e., Donald Joseph and Terrence O’Donnell) of each committee, other than the Executive Committee, satisfy the independence standards applicable and established by the American Stock Exchange (“AMEX”) and the Securities and Exchange Commission (“SEC”) and that each member is free of relationships that would interfere with the individual exercise of independent judgment.

Executive Committee.The Executive Committee has, during times between Board meetings, all the authority of the Board in the management of the Company’s business, except that the Executive Committee has no authority for any matters as to which the Board has specifically directed otherwise and for certain matters set forth under law and in the By-Laws. In practice, the Executive Committee usually acts only on matters specifically delegated to it by the Board and on matters of a more routine nature, and matters to be acted upon must be approved by the independent membersmember of the Committee. In fiscal year 2003, the Board authorized the Executive Committee to oversee the operations of the Company on an interim basis following Mr. Ambrose’s resignation as the Company’s Chief Executive Officer on August 15, 2003 until the appointment of a replacement for Mr. Ambrose. On September 5, 2003, Frank Gerardi was appointed by the Board as the new Chief Executive Officer and immediately assumed responsibility for the operations of the Company.

The members of the Executive Committee are Frank Gerardi (Chair), Stephen Morris and Donald Joseph. During the Company’s fiscal year 2003,2004, the Executive Committee met three times.did not meet.

Organization and Compensation Committee.The Board of Directors has adopted a charter governing the duties and responsibilities of the Organization and Compensation Committee. Pursuant to the charter, the purpose of the Committee shall be to: (i) recommend to the Board of Directors compensation arrangements for the Chief Executive Officer and other executive officers and review their responsibilities and performance and plans for their succession; and (ii) approve

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compensation arrangements for and changes in other corporate officers. In furtherance of this purpose, the Committee shall have the following goals and responsibilities:

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The members of the Organization and Compensation Committee are Stephen Morris (Chair), Donald Joseph and Terrence O’Donnell.O’Donnell (Chair). During the Company’s fiscal year 2003,2004, the Organization and Compensation Committee met twice.two times.

Audit Committee. The Audit Committee has been established for the purpose of overseeing the accounting and financial reporting processes of the Company and audits of the Company’s annual financial statements, as well as its internal controls and audit functions. The Audit Committee is made up at least three solely independent directors and operates under a written charter adopted by the Board of Directors. A copy ofThe charter requires that the Audit Committee Charterconsist solely of no fewer than three independent directors. At the present time, however, the Audit Committee is annexedcomprised of only two independent directors: Donald Joseph and Terrence O’Donnell. This is due to this Proxy Statementthe fact that there are only four directors in total, two of whom are independent. AMEX Rule 121(c), however, provides that “Small Business Issuers” (as defined in SEC Regulation S-B) are only required to maintain a Board of Directors comprised of at least 50% of independent directors and an Audit Committee of at least two members, comprised solely of independent directors. IGI qualifies as Appendix A.a Small Business Issuer (i.e.,the Company is a U.S. issuer with revenues less than $25,000,000 and has a public float less than $25,000,000).

As described more fully in its Audit Committee Charter, the purpose of the Audit Committee is to assist the Board of Directors in fulfilling its responsibilities to shareholders

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stockholders concerning the Company’s accounting and reporting practices, and shall facilitate open communication between the Audit Committee, the Board of Directors, outside auditor and management. The Audit Committee shall discharge its responsibilities, and shall assess the information provided by the Company’s management and the outside auditor, in accordance with its business judgment. In exercising its business judgment, the Audit Committee shall rely on the information and advice provided by the Company’s management and/or its outside auditor. Pursuant to the charter, the function of the Audit Committee includes:

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The members of the Audit Committee are Terrence O’Donnell (Chair), Stephen Morris and Donald Joseph. Due to change in composition of the Company’s Audit Committee in January 2004 as a result of the voluntary resignation of two (2) directors and reduction of the Board to four (4) members, theThe Board of Directors has not yet made a determination as to the designation ofdetermined that Mr. Joseph is an “audit committee financial expert,” which is the subject of Board action for consideration at the annual meeting. See discussion set forth hereinexpert” as to the voluntary resignation of directors and reductiondefined in Board Membership.SEC rules. The Audit Committee met four (4) times during the Company’s fiscal year 2003.2004. A report of the Audit Committee is set forth herein.

Nominating and Corporate Governance Committee.The Board of Directors has adopted a charter governing the duties and responsibilities of the Nominating and Corporate Governance Committee (“Nominating Committee”). A copy of the charter is attached asExhibit A to this proxy statement. Pursuant to the charter, the purpose of the Nominating Committee is to identify individuals qualified to become board members, and to recommend that the board select the director nominees for the next annual meeting of shareholders,stockholders, to develop and recommend to the board a set of corporate governance principles applicable to the Company, and to make recommendations on compensation of the Board of Directors. In furtherance of such purpose, the Nominating Committee shall have the following goals and responsibilities:

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The Nominating Committee shall have sole authority to retain and terminate any consulting firm to assist it in carrying out its duties and responsibilities, as the committee may deem appropriate in its sole discretion. The Nominating Committee shall have sole authority to approve related fees and other retention terms.

The Nominating Committee’s process for recruiting and selecting nominees is for Committee members to attempt to identify individuals who are thought to have the business background and experience, industry specific knowledge and general reputation and expertise that would allow them to contribute as effective directors to the Company’s governance, and who are willing to serve as directors of a public company. To date, the Company has not engaged any third party to assist in identifying or evaluating potential nominees. After a possible candidate is identified, the individual meets with various members of the Committee to ascertain his or her interest and willingness to serve, and Committee members discuss amongst themselves the individual’s potential to be an effective Board member. If the discussions and evaluation are positive, the individual is invited to serve on the Board.

The entire Board of Directors, including the Nominating Committee, approves the nomination of the candidates reflected in Proposal 1. The Nominating Committee will consider shareholderstockholder recommendations for candidates to serve on the Board of Directors. The name of any recommended candidate for director, together with pertinent biographical information, a document indicating the candidate’s willingness to serve if elected, and evidence of the nominating shareholder’sstockholder’s ownership of Company stock should be sent to the Nominating Committee c/o IGI, Inc., Corporate Secretary, 105 Lincoln Avenue, Buena, New Jersey 08310. To date, the Nominating Committee has not adopted a specific formal policy with respect to the consideration of director candidates recommended by shareholdersstockholders and to date no director candidates have been recommended by shareholders.stockholders. If a director candidate were to be recommended by a shareholder,stockholder, the Nominating Committee expects to evaluate such candidate in the same manner it evaluates director candidates identified by the Committee.

The members of the Nominating Committee are Donald Joseph (Chair), and Terrence O’Donnell and Stephen Morris.O’Donnell. The Nominating Committee met onceone time during the Company’s fiscal year 2003.2004.

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Meeting Attendance

During the Company’s fiscal year 2003,2004, the Board of Directors met eight (8)nine times. Each of the current directors attended at least 75% of the meetings of the Board of Directors and the committees on which he served.

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Stockholder Communications with Directors and Director Attendance at Annual Meetings

Stockholders who wish to send communications to the Company’s Board of Directors may do so by sending them in care of the Secretary of the Company at the address which appears on the first page of this proxy statement. Such communications may be addressed either to specified individual directors or the entire Board. The Secretary will have the discretion to screen and not forward to directors communications which the Secretary determines in his or her discretion are communications unrelated to the business or governance of the Company and its subsidiaries, commercial solicitations, offensive, obscene, or otherwise inappropriate. The Secretary will, however, compile all stockholder communications which are not forwarded and such communications will be available to any director

It is the policy of our board of directors that directors are strongly encouraged to attend all annual stockholder meetings. All of our directors attended the 2004 annual meeting of stockholders.

Director Compensation and Stock Options

Director Options.In September 1999, the Board of Directors adopted the 1999 Director Stock Option Plan (the “1999 Plan”). Under the 1999 Plan, on January 2 of each year, beginning with January 2000 (i) each non-employee director is granted a stock option for 15,000 shares, and (ii) each of the Chairmen of the Audit Committee and the Organization and Compensation Committee is granted additional stock options for 15,000 and 10,000 shares, respectively. Additionally, under the 1999 Plan, each newly elected director will receive a stock option grant of 15,000 shares at the time of his/her election. All of such options will be granted at an exercise price equal to the closing price of the Common Stock on the American Stock Exchange on the date of grant. All options granted under the 1999 Plan become 100% vested twelve months after the date of grant.

During 2003,2004, the following number of options were granted under the 1999 Plan on the date indicated to each of the following directors listed below:

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Director Fees. The Board of Directors adopted the 1998 Directors Stock Plan (the “1998 Plan”) in October 1998 to provide each outside director with the right to receive shares of the Company’s Common Stock as director compensation in lieu of cash payments of director fees, thereby encouraging ownership in the Company by the directors. Each non-employee director receives $2,000 in value of Common Stock for each meeting of the Board he or she attends in person, $1,000 in value of Common Stock for each telephonic meeting of the Board attended, $500 in value of Common Stock for each committee meeting attended which is held on the same day as a Board meeting, $1,000 in value of Common Stock for each committee meeting attended which is not held on the same day as the Board meeting, and up to $5,000 in value of Common Stock annually for the Chairmen of certain of the Board committees. The fees are payable quarterly and the number of shares of Common Stock issued to each director is determined by dividing the fees payable for the quarter by the closing price of the Company’s Common Stock on the American Stock Exchange on the last business day of the applicable quarter.

At a Board meeting held on July 19, 2002, the Directors unanimously expressed their willingness to accept a significant reduction in the amount of the share grants to be received under the 1998 Plan as compensation for service on the Board in an effort to provide the Company with their personal support, commitment and assistance at a pivotal time in its growth and development. In furtherance thereof during the July 19, 2002 meeting, the Members of the Board collectively agreed to a 50% reduction in the amount of the share grant fee compensation payable to each Director under the 1998 Plan for the third and fourth quarters of 2002. Moreover, the Board continued to honor this commitment for the entire year of 20032004 in support of the future success of the Company. Moreover, at the meeting of the Board of Directors on July 23, 2003, a resolution was unanimously adopted providing that unless and until only in the event that the Company returns to profitability shall the Directors’ compensation be prospectively restored to the full amounts provided by the 1998 Plan as in effect prior to the Directors’ voluntary 50% reduction program in effect since July 19, 2002.

From the fourth quarter of 2002 through the Third Quarter 2003, the following number of shares of the Company’s Common Stock were received by each of the Directors listed below as compensation due under the 1998 Plan for service on the Board. (1)

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These shares represented a total value at the time of issuance of $56,000.

Legal Proceedings

In August 2003, Dr. Constantine Hampers entered into a settlement with the Securities and Exchange Commission (“SEC”) in the case captionedIn the Matter of Jean-Paul Bolduc, et al, SEC Administrative Proceeding File No. 3-9793 (hereinafter referred to as the “Proceeding”)(1). The matters at issue in the Proceeding concerned events occurring during the time that Dr. Hampers formerly served as the Executive Vice President and member of the Board of Directors of WR Grace & Company (“Grace”). Specifically, the Proceeding concerned the SEC’s challenge and allegations of wrongful conduct by Grace in violation of Generally Accepted Accounting Principles. Dr. Hampers fully cooperated with the SEC at all times in its investigation of such matters and during the pendency of the Proceeding. Without any admission of liability as to the SEC claims and allegations at issue in the Proceeding, under the terms of the settlement reached with the SEC in August 2003 (hereinafter referred to as the “Settlement”), Dr. Hampers consented to the entry of an Order, whereby he shall cease and desist from future violations of Sections 13(a) and 13(b)(2) and (5) of the Securities Exchange Act of 1934 (“1934 Act”) and the rules and regulations promulgated thereunder. In general, Section 13 of the 1934 Act sets forth the laws relating to SEC reporting, filing and other record keeping requirements. Notably, while the Order entered in the Settlement makes findings that Dr. Hamper and other Grace principals “caused” the Section 13 records violations referred to therein, the SEC expressly acknowledged in the Order that Grace’s auditors, Price Waterhouse, were aware of the subject reserves in dispute and nevertheless, gave unqualified opinions with respect to Grace’s financials during the audit year in question. The SEC Order also acknowledged that Dr. Hampers knew that the accounting treatment of the reserves was approved by the Audit Committee of Grace’s Board of Directors after consultation with the Price Waterhouse team. The Settlement was reported by the SEC under Securities Exchange Act of 1934 Release No. 48325 (August 12, 2003) and available online at the SEC websitewww.sec.gov.

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Certain Relationships and Related Transactions

On July 23, 2003, Dr. Michael F. Holick, a professor of Medicine, Physiology and Biophysics at the Boston University School of Medicine, was appointed to head IGI’s newly formed Scientific Advisory Board (“SAB”). The Company selected Dr. Holick based upon his many accomplishments, including the discovery of the active form of Vitamin D, and his extensive research in dermatology, combined with IGI’s exclusive use of the patented Novasome^® technologies in its delivery systems, which should enable the Company to further advance IGI’s position in the topical dermatologics market. As compensation for Dr. Holick’s service on the SAB, on July 23, 2003, Dr. Holick received options for 25,000 shares of the Company’s common stock at a strike price of $1.05, subject to a three yearthree-year vesting schedule contingent upon his containedcontinued affiliation with the Company.

On September 26, 2003, the Company entered into an Employment Agreement with Dr. Holick where he will serve as the Company’s Vice President of Research and Development and Chief Scientific Officer for a term of three years. Under the Employment Agreement, from September 26, 2003 until December 31, 2003, Dr. Holick received a gross monthly salary in the amount of $4,000. Commencing January 1, 2004 and for the remaining term of the Employment Agreement, Dr. Holick shall receive a gross monthly salary in the amount of $8,000 or $96,000 annually.

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On December 24, 2003, the Company entered into a license agreement (“License Agreement”) with Dr. Holick and A&D Bioscience, Inc., a Massachusetts corporation wholly owned by Dr. Holick (collectively referred to as “Holick”), whereby Holick granted an exclusive license to the Company to all his rights to the parathyroid hormone related peptide technologies and the Glycoside technologies (referred to as “PTH Technologies” and “Glycoside Technologies”, respectively) that he developed for various clinical usages including treatment of psoriasis, hair loss and other skin disorders. In consideration for entering into the License Agreement, Holick received up-front a $50,000 non-refundable payment from the Company. ProvidedOn January 24, 2004, in accordance with certain conditions are met,under the License Agreement, Dr. Holick will also receivereceived a grant of 300,000 stock options under the Company’s authorized stock option plans. In addition, Holick shall receivereceived a single milestone payment contingent onof $232,000 (net of 50% of legal fees paid by the Company or $4,000) upon the execution of a sublicense agreement between the Company and a third-partyTarpan Therapeutics, Inc. for the licensed technologies. Certain subsequent royalty payments received by the Company under a sublicense agreement will be shared with Holick after the Company has recovered any payments previously made to Holick under the License Agreement and an amount equal to the value of the options received by Holick under the License Agreement. The Company is responsible for any and all costs, fees and expenses for the prosecution and oversight of any intellectual property rights related to the licensed technologies. Subject to Holick’s early termination rights as provided below, the term of the License Agreement is the longer of twenty (20) years or the life of each of the patents thereunder. However, if within 180 days from the effective date of the License Agreement, the Company has not entered into a sublicense agreement for the PTH Technologies or raised sufficient capital to fund Phase 1 of the New Drug

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Study Human Clinical Trial for Alopecia, Holick has the right to terminate the License Agreement as to the PTH Technologies only, provided Holick returns any and all consideration he received from or paid by the Company under the License Agreement prior thereto, excluding the up-front payment. Further, if within 90 days from the effective date of the License Agreement, the Company hashad not entered into a sublicense agreement for the Glycoside Technologies, Holick hasreserved the right to terminate the License Agreement as to the Glycoside Technologies only. The Company did not sublicense the Glycoside Technologies and, as a result, on April 5, 2004, Holick terminated the Company’s license to the Glycoside Technologies.

On November 10, 2003, the Company entered into a Joint Development Agreement with Pure Energy Corporation d/b/a Pure Energy of America, Inc. (“PEC”), under which each party’s financial commitment is limited to an initial sum of $10,000. The goal of the Joint Development Agreement is to develop a new class of cleaner burning alternative fuel formulations based on PEC’s proprietary fuel formulations and IGI’s microencapsulation technology or a new class of high performance fuel additives based on PEC’s proprietary fuel additives and IGI’s microencapsulation technology. Stephen J. Morris, a Director and a major shareholderstockholder of the Company, is the sole shareholder of PEC and a member of the PEC Board of Directors.

On February 9, 2004, the Company signed a license agreement (“UCT License Agreement”) with Universal Chemical Technologies, Inc. (“UCT”) to utilize theirits patented technology for an electroless nickel boride metal finishing process. This will beis a new venture for the Company and will require anthe Company has had initial capital expenditureexpenditures of approximately $500,000$782,000 in order to set up the operations and commits the Company to purchase a minimum of $25,000 of raw materials from UCT in the first year of the license, $75,000 during the second year and $150,000 during the third and subsequent years.operations. The Company willhas also be required to hire at least onehired two new employeeemployees to oversee the facility operations at an estimated costand for sales and marketing of $60,000 per year.the product. The Company has an exclusive license within a 150 mile150-mile radius of its facility for commercial and military applications. The Company believes there is the possibility of revenue and profit growth using this application, but there is no guarantee that it will materialize. Frank Gerardi, the Company’s Chairman and Chief Executive Officer, as well as a major IGI shareholder,stockholder, has personally invested $250,000$350,000 in UCT, which represents less than a 1% ownership interest by Mr. Gerardi in UCT.

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ownership interest in UCT. We anticipate additional capital expenditures of the Board’s approval of the foregoing license agreement with UCT, it was agreed that the Company would proceed with a limited investment of the initial expenditure required under the UCT License Agreement of $180,000 for the manufacturing equipment. Following thereafter the Board can determine whether or not to proceed with the UCT License Agreement. If the Board determines not to go forward, the Company’s financial exposure is limited at $180,000, and can be mitigated by the sale of the equipment so acquired by the initial expenditure. Furthermore, if the Board determines not to proceed with the proposed UCT License Agreement as provided above, Frank Gerardi (CEO and Chairman of the Board and 8.6% shareholder) and Stephen Morris (Director and 22.6% shareholder) personally guarantee to reimburse the Company for the initial expenditure of $180,000 and further agree to personally take over and assume all the rights and obligations under the proposed UCT License Agreement without any further liability or exposure to IGI.approximately $120,000 in 2005.

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As of December 31, 2003,2004, the Company’s principal sources of liquidity were cash flow from operations, cash and cash equivalents and marketable securities. Management believes that existing cash and cash equivalents, marketable securities and cash flows from operations will be sufficient to meet the Company’s foreseeable cash needs for at least the next year. In addition, as a further measure to ensure the Company’s financial stability, Frank Gerardi (CEO and Chairman of the Board and 8.6% shareholder)9.5% stockholder) and Stephen Morris (Director and 22.6% shareholder)22.8% stockholder) have each personally agreed to loan the Company up to $500,000 each, if necessary, to fund any deficit of the Company through MarchDecember 31, 2005.

At December 31, 1999, accrued compensation totaling $115,000 was owed to the Company’s former Chief Executive Officer, which represented compensation earned but not yet paid. The Company paid this amount in the first quarter of 2000 by issuing 63,448 shares of its Common Stock in satisfaction of the amount owed.

In 2000, the Company’s former Chief Executive Officer chose to defer payment of 2000 and 1999 travel expenses amounting to $129,000 until the Company’s cash flow stabilized. On February 14, 2001, the Company agreed to pay the Company’s obligation using shares of Company Common Stock. Total payments through December 31, 2001 resulted in the issuance of 125,625 shares valued at $129,000.

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company, the most highly compensated executive officers of the Company who received compensation in excess of $100,000 during 20032004 and who were, except as noted below, serving as executive officers at the end of 20032004 (“Named Executive Officers”).

Summary Compensation Table

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Ambrose and Golato, respectively; (ii) $12,509 and $12,509 in medical insurance premiums for each of Messrs. Ambrose and Golato, respectively; and (iii) $2,194 in 401(k) Plan contributions for Mr. Golato. In 2002, the Company paid (i) $1,755, $1,691 and $1,094 in group life insurance premiums for Messrs. Ambrose, Golato and Ms. Lawrence, respectively; (ii) $12,461 and $12,461 in medical insurance premiums for each of Messrs. Ambrose and Golato, respectively; (iii) $942 and $942 in dental insurance premiums for both Messrs. Ambrose and Golato, respectively; (iv) $108 and $108 in vision insurance premiums for both Messrs. Ambrose and Golato, respectively; and (v) $2,189, $2,755 and $1,674 in 401(k) Plan contributions for Messrs. Ambrose and Golato and Ms. Lawrence, respectively. In 2003, the Company paid (i) $1,756, $912, $1,654 and $1,140 in group life insurance premiums for Mr. Ambrose, Ms. Higuera, Mr. Golato and Ms. Lawrence, respectively; (ii) $3,681, $18,261, $4,400, $12,720 and $9,166 in medical insurance premiums for Mr. Gerardi, Mr. Ambrose, Ms. Higuera, Mr. Golato and Ms. Lawrence, respectively; (iii) $980, $301, $980 and $597 in dental insurance premiums for Mr. Ambrose, Ms. Higuera, Mr. Golato and Ms. Lawrence, respectively; (iv) $187, $61, $187 and $113 in vision insurance premiums for Mr. Ambrose, Ms. Higuera, Mr. Golato and Ms. Lawrence, respectively; and (v) $3,896, $1,613 and $2,221 in 401(k) Plan contributions for Mr. Ambrose, Ms. Higuera and Mr. Golato, respectively.

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continue participation therein under COBRA and/or any other applicable laws, and Ambrose and/or his dependents shall be solely responsible for the payment of any and all costs and expenses relating thereto, including, without limitation, premium costs and expenses for continued coverage under COBRA and/or any other applicable law.

Stock Options

The following tables set forth certain information concerning option grants during the fiscal year ended December 31, 20032004 to the Named Executive Officers and the number and the value of the options held by such persons on December 31, 2003.2004. No options were exercised by Named Executive Officers during 2003.2004.

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OPTION GRANTS IN LAST FISCAL YEAR

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16

AGGREGATEAGGREGATED OPTION EXERCISES IN FISCAL YEAR 20032004 AND YEAR END 2003

2004 OPTION VALUEVALUES

The following table sets forth information concerning the exercise of stock options during fiscal year 20032004 by each of the Named Executive Officers and the fiscal year-end value of unexercised options.

Employment AgreementsSeverance Agreement

In April 2001, John F. Ambrose was appointed by the Board of Directors asThe Company and Domenic Golato, the Company’s newformer Chief Executive Officer. Prior thereto, Mr. Ambrose had been the Company’sFinancial Officer and Senior Vice President, and Chief Operating Officer since September 2000. The Company did not have an employment agreement with Mr. Ambrose. Effective as of August 15, 2003, John Ambrose ended his employment with the Company. In conjunction therewith, the Company entered into a severance

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agreement, with Mr. Ambrose dated August 15, 2003 (“Severance Agreement”).effective July 1, 2004. Under the termsagreement, Mr. Golato continued to receive his annual base salary of the Severance Agreement, any$168,600 and all claims between the Company and Mr. Ambrose were resolved by the exchangeannual auto allowance of mutual general releases. In addition, Mr. Ambrose returned to the Company the 400,000 fully vested unexercised stock options granted to him by the Company over the course of his employment, which were promptly cancelled. In consideration of the foregoing, the Company was required under the Severance Agreement to provide the following payments and benefits to Mr. Ambrose: (a) upon execution of the Severance Agreement, Mr. Ambrose received a lump sum payment of $173,250$7,200 (less any and all applicable taxes, withholdings, contributions and other deductions), representing 90% of his gross annual salary in effect immediately prior to through the end of his employment with IGI; and (b) for a period of twelve (12) months commencing August 31, 2003 and ending August2004. On December 31, 2004, IGI shall continue at its expensethe Company made a lump sum severance payment to provide Mr. AmbroseGolato in the amount of $85,646 (less any and his dependents with health, medicalall applicable taxes, withholdings, contributions and dental insurance coverage benefits under the IGI, Inc. Aetna, Inc. Health Insurance Plan and/or any other employer provided plan or policy, if any.deductions).

On July 1, 2000, the Company entered into an employment agreement with Domenic Golato, Senior Vice President and Chief Financial Officer of the Company. The agreement provided for employment through June 30, 2001. Each year beginning June 30, 2001, the term of the agreement shall automatically be extended for an additional year unless either party gives written notice to the other party by April 30 of that year that it does not wish to extend the term of the agreement. Under the terms of the agreement, Mr. Golato’s base salary for the first year of the term thereof was $168,600, subject to annual merit increase reviews, plus an auto allowance of $600 per month. Mr. Golato’s employment agreement also provides that all equity-based awards received by Mr. Golato will vest fully upon a change of control of the Company or a change in more than half of the members of the Board of Directors over a two-year period. In April 2001, Mr. Golato’s base salary and auto allowance under his employment agreement were increased to $185,460 and $750 per month, respectively.

As of September 26, 2003, the Company over Mr. Golato’s protest unilaterally reduced his salary and auto allowance to the initial first year amounts under his employment agreement of $168,600 annual salary and $600 monthly auto allowance. The Company reduced Mr. Golato’s compensation as a cost savings measure to reflect the new size of the Company. Mr. Golato contests the Company’s unilateral reduction of his compensation as prohibited under the terms of his employment agreement. The Company deems the compensation reduction to be permissible by the terms of the employment agreement.

In the event that Mr. Golato’s employment is terminated by the Company with cause or if Mr. Golato resigns, Mr. Golato will receive his base salary, bonus and all other benefits which have accrued as of the date of termination. In the event that Mr. Golato’s employment is terminated by the Company without cause, Mr. Golato is entitled to continuation of his annual salary and benefits for twelve months, and all of his unvested options will fully vest and become exercisable for a period of at least two years after the date of his termination.

IGI has given written notice under the terms of the employment agreement dated August 31, 2000 between Domenic N. Golato and IGI that IGI will not extend the employment agreement that is in effect until June 30, 2004.

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The Company will give a descriptive reason for this action after the next Board meeting.

REPORT OF THE ORGANIZATION AND COMPENSATION COMMITTEE

Overview and Philosophy

The Organization and Compensation Committee of the Board of Directors (the “Compensation Committee”), previous known as the Human Resources and Compensation Committee and prior thereto as the Compensation and Stock Option Committee, shall be comprised of no fewer than two members. All members of the Compensation Committee shall be independent directors and shall satisfy the independence standards established by the American Stock Exchange and the Securities and Exchange Commission. The members of the Compensation Committee shall be appointed by the Board of Directors upon recommendation of the Nominating and Corporate Governance Committee and may be removed by the Board of Directors in its discretion.

The purpose of the Committee shall be to: (i) recommend to the Board of Directors compensation arrangements for the Chief Executive Officer and other executive officers and review their responsibilities and performance and plans for their succession; and (ii) approve compensation arrangements for and changes in other corporate officers.

The objectives of the Company’s executive compensation program are to:

Compensation Program

The Company’s executive compensation program consists of three principal elements — base salary, annual cash incentive compensation and long-term incentive compensation in the form of stock options.

The base salaries received by Mr. Golato in 2001, 2002 and 2003 were established pursuant to the terms of his employment agreement with the Company. See discussion set forth above under heading “Employment Agreements.” Base salary levels for the Company’s executive officers are generally based on a review of compensation for competitive positions in the market, the executives’ job skills and experience and judgments as to past and future contributions of the executives to the Company’s success. The Committee seeks to set the annual base salaries of its executives at levels competitive with those paid to executives in those businesses in which the Company is engaged, namely, consumer products (with the discontinuation of the Companion Pet Products’ operations in the second quarter of 2002).products. It seeks, however, to provide its executives with opportunities for substantially higher compensation through annual incentive awards and stock options.

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The Company has implemented a variable compensation plan for its top executives. The purpose of the plan is to directly link management compensation to Company performance. Present plans include expanding the application of the variable compensation plan to more upper level managers. Long-term incentives for executive officers and key managers are provided through stock options. The objectives of this program are to align executive and stockholder long-term interests by creating a strong and direct link between executive compensation and stockholder return, and to

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enable executives to develop and maintain a significant, long-term stock ownership position in the Company’s Common Stock. Stock options are granted at an option price equal to the fair market value of the Company’s Common Stock on the date of grant and will only have value if the Company’s stock price increases. In selecting executives eligible to receive option grants and determining the amount of such grants, the Committee evaluates a variety of factors including (i) the job level of the executive, (ii) option grants awarded by competitors to executives at a comparable job level, and (iii) past, current and prospective service to the Company rendered, or to be rendered, by the executive. It has been

Chief Executive Officer’s 2004 Compensation

The factors considered by the Compensation Committee in determining the compensation of Mr. Gerardi, the Chief Executive Officer, in addition to survey data, include the Company’s practiceoperating and financial performance, as well as his leadership and establishment and implementation of strategic direction for the Company. During 2004, the Compensation Committee increased Mr. Gerardi’s base compensation from $60,000 to fix$120,000 per year. The Committee authorized this increase because Mr. Gerardi’s salary was, and remains, significantly below the market level for companies of comparable size.

The Compensation Committee considers stock options to be an important component of the Chief Executive Officer’s compensation as a way to reward performance and motivate leadership for long-term growth and profitability. In 2004, Mr. Gerardi was granted options to purchase 50,000 shares, with an exercise price of option grants at 100% ofequal to the fair market value per share on theat date of grant.

Executive Officers’ 2003 Compensation

Mr. Ambrose was the Chief Executive Officer of the Company from April 30, 2001 until August 15, 2003. Frank Gerardi was appointed Chief Executive Officer of the Company on September 5, 2003 and currently holds such position with the Company. Mr. Golato became the Chief Financial Officer and Senior Vice President of the Company This option vests over three years in June 2000 pursuant to the terms of his employment agreement with the Company. While Mr. Golato currently holds such position with the Company, on April 26, 2004, the Company gave Mr. Golato written notice of termination of employment under his employment agreement with the Company effective as of June 30, 2004. See discussion concerning Mr. Golato’s employment set forth above under section heading “Employment Agreements.”

Mr. Ambrose did not have an employment agreement with the Company, but his base salary compensation was annually reviewed for merit increases. In 2003, Mr. Ambrose received base salary compensation of $126,606 for his service as the Company’s Chief Executive Officer and President from January 1 until his resignation on August 15, 2003. In addition, under a severance agreement dated August 15, 2003 (“Severance Agreement”), Mr. Ambrose received from the Company a lump sum payment of $173,250 (less any and all applicable taxes, withholdings, contributions and other deductions), representing 90% of his gross annual salary in effect immediately prior to the end of his employment with IGI. On September 5, 2003, Mr. Gerardi was appointed as the Company’s Chief Executive Officer at a base annual salary of $60,000. In 2003, Mr. Gerardi received as base salary compensation $18,462. In 2003, Mr. Golato received base salary compensation of $181,569, under the terms of his employment agreement with the Company subject to a 10% reduction in the base salary compensation amount thereunder effectuated by the Company under protest by Mr. Golato as of September 26, 2003.equal yearly increments.

Tax Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), generally disallows a tax deduction to public companies for compensation in excess of one million dollars

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paid to its chief executive officer and its other four highest compensated officers.officers (collectively, the “Named Executive Officers”). Qualified performance-based compensation will not be subject to the deduction limit if certain requirements are met. While the Committee does not currently intend to qualify its annual cash incentive compensation as qualified performance-based compensation, it will continue to monitor the impact of Section 162(m) on the Company. Based on the compensation receivedpaid to the Named Executive Officers in 2003 by Messrs. Ambrose, Gerardi and Golato as summarized above,2004, it does not appear that the Section 162(m) limitation will have a significant impact on the Company in the near term.

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REPORT OF THE AUDIT COMMITTEE

The ultimate responsibility for good corporate governance rests with the Board of Directors, whose primary roles are oversight, counseling and direction to IGI’s management in the best long-term interests of the corporation and its stockholders. The Board’s Audit Committee (the “Audit Committee”) has been established for the purpose of overseeing the accounting and financial reporting processes of the Company and audit of the Company’s annual financial statements. During the past year, theThe Sarbanes-Oxley Act of 2002 added a number of provisions to federal law to strengthen the authority of, and increase the responsibility of, corporate audit committees. The Company is subject as well to related rules concerning audit committee structure, membership, authority and responsibility recently adopted by the American Stock Exchange (“AMEX”).

IGI’s Audit Committee is made up at least three solely independent directors, as defined in the rules of the SEC and AMEX, and it operates under a written charter adopted by the Board. The composition of the Audit Committee, the attributes of its members and its responsibilities, as reflected in its charter, are intended to be in accordance with applicable requirements for corporate audit committees. The Audit Committee reviews and assesses the adequacy of its charter on an annual basis.

The annual review of theAudit Committee charter was recently completed and adopted by the Board with all relevant provisions of the Sarbanes-Oxley Act and related AMEX rules having been reflected therein. A copy ofrequires that the Audit Committee Charterconsist solely of no fewer than three independent directors. At the present time, however, the Audit Committee is annexed heretocomprised of only two independent directors: Donald Joseph and Terrence O’Donnell. This is due to the fact that there are only four directors in total, two of whom are independent. AMEX Rule 121(c), however, provides that “Small Business Issuers” (as defined in SEC Regulation S-B) are only required to maintain a Board of Directors comprised of at least 50% of independent directors and an Audit Committee of at least two members, comprised solely of independent directors. IGI qualifies as Appendix A.a Small Business Issuer (i.e.,the Company is a U.S. issuer with revenues less than $25,000,000 and has a public float less than $25,000,000).

As described more fully in its charter, the purpose of the Audit Committee is to assist the Board in its general oversight of IGI’s financial reporting, internal controls and audit functions. Management is responsible for the preparation, presentation and integrity of IGI’s financial statements; accounting and financial reporting principles; internal controls; and procedures designed to ensure compliance with accounting standards, applicable laws and regulations. KPMG LLP, IGI’sThe Company’s independent auditing firm is responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards. In accordance with the Sarbanes-Oxley Act, the Audit Committee has ultimate authority and responsibility to select, compensate, evaluate and, when appropriate, replace IGI’s independent auditors.

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The Audit Committee members are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the independent auditors, nor can the Audit Committee certify that the independent auditors are “independent” under applicable rules. The Audit Committee serves a board-level oversight role, in which it provides advice, counsel and direction to management and the auditors on the basis of the information it receives, discussions with management and the auditors, and the experience of the Audit Committee’s members in business, financial and accounting matters. The Audit Committee has the authority to engage its own outside advisers, including experts in particular areas of accounting, as it determines appropriate, apart from counsel or advisers hired by management.

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The Audit Committee has an annual agenda that includes reviewing IGI’s financial statements, internal controls and audit matters. The Audit Committee meets each quarter with the Company’s external auditors KPMG LLP, IGI’s Chief Financial Officer and management to review IGI’s interim financial results before the publication of IGI’s quarterly earnings press releases. Management’s and independent auditors’ presentations to and discussions with the Audit Committee cover various topics and events that may have significant financial impact and/or are the subject of discussions between management and the independent auditors. In addition, the Audit Committee generally oversees IGI’s internal compliance programs. In accordance with law, the Audit Committee is responsible for establishing procedures for the receipt, retention and treatment of complaints received by IGI regarding accounting, internal accounting controls or auditing matters, including the confidential, anonymous submission by IGI employees, received through established procedures, of concerns regarding questionable accounting or auditing matters.

Among other matters, the Audit Committee monitors the activities and performance of IGI’s external auditors, including the audit scope, external audit fees, auditor independence matters and the extent to which the independent auditors may be retained to perform non-audit services. IGI’s independent auditors provide the Audit Committee with the written disclosures required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and the Audit Committee discussesdiscussed with the independent auditors and management that firm’s independence.

Additionally, the Committee considered all audit services provided by the independent auditors and the fees and costs billed and expected to be billed by the independent auditors for those services. The Committee has discussed with management the procedures for selection of consultants and the related competitive bidding practices and fully considers whether those services provided by the independent auditors are compatible with maintaining auditor independence.

In accordance with existing Audit Committee policy and the more recent requirements of the Sarbanes-Oxley Act, all services to be provided by KPMG LLPthe Company’s independent auditors are subject to pre-approval by the Audit Committee. This includes audit services, audit-related services, tax services and other services. The Sarbanes-Oxley Act prohibits an issuer from obtaining certain non-audit services from its auditing firm so as to avoid certain potential conflicts of interest. IGI has not in recent years obtained any of these services from KPMG LLP,its independent auditors, and IGI is able to obtain such services, if needed, from other service providers at competitive rates. See “Selection of“Relationship with Independent Auditors for 2004”Accountants” for more information regarding fees paid to KPMG LLPthe Company’s independent auditors for services in fiscal years 20022004 and 2003.

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The Audit Committee has reviewed and discussed the consolidated financial statements for fiscal year 20032004 with management and the independent auditors; management represented to the Audit Committee that IGI’s consolidated financial statements were prepared in accordance with generally accepted accounting principles; and the independent auditors represented that their presentations included the matters required to be discussed with the independent auditors by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees.” This review included a discussion with management of the quality, not merely the acceptability, of IGI’s accounting principles, the reasonableness of significant estimates and judgments, and the clarity of disclosure in IGI’s financial statements. The Audit Committee has received the written disclosures and the letter from KPMG LLPAmper, Politziner & Mattia, P.C. required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as modified

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or supplemented, and the Audit Committee and the independent auditors have discussed the auditors’ independence from the Company and its management. The Audit Committee has discussed with the Company’s independent auditors, with and without management present, their evaluations of the Company’s internal accounting control and the overall quality of the Company’s financial reports. In reliance on these views and discussions, and the report of the independent auditors, the Audit Committee has recommended to the Board, and the Board has approved, the inclusion of the audited consolidated financial statements in IGI’s Annual Report on Form 10-K for the year ended December 31, 20032004 for filing with the SEC.

SELECTION OFRELATIONSHIP WITH INDEPENDENT AUDITORS FOR 2004PUBLIC ACCOUNTANTS

The Audit Committee ofhas selected Amper, Politziner & Mattia, P.C. to serve as the Board has not yet determined to select KPMG LLP as IGI’sCompany’s independent auditors for the fiscal year ending December 31, 2004. The Audit Committee has decided that it will request proposals2005. No representatives from several other largeAmper, Politziner & Mattia, P.C. are expected to mid-size independent auditing firms, includingattend the annual meeting.

Change in Independent Auditors

By letter dated May 18, 2004, KPMG LLP with regard tonotified the audit engagement for 2004. KPMG LLP is engagedCompany of its resignation as ourthe Company’s independent auditors by the Board’s Audit Committee, who can dismiss the firm in its sole discretion without payment of any penalty fee. This review process will likely take a number of months, and it may be the case that any resulting decision will be for 2005 rather than 2004.

The Audit Committee decided to take this action on auditor selection because it wanted the opportunity for a detailed review of other auditing firms as prospective independent auditors for IGI, in addition to KPMG LLP, and to consider the benefits and detriments of changing independent audit firms. The Audit Committee, in consultation with management, determined that there were possible benefits to be considered with regard to obtaining a “fresh look” at IGI’s financial

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accounting and internal controls processes. This decision was not related to the quality of services provided by KPMG LLP, nor was it undertaken with the expectation of realizing overall cost savings. Changing auditing firms would involve substantial time and expense, and may have both positive and negative aspects. In connection with this hiring review,auditors. On June 21, 2004, the Audit Committee will considerengaged Amper, Politziner & Mattia, P.C. as the advisability and ramifications of a change of auditor.

In the past, we have requested that our stockholders vote to ratify the appointment of KPMG LLP asCompany’s independent auditors for the year. This vote is only advisory, because the Board of Directors (and now the Board’s Audit Committee) has the sole authority to hire and dismiss the independent auditors. We have not included an auditor ratification proposal this year because it is not known as of the date of this proxy statement whether or not KPMG LLP will remain as our independent auditors for 2004; as a result, the Board did not consider a ratification proposal to be meaningful this year. It is not presently known when a final decision will be made with regard to choice of independent auditors and if it will be for 2004 or for 2005. IGI will make a public announcement in the event that it decides to engage a firm other than KPMG LLP.

KPMG LLP has not resigned from or advised IGI that it will decline to stand for reappointment to the IGI engagement. KPMG LLP has not advised IGI that information has come to its attention that has led the firm to no longer be able to rely on management’s representations, or that has made KPMG LLP unwilling to be associated with the consolidated financial statements prepared by management. KPMG LLP’s report on IGI’s consolidatedthe financial statements in IGI’s Form 10-Kof the Company for each of the fiscal years ended December 31, 2003 doesand December 31, 2002 did not contain an adverse opinion or a disclaimer of opinion nor is itand was not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit scope. There have not been anyreport for the fiscal year ended December 31, 2003 included an explanatory paragraph with respect to the Company’s adoption of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, relating to the classification of losses from the extinguishment of debt in 2003.

During the fiscal years ended December 31, 2003 and December 31, 2002 and for the period of January 1, 2004 through May 18, 2004, there were no disagreements withbetween the Company and KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements,disagreement(s), if not resolved to the satisfaction of KPMG LLP, would have caused the firmit to make reference to the subject matter of the disagreementsdisagreement(s) in connection with its report.report on the financial statements for that fiscal year. During the fiscal years ended December 31, 2003 and December 31, 2002 and for the period of January 1, 2004 through May 18, 2004, there were no reportable events that would have required disclosure under Item 304(a)(1)(v) of Regulation S-K promulgated by the SEC.

In part due to22

During the new requirements of the Sarbanes-Oxley Act offiscal years ended December 31, 2003 and 2002 and for the period of January 1, 2004 through May 18, 2004, the Company did not consult Amper, Politziner & Mattia, P.C. regarding the application of generally accepted accounting principles to a specific transaction, either proposed or completed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements or any other currentmatters or reportable events as set forth in Items 304(a)(2)(i) and future regulations, IGI expects that its(ii) of Regulation S-K.

Fees Paid to Independent Auditors

The following table shows the fees for the audit and audit-related expenses will increase for 2004 over the 2003 amounts described below. IGI’s overall costs, including related internal costs, may possibly be greater in the event that a firm other thanservices provided by each of KPMG LLP is chosen as independent auditorsand Amper, Politziner & Mattia, P.C. for 2004. Extra timefiscal years 2004 and expense would be involved to familiarize new auditors with IGI’s operations, procedures, systems and the industry environment. The knowledge, expertise and efficiencies developed over time by KPMG LLP with regard to IGI would not likely be duplicated by a new firm for a number of years. The Audit Committee will consider these and other matters in its selection process.2003:

Representatives of KPMG LLP or Amper, Politziner & Mattia, P.C. attended all meetings of the Audit Committee in 2003.2004. The Audit Committee pre-approves and reviews audit services performed by KPMG LLPthe Company’s independent auditors as well as the fees charged by KPMG LLP for such services. KPMG LLP did not perform any non-audit services for IGI during fiscal year 2003. However, to the extent KPMG LLP has previously or may in the future perform non-audit services for IGI, inIn its pre-approval and review of non-audit service fees, the Audit Committee considers, among other things, the possible effect of the performance of such services on the auditors’ independence. Neither KPMG LLP nor Amper, Politziner & Mattia, P.C. performed any non-audit services for IGI during fiscal year 2004.

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IGI expects that a representative of KPMG LLP will attend the annual meeting, and the representative will have an opportunity to make a statement if he or she so desires. The representative will also be available to respond to appropriate questions from stockholders.

Fees Paid to KPMG LLP

Audit Fees

During fiscal year 2003, KMPG LLP acted only as the independent auditors for the Company (work related to auditing the annual financial statements for those fiscal year and reviewing the financial statements included in the Company’s Forms 10-Q) and did not render any other non-audit services to the Company. During fiscal year 2002, KPMG LLP not only acted as the independent auditors for the Company, but also rendered other audit-related and non-audit services falling in the exempted category of “tax services.”

The aggregate amount the Company was billed by KPMG LLP as fees for audit services rendered for the 2003 quarterly reviews and audit of the Company’s annual financial statements for 2003 was $78,500, plus expenses, but does not include any overrun billings which have yet to be billed to the Company by KPMG LLP.

The aggregate amount the Company was billed by KPMG LLP as fees for audit services rendered for the 2002 quarterly reviews and audit of the Company’s annual financial statements for 2002 was $102,000 plus expenses. KPMG LLP billed the Company for $54,100 for audit-related fees for 2002 with respect to the proxy statement for the sale of the Companion Pet Products division and the closing balance sheet audit of such division. In addition, the Company was billed $4,120 for tax related services rendered in 2002.

Compensation Committee Interlocks and Insider Participation

The Organization and Compensation Committee is comprised of Messrs. Joseph, and O’Donnell. No member of the Organization and Compensation Committee was, during fiscal year 2003,2004, an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries. During fiscal year 2003,2004, no executive officer of the Company served as a director or member of the Organization and Compensation Committee (or other board committee performing equivalent functions, or in the absence of such committee, the

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entire board of directors) of another entity, one of whose executive officers served as a member of the Organization and Compensation Committee, or as a director of the Company.

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Comparative Stock Performance

The graph below compares the cumulative total stockholder return on the Common Stock of the Company for the last five fiscal years with the cumulative total return on the AMEX Market Value (U.S. & Foreign) Index, a peer group over the same period (assuming the investment of $100 in the Company’s Common Stock, the AMEX Market Value (U.S. & Foreign) Index and the peer group on December 31, 1998,1999, and reinvestment of all dividends). The peer group consists of Connetics Corp., Bradley Pharmaceutical Inc., ProCyte Corp., Allergan Inc., Lectec Corp. and Nu Skin Enterprises, Inc.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURNRETURN*

AMONG IGI, INC,INC., THE AMEX MARKET VALUE (U.S. & FOREIGN) INDEX

AND A PEER GROUP

Fiscal year ending December 31.

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PROPOSAL 2 – APPROVAL OF AND PROPOSED ADOPTION OF AN AMENDMENT

TO INCREASE THE NUMBER OF SHARES BY 200,000 AUTHORIZED AND

AVAILABLE UNDER THE COMPANY’S 1998 DIRECTORS STOCK PLAN.

The Board of Directors adopted the 1998 Directors Stock Plan (the “1998 Plan”) in October 1998 to provide each outside director with the right to receive shares of the Company’s Common Stock as director compensation in lieu of cash payments of director fees, thereby encouraging ownership in the Company by the directors, and authorized 200,000 shares of the Company’s common stock to be reserved for issuance under the 1998 Plan. Under the 1998 Plan, each non-employee director receives $2,000 in value of Common Stock for each meeting of the Board he or she attends in person, $1,000 in value of Common Stock for each telephonic meeting of the Board attended, $500 in value of Common Stock for each Committee meeting attended which is held on the same day as a Board meeting, $1,000 in value of Common Stock for each Committee meeting attended which is not held on the same day as the Board meeting, and up to $5,000 in value of Common Stock annually for the Chairmen of certain of the Board committees. The fees are payable quarterly and the number of shares of Common Stock issued to each director is determined by dividing the fees payable for the quarter by the closing price of the Company’s Common Stock on the American Stock Exchange on the last business day of the applicable quarter.

At a Board meeting held on July 19, 2002, the Directors unanimously expressed their willingness to accept a significant reduction in the amount of the share grants to be received under the 1998 Plan as compensation for service on the Board in an effort to provide the Company with their personal support, commitment and assistance at a pivotal time in its growth and development. On July 19, 2002, the Members of the Board collectively agreed to a 50% reduction in the amount of the share grant compensation payable to each Director under the 1998 Plan for the third and fourth quarters of 2002. Moreover, the Board continued to honor this commitment for the entire year of 2003 in further support of the future success of the Company. At the Company’s Board of Directors meeting held on July 23, 2003, a resolution was unanimously adopted providing that unless and until only in the event that the Company returns to profitability shall the Directors’ compensation be prospectively restored to the full amounts provided by the 1998 Plan as in effect prior to the Directors’ voluntary 50% reduction program in effect since July 19, 2002.

The Company believes that the 1998 Plan has been and will continue to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons to serve as Directors who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities, thereby better aligning the interests of such persons with those of the Company’s stockholders. As of the present date, all of the 200,000 shares of the Company’s common stock reserved under the 1998 Plan have been issued and none remain for future grants under the 1998 Plan. Specifically, in 2002 and 2001, 70,011 and 129,989 shares of the Company’s Common Stock were issued under the 1998 Plan as consideration for directors’ fees using up all 200,000 shares reserved under the 1998 Plan. In 2003 and 2002, the Company issued 79,318 and 311 shares of Common Stock as consideration for directors’ fees as provided by the 1998 Plan, which were funded from available shares reserved under the 1999 Stock Incentive Plan (“1999 Plan”) as authorized by the terms thereof.

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Federal Income Tax Consequences

The following is a summary of the United States federal income tax consequences that generally will arise with respect to shares of the Company’s Common Stock issued as compensation for directors’ fees under the 1998 Plan and with respect to the sale of Common Stock issued under 1998 Plan.

A participant Director will not recognize taxable income upon the issuance of restricted shares of common stock under the 1998 Plan as compensation for director’s fees, unless the participant Director makes an election under Section 83(b) of the Code (a “Section 83(b) Election”). If the participant Director makes a Section 83(b) Election within 30 days of the date the shares are issued, then the participant Director will recognize ordinary compensation income, for the year in which the shares are issued, in an amount equal to the difference between the fair market value of the Common Stock at the time the shares are issued and the purchase price paid for the Common Stock. If a Section 83(b) Election is not made, the participant Director will recognize ordinary compensation income at the time that the forfeiture provisions or restrictions on transfer lapse, in an amount equal to the difference between the fair market value of the Common Stock at the time of such lapse and the original price at which the Common Stock was issued. The participant Director will have a basis in the Common Stock acquired equal to the sum of the issue price and the amount of ordinary compensation income recognized. Upon the disposition of the restricted shares of Common Stock acquired under the 1998 Plan, the participant Director will recognize a capital gain or loss in an amount equal to the difference between the sale price of the Common Stock and the participant Director’s basis in the Common Stock. This capital gain or loss will be a long-term capital gain or loss if the shares are held for more than one year. For this purpose, the holding period shall begin just after the date on which the forfeiture provisions or restrictions lapse if a Section 83(b) Election is not made or just after the stock is issued if a Section 83(b) Election is made.

Tax Consequences to the Company

The issuance of shares of Common Stock as compensation for director’s fees under the 1998 Plan will have no tax consequences to the Company. Moreover, in general, the sale of any Common Stock acquired under the 1998 Plan will not have any tax consequences to the Company. The Company generally will be entitled to a business-expense deduction relating to shares issued to Directors under the 1998 Plan. Any such deduction will be subject to the limitations of Section 162(m) of the Code.

32

Board Recommendation

THE BOARD OF DIRECTORS BELIEVES THAT APPROVAL OF ADOPTION OF AN AMENDMENT TO INCREASE THE NUMBER OF SHARES BY 200,000 AUTHORIZED AND AVAILABLE UNDER THE COMPANY’S 1998 DIRECTORS STOCK PLAN IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” APPROVAL OF AN INCREASE IN THE NUMBER OF AUTHORIZED SHARES UNDER THE 1998 DIRECTORS STOCK PLAN.

STOCKHOLDER PROPOSALS FOR 20052006 ANNUAL MEETING

Any proposal that a stockholder intends to present at the 20052006 Annual Meeting of Stockholders must be submitted to the Secretary of the Company at its offices, 105 Lincoln Avenue, Buena, New Jersey 08310, no later than December 8, 2004,28, 2005, in order to be considered for inclusion in the Proxy Statement relating to that meeting.

If a stockholder of the Company wishes to present a proposal before the 20052006 Annual Meeting and the Company has not received notice of such matter prior to March 22, 2005,4, 2006, the Company shall have discretionary authority to vote on such matter, if the Company includes a specific statement in the proxy statement or form of proxy to the effect that it has not received such notice in a timely fashion.

OTHER MATTERS

The Board of Directors knows of no other business which will be presented for consideration at the Meetingmeeting other than that described above. However, if any other business should come before the Meeting,meeting, it is the intention of the persons named in the enclosed Proxy to vote, or otherwise act, in accordance with their best judgment on such matters.

The Company will bear the costs of soliciting proxies. In addition to solicitations by mail, the Company’s directors, officers and regular employees may, without additional remuneration, solicit proxies by telephone, telegraph, facsimile and personal interviews. The Company will also request brokerage houses, custodians, nominees and fiduciaries to forward copies of the proxy material to those persons for whom they hold shares and request instructions for voting the Proxies. The Company will reimburse such brokerage houses and other persons for their reasonable expenses in connection with this distribution.

3326

THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.

April 27, 2004May 2, 2005

3427

Appendix

Exhibit A

IGI Inc.

AUDITNOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER

(As amended, effective November 5, 2003)February 10, 2004)

The AuditNominating and Corporate Governance Committee of the Board of Directors of IGI Inc. (the “Committee”) shall consist of no fewer than threetwo members. All members of the Committee shall be independent directors and shall satisfy the independence and qualification standards established by the American Stock Exchange and the Securities and Exchange Commission (the “SEC”). It is the goal of the Committee that one member of the Committee shall be an “audit committee financial expert” as defined by the SEC. No Committee member shall simultaneously serve on the audit committees of more than two other public companies, unless the Board of Directors determines that such service would not impair the member’s ability to effectively serve on the Audit Committee.Commission. The members of the Committee shall be appointed by the Board of Directors upon recommendation of the Nominating and Corporate Governance Committee and may be removed by the Board of Directors in its discretion.

The purpose of the Committee shall be to (a) assistidentify individuals qualified to become board members, and to recommend that the board select the director nominees for the next annual meeting of shareholders, to develop and recommend to the board a set of corporate governance principles applicable to the Corporation, and to make recommendations on compensation of the Board of Directors oversight of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of the Company’s internal audit function (if applicable) and independent auditor, and (b) prepare the report SEC rules require be included in the Company’s annual proxy statement.Directors.

In furtherance of this purpose, the Committee shall have the following dutiesgoals and responsibilities:

Page 1 of 2

The Committee shall provide for appropriate funding, as determined by the Committee, for payment of compensationhave sole authority to the independent auditor for the purpose or preparing or issuing an audit report or performing other audit, review or attest services for the Companyretain any search firm engaged to assist in identifying director candidates, and to retain outside counsel and any other advisors employed byas the Committee, and for ordinary administrative expenses of the Committee that are necessary orcommittee may deem appropriate in carrying out its duties.

The Committee may, in its sole discretion, delegate to one or more of its members thediscretion. The committee shall have sole authority to pre-approve any audit or non-audit services to be performed by the independent auditor, provided that any such approvals are reported to the Committee at its next scheduled meeting.approve related fees and retention terms.

The Committee shall conduct an annual performance evaluation of the Committee and the Committee shall review at least annually the adequacy of this charter and recommend any proposed changes to the Board of Directors for approval.

The Committee shall regularly report its actions and recommendations to the Board of Directors.

Revised February 12, 2004

Adopted April 21, 2001

Modified and Approved

October 22, 2003Page 2 of 2

n

IGI, INC,INC.

PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 24, 200423, 2005

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF

THE COMPANY

The undersigned, having received notice of the meeting and management’s proxy statement therefore, and revoking all prior proxies, hereby appoint(s) Frank Gerardi and Domenic N. Golato,Carlene A. Lloyd, and each of them, attorneys or attorney of the undersigned (with full power of substitution in them and each of them) for and in the name(s) of the undersigned to attend the Annual Meeting of Stockholders of IGI, Inc. (the “Company”) to be held on Monday, May 24, 200423, 2005 at 9:10:00 a.m. at the Embassy Suites Hotel, 4350 PGA Blvd., Palm Beach Gardens, Florida 33410,The Ritz-Carlton Club, 115 Eagle Tree Terrace, Jupiter, FL 33477, and at any adjourned sessions thereof, and there to vote and act upon the following matters in respect of all shares of stock of the Company which the undersigned will be entitled to vote or act upon, with all the powers the undersigned would possess if personally present.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL.

PLEASE VOTE, DATE, AND SIGN ON REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.

Please sign this proxy exactly as your name appears(Continued and to be signed on the books of the Company. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, the signature must be that of an authorized officer who should state his or her name and title.reverse side)

x    PLEASE MARK VOTES AS INDICATED IN THIS EXAMPLE

PROPOSAL 1 - ELECTIONANNUAL MEETING OF DIRECTORSSTOCKHOLDERS OF

¨    For All Nominees                     ¨    Withhold Authority

Frank Gerardi, Donald W. Joseph, Stephen J. Morris and Terrence O’Donnell

NOTE: If you do not wish your shares voted “For” a particular nominee, mark the “For All Nominees” box and strike a line through the name(s) of the nominee(s) that you do not wish to vote for. Your shares will be voted for the remaining nominee(s).

PROPOSAL 2 - TO APPROVE THE ADOPTION OF AN AMENDMENT TO INCREASE THE NUMBER OF SHARES BY 200,000 AUTHORIZED AND AVAILABLE UNDER THE COMPANY’S 1998 DIRECTORS STOCK PLAN.IGI, INC,

¨    For             ¨    Against             ¨    AbstainMay 23, 2005

Please date, sign and mail

your proxy card in the

envelope provided as soon

as possible.

IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.ê Please detach along perforated line and mail in the envelope provided.ê

n

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ALL NOMINEES LISTED IN PROPOSAL 1 AND A VOTE “FOR” PROPOSAL 2.1.

PLEASE BE SURE TO SIGN, DATE AND DATE THIS PROXY BELOWRETURN PROMPTLY IN THE ENCLOSED ENVELOPE.

Date:PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE  x

¨    Please mark box here

if address change or comment

has been noted on the

reverse side of this card.