SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]

Check the appropriate box: [_] Confidential, for Use of the
[X] Preliminary Proxy Statement Commission Only (as Permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12

IGI, INC.

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(Name of Registrant as Specified in Its Charter)

Not Applicable
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[_] No fee required.

[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:
Not applicable
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(2) Aggregate number of securities to which transaction applies:
Not applicable
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $16,700,000,
all of which is a cash payment to be received by the Registrant(a)
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(4) Proposed maximum aggregate value of transaction:
$16,700,000
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(5) Total fee paid:
$1,537
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(a) Fee calculated based upon Section 14(g) of the Securities Exchange Act of
1934, as amended. See Fee Rate Advisory #8 dated January 16, 2002.

[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.

1. Amount Previously Paid:

______________________________________________________
2. Form, Schedule or Registration Statement No.:

______________________________________________________
3. Filing Party:

______________________________________________________
4. Date Filed:

______________________________________________________

Preliminary Copy
Filed on April 24, 2002

[IGI LOGO]

May , 2002

Dear IGI Stockholder:

On February 6, 2002, IGI, Inc. entered into an asset purchase agreement for
the sale of substantially all of the assets of its companion pet products
business to Vetoquinol U.S.A., Inc., a wholly owned subsidiary of Vetoquinol
S.A. of Lure, France. IGI's companion pet products business produces and
markets products such as pharmaceuticals, nutritional supplements and grooming
aids under the names EVSCO Pharmaceuticals, Tomlyn and Luv 'Em. Under the terms
of the asset purchase agreement, IGI will receive at closing cash consideration
of $16.7 million. In addition, specified liabilities of IGI's companion pet
products business will be assumed by Vetoquinol U.S.A. The cash consideration
is subject to post-closing adjustments.

The sale of our companion pet products business will, among other things,
provide IGI with cash resources sufficient to repay our outstanding obligations
under our principal loan agreements, including prepayment and related fees. The
sale will also permit IGI and its management to focus their attention, efforts
and resources, including the additional working capital provided by the sale of
the companion pet products business, on further developing our consumer
products business.

It is a condition to closing the sale of assets contemplated by the asset
purchase agreement that the asset sale be authorized by the holders of at least
a majority of our outstanding shares of common stock. We are holding a special
meeting of IGI's stockholders on May 31, 2002 at 10:00 a.m., local time, at the
offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109. At
the special meeting, we will ask our stockholders to consider and vote upon a
proposal to authorize the sale of assets contemplated by the asset purchase
agreement. All IGI stockholders are cordially invited to attend the meeting.

After careful consideration, our board of directors has unanimously
determined that the asset purchase agreement and the sale of assets
contemplated by the asset purchase agreement are fair and in the best interests
of IGI and its stockholders. The board has unanimously approved the asset
purchase agreement and the sale of assets contemplated by that agreement and
unanimously recommends that you vote to authorize the asset sale.

In the materials accompanying this letter, you will find a notice of special
meeting of stockholders, a proxy statement relating to the actions to be taken
by stockholders at the special meeting and a proxy card. The proxy statement
more fully describes the asset purchase agreement and the sale of assets
contemplated by that agreement. Please read carefully the proxy statement and
notice and consider the information included in those documents. This letter
and the accompanying notice of special meeting, proxy statement and proxy card
are first being sent to IGI's stockholders on or about May , 2002

Your vote is important. Whether or not you plan to attend the special
meeting, please complete, sign, date and return your proxy card in the enclosed
envelope or direct your broker or other nominee to vote your shares pursuant to
the applicable instructions provided to you by your broker or other nominee. In
this way you will ensure that your shares will be represented at the special
meeting. No postage need be affixed if the proxy card is mailed in the United
States.

Sincerely,

John Ambrose
President and Chief Executive Officer

Preliminary Copy
Filed on April 24, 2002

IGI, INC.
105 Lincoln Avenue
Buena, New Jersey 08310
(856) 697-1441

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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 31, 2002

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NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of IGI,
Inc. will be held on May 31, 2002, at 10:00 a.m., local time, at the offices of
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 for the purpose
of considering and acting upon the following matters:

1. to authorize the sale of assets contemplated by the asset purchase
agreement dated as of February 6, 2002 by and between Vetoquinol
U.S.A., Inc. and IGI, Inc., a copy of which is set forth in Annex A
to the proxy statement accompanying this notice of special meeting;
and

2. to transact such other business incident to the conduct of the
special meeting as may properly be brought before the special meeting
and any adjournment of the special meeting.

Our board of directors has fixed the close of business on May 1, 2002 as the
record date for determining the stockholders entitled to notice of and to vote
at the special meeting and at any adjournment of the special meeting. Our stock
record books remain open.

All stockholders are cordially invited to attend the special meeting.

By order of the board of directors,

Domenic N. Golato
Secretary

May , 2002

Your vote is important. It is a condition to consummating the sale of assets
contemplated by the asset purchase agreement that the holders of at least a
majority of our outstanding shares of common stock authorize the asset sale.
Therefore, a failure to vote, either by not completing and returning the
enclosed proxy card and not attending the special meeting, by checking the
"abstain" box on the enclosed proxy card or by not directing your broker or
other nominee to vote your shares pursuant to the applicable instructions
provided to you by your broker or other nominee, will have the same effect as a
vote against the authorization of the sale of assets contemplated by the asset
purchase agreement. Even if you plan to attend the special meeting in person,
we request that you complete, sign, date and return your proxy card in the
enclosed envelope or direct your broker or other nominee to vote your shares
pursuant to the applicable instructions provided to you by your broker or other
nominee. In this way you will ensure that your shares will be represented at
the special meeting, if you are unable to attend. No postage need be affixed if
the proxy card is mailed in the United States.

Preliminary Copy
Filed on April 24, 2002

IGI, INC.
105 Lincoln Avenue
Buena, New Jersey 08310
(856) 697-1441

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PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 31, 2002

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SUMMARY

This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. For a more
complete description of the terms of the proposed transaction, you should read
carefully this entire proxy statement, including the agreements attached as
annexes to this proxy statement. This section includes page references in
parentheses to direct you to a more complete description of the topics
presented in this summary.

Q: Why is this proxy statement being distributed to IGI's stockholders? (see
page 1)

A: We have entered into an asset purchase agreement for the sale of
substantially all of the assets of our companion pet products business to
Vetoquinol U.S.A., Inc., a wholly owned subsidiary of Vetoquinol S.A. of
Lure, France. The assets to be sold include, to the extent they relate
solely to the companion pet products business: inventories, products,
product formulations and specifications, contractual relationships, permits
and licenses, intellectual property rights and accounts receivable.
Following the sale, we will retain the assets used in our consumer products
business, as well as the real property and facilities relating to our
companion pet products business.

It is a condition to closing the sale of assets contemplated by the asset
purchase agreement that the asset sale be authorized by the holders of at
least a majority of our outstanding shares of common stock. We are holding a
special meeting of our stockholders on May 31, 2002 at 10:00 a.m., local
time, at the offices of Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts 02109 for our stockholders to consider and vote upon the
authorization of the sale of assets contemplated by the asset purchase
agreement. This proxy statement is being distributed by IGI on behalf of its
board of directors. This proxy statement and the accompanying letter to
stockholders, notice of special meeting and proxy card are first being sent
to our stockholders on or about May , 2002.

Q: What is IGI's companion pet products business? (see page 7)

A: Our companion pet products business produces and markets products such as
pharmaceuticals, nutritional supplements and grooming aids under the names
Tomlyn, EVSCO Pharmaceuticals and Luv 'Em for dogs, cats and other companion
pets. Revenues from the companion pet products business represented
approximately 73% of our revenues in the year ended December 31, 2001, and
the assets of the companion pet products business as of December 31, 2001
represented approximately 52% of our assets.

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Q: Why did IGI enter into the asset purchase agreement? (see page 12)

A: We entered into the asset purchase agreement because we believe it will
result in a number of benefits to IGI and our stockholders, including the
following:

. that the sale of the companion pet products business pursuant to the asset
purchase agreement enables IGI to realize immediately the value of that
business in cash;

. that the cash consideration to be received by IGI for the sale of its
companion pet products business will be sufficient to allow the repayment
in full of IGI's obligations under its loan agreements with American
Capital Strategies, Ltd. and Fleet Capital Corporation, including
prepayment and related fees. These obligations aggregated to approximately
$11.9 million as of April 1, 2002;

. that the repayment by IGI of its obligations under its loan agreements
with American Capital Strategies and Fleet Capital Corporation will
substantially reduce IGI's long-term debt obligations, which were $11.8
million as of December 31, 2001 and will reduce IGI's interest expense,
which was approximately $2.1 million in the year ended December 31, 2001,
of which approximately $577,000 represents the amortization of deferred
financing costs and debt discount, to approximately $25,000 per year,
payable in cash. The remaining interest expense is related to additional
long-term debt obligations of approximately $200,000 taken on as of
January 31, 2002; and

. the sale of the companion pet products business will permit IGI and its
management to focus their attention, efforts and resources, including the
additional working capital provided by the sale of the companion pet
products business, which is expected to be approximately $4.3 million, on
further developing IGI's consumer products business.

Q: What will IGI receive for the sale of its assets contemplated by the asset
purchase agreement? (see pages 8 and 26)

A: We will receive cash consideration of $16.7 million at the closing of the
sale of assets contemplated by the asset purchase agreement. In addition,
specified liabilities of our companion pet products business, aggregating to
approximately $1.5 million as of December 31, 2001, will be assumed by
Vetoquinol U.S.A. The cash consideration is subject to post-closing
adjustments.

Q: What are the other material terms of the asset purchase agreement? (see
pages 8 and 25)

A: In addition to the cash consideration to be received by IGI and the
liabilities to be assumed by Vetoquinol U.S.A., the asset purchase agreement
contains several other terms and provisions, including:

. during the period ending 60 months following the closing, we have agreed,
subject to limited exceptions, not to engage anywhere in the United States
and Canada in any enterprise in the business of manufacturing, packaging,
marketing, selling or otherwise distributing animal health products;

. we will enter into a sublicense and supply relationship with Vetoquinol
U.S.A. with respect to rights and products relating to the Novasome lipid
vesicle encapsulation technology;

. we will indemnify Vetoquinol U.S.A. for damages arising from, among other
things, breaches of our representations and warranties and of our
post-closing agreements under the asset purchase agreement and for
specified environmental liabilities;

. following the closing, we have agreed to provide Vetoquinol U.S.A. with
specified transitional services and, at Vetoquinol U.S.A.'s election, use
and occupancy of our facility located at 701-711 Harding Road, Buena, New
Jersey on a "triple net" basis;

. Vetoquinol U.S.A. has agreed to hire 33 of our 52 employees. None of the
employees being hired are directors or executive officers of IGI. All of
the employees to be hired by Vetoquinol U.S.A. are engaged in our
companion pet products business. We have agreed not to solicit or induce
any of those employees to terminate their employment in the companion pet
products business at any time during the period

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ending two years following the closing. The asset purchase agreement does
not provide that Vetoquinol U.S.A. will retain any of the transferred
employees for a minimum period of time; and

. Vetoquinol S.A. has unconditionally guaranteed the due and punctual
performance of all of Vetoquinol U.S.A.'s obligations under the asset
purchase agreement.

Q: How many shares must be voted to authorize the sale of assets contemplated
by the asset purchase agreement? (see page 2)

A: As of the close of business on May 1, 2002, the record date for the special
meeting, there were issued and outstanding [ ] shares of our common
stock. The authorization of the sale of assets contemplated by the asset
purchase agreement at the special meeting requires the affirmative vote of a
majority of the outstanding shares of common stock as of the record date.
Therefore, authorization of the matter requires the affirmative vote of at
least [ ] shares of our common stock. Stockholders holding an aggregate
of [ ], or [ ]% of the outstanding shares of our common stock as of
the record date for the special meeting, including all of our directors,
have entered into voting agreements with, and granted irrevocable proxies to
Vetoquinol U.S.A. authorizing designees of Vetoquinol U.S.A., to vote their
shares of common stock outstanding as of the record date for the special
meeting to authorize the sale of assets contemplated by the asset purchase
agreement.

Q: What do I need to do now? (see page 1)

A: You should read carefully this proxy statement, including the agreements
attached as annexes to this proxy statement, and consider how the asset
purchase agreement will affect you. Then you should complete and mail your
signed and dated proxy card in the enclosed return envelope as soon as
possible so that your shares can be voted at the special meeting of
stockholders. If your shares are held in "street name" by a broker or other
nominee, your broker or other nominee will not be able to vote your shares
prior to the special meeting unless you have given your broker or other
nominee instructions to vote your shares on this matter. You should instruct
your broker or other nominee to vote your shares by following the procedure
provided by your broker or other nominee. You may also attend the special
meeting and vote in person. If you fail either to return your proxy card, to
instruct your broker or other nominee to vote your shares or to vote in
person at the special meeting, or if you mark your proxy "abstain", the
effect will be a vote against the sale of assets contemplated by the asset
purchase agreement. Even if you plan to attend the special meeting in
person, we request that you complete, sign, date and return your proxy card
in the enclosed envelope or grant a proxy pursuant to the applicable
instructions provided to you by your broker or other nominee. In this way
you will ensure that your shares will be represented at the special meeting,
if you are unable to attend.

Q: May I change my vote after I have mailed in my signed proxy card? (see page
1)

A: You may change your vote at any time before the vote takes place at the
special meeting by either submitting a later dated proxy card or sending a
written notice stating that you would like to revoke your proxy. In
addition, you may attend the special meeting and vote in person. However, if
you elect to vote in person at the special meeting and your shares are held
by a broker or other nominee, you must bring to the special meeting a legal
proxy from the broker or other nominee authorizing you to vote the shares.

Q: What does IGI recommend? (see page 15)

A: After careful consideration, our board of directors has unanimously
determined that the asset purchase agreement and the sale of assets
contemplated by that agreement are fair and in the best interests of IGI and
its stockholders. The board has unanimously approved the asset purchase
agreement and the sale of assets contemplated by that agreement and
unanimously recommends that you vote to authorize the asset sale.

S-3

Q: Do IGI's directors and executive officers have any interests in the sale of
assets contemplated by the asset purchase agreement which may be different
from my interests? (see page 15)

A: In considering the recommendation of our board of directors, you should be
aware that upon the closing of the sale of assets contemplated by the asset
purchase agreement, all options to purchase shares of common stock issued by
IGI to its directors and executive officers will vest in full. As of
February 6, 2002, the date the asset purchase agreement was signed, this
acceleration would result in the accelerated vesting of an aggregate of
options to purchase approximately 795,000 shares of our common stock, with a
per share weighted average exercise price of $0.69. On April 15, 2002 the
per share closing price of our common stock on the American Stock Exchange
was $0.69.

Q: When is the closing expected to occur? (see page 27)

A: The parties are working towards completing the transaction as quickly as
possible. In addition to obtaining the authorization of our stockholders,
the parties must satisfy or waive all of the closing conditions contained in
the asset purchase agreement. The parties hope to complete the transaction
promptly after the special meeting of our stockholders, which is scheduled
for May 31, 2002. Either IGI or Vetoquinol U.S.A. may terminate the asset
purchase agreement under circumstances specified in the asset purchase
agreement, including if the closing has not taken place by , 2002.

Q: What are the conditions to the closing of the sale of assets contemplated by
the asset purchase agreement? (see page 34)

A: The closing of the sale of the assets contemplated by the asset purchase
agreement depends upon the satisfaction of a number of conditions,
including:

. the authorization by the holders of a majority of the outstanding shares
of our common stock of the sale of assets contemplated by the asset
purchase agreement;

. we must obtain the consents of third parties under agreements to which we
are a party or which we will assign to Vetoquinol U.S.A. pursuant to the
asset purchase agreement, including the consents of American Capital
Strategies and Fleet Capital Corporation under our loan agreements with
each of those entities;

. we must obtain an appropriate determination, waiver or approval from the
New Jersey Department of Environmental Protection with respect to the
transactions contemplated by the asset purchase agreement; and

. other customary conditions specified in the asset purchase agreement,
including: the truth of representations and warranties made in the asset
purchase agreement, the absence of injunctions, litigation or other
restraints preventing the consummation of the transactions contemplated by
the asset purchase agreement, the delivery of legal opinions and the
performance in all material respects of the obligations of the parties to
the asset purchase agreement.

In some circumstances, conditions to the closing may be waived by one or
both of IGI and Vetoquinol U.S.A.

Q: How does IGI intend to use the cash consideration it will receive for the
sale of assets contemplated by the asset purchase agreement? (see page 9)

A: We intend to use the cash consideration we will receive for the sale of
assets contemplated by the asset purchase agreement to:

. pay all of our outstanding debt obligations and applicable prepayment and
other fees under our loan agreements with American Capital Strategies and
Fleet Capital Corporation, which as of April 1, 2002 amounted in the
aggregate to approximately $11.9 million;

S-4

. pay our costs and expenses associated with the transactions contemplated
by the asset purchase agreement, which we anticipate to be approximately
$480,000; and

. use the remaining cash consideration of approximately $4.3 million for
general corporate purposes.

Q: Are there other financial or legal issues, other than the terms of the asset
purchase agreement, of which I should be aware? (see page 16)

A: The sale of assets contemplated by the asset purchase agreement has various
financial and legal effects. Among these effects are the following:

. We have been advised by the American Stock Exchange that we are no longer
in compliance with its continuing listing standards. Consistent with the
instructions of the American Stock Exchange, we have presented to that
exchange a plan for future compliance with its continuing listing
standards. Based upon that plan, the exchange has not delisted our common
stock, notwithstanding our present failure to comply with its continuing
listing standards. The exchange is monitoring our compliance with our plan
on a monthly basis. The consummation of the sale of our companion pet
products business and the related pay-off of our outstanding long-term
debt are integral components of our plan. If we consummate the sale of our
companion pet products business and pay off our outstanding debt
obligations to American Capital Strategies and Fleet Capital Corporation,
the American Stock Exchange will continue to monitor our compliance with
our plan on a monthly basis and will review our overall compliance with
its continuing listing standards in March 2003 in light of our financial
results for fiscal 2002. In the event the sale of our companion pet
products business pursuant to the asset purchase agreement is not
consummated, we will not be in compliance with our plan, as presented to
the American Stock Exchange, and the exchange will delist our common stock;

. the sale of assets contemplated by the asset purchase agreement will be a
taxable sale of the assets of our companion pet products business, which
will be accounted for as a discontinued operation. We anticipate that we
will be able to offset all taxable gain we experience for United States
federal income tax purposes against our net operating loss carryforwards
and that therefore any federal income tax liability resulting from the
asset sale will not reduce the amount of cash available for corporate
purposes;

. the closing of the sale of assets contemplated by the asset purchase
agreement will not be a taxable event for our stockholders under
applicable United States federal income tax laws; and

. under Delaware law, you will not be entitled to exercise appraisal rights
in connection with the sale of assets contemplated by the asset purchase
agreement.

Q: Who can help answer my additional questions?

A: If you would like additional copies, without charge, of this proxy statement
or if you have questions regarding the procedures for voting your shares,
you should contact IGI, Inc., 105 Lincoln Avenue, Buena, New Jersey 08310,
Attention: Domenic N. Golato, Chief Financial Officer, phone number: (856)
697-1441.

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TABLE OF CONTENTS

SUMMARY........................................................................................ S-1
TABLE OF CONTENTS.............................................................................. i
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS..................................... ii
THE SPECIAL MEETING OF STOCKHOLDERS............................................................ 1
Date, Time and Place of the Special Meeting................................................. 1
Matter to be Considered at the Special Meeting.............................................. 1
Record Date................................................................................. 1
Voting...................................................................................... 1
Votes Required.............................................................................. 2
Quorum...................................................................................... 2
Abstentions and Broker Non-Votes............................................................ 2
Solicitation of Proxies and Expenses........................................................ 3
Other Matters............................................................................... 3
Recommendation to Stockholders.............................................................. 3
Security Ownership of Certain Beneficial Owners and Management.............................. 3
Stockholder Proposals for the 2002 Annual Meeting........................................... 6
Householding of Proxy Materials............................................................. 6
THE SALE OF THE COMPANION PET PRODUCTS BUSINESS................................................ 7
Overview of IGI............................................................................. 7
Consumer Products Business.................................................................. 7
Companion Pet Products Business............................................................. 7
Other Parties to the Sale of the Companion Pet Products Business............................ 8
Sale of the Companion Pet Products Business................................................. 8
Use of Proceeds from the Sale............................................................... 9
Background of the Sale...................................................................... 10
Reasons for the Sale........................................................................ 12
No Fairness Opinion......................................................................... 14
Recommendation of IGI's Board of Directors.................................................. 15
Interests of Directors and Executive Officers of IGI in the Sale............................ 15
Material United States Federal Income Tax Consequences and Accounting Treatment of the Sale. 16
Listing of Our Common Stock on the American Stock Exchange.................................. 16
No Rights of Appraisal...................................................................... 16
UNAUDITED PRO FORMA FINANCIAL INFORMATION...................................................... 17
THE ASSET PURCHASE AGREEMENT................................................................... 25
Asset Sale.................................................................................. 25
Purchased Assets............................................................................ 25
Excluded Assets............................................................................. 26
Purchase Price.............................................................................. 26
Closing..................................................................................... 27
Representations and Warranties.............................................................. 27
Additional Agreements of IGI and Vetoquinol U.S.A........................................... 29
Conditions to Closing....................................................................... 34
Expenses and Termination.................................................................... 35
Indemnification............................................................................. 35
Other Agreements............................................................................ 36
WHERE YOU CAN FIND MORE INFORMATION............................................................ 37
INDEX TO FINANCIAL STATEMENTS.................................................................. F-1
ASSET PURCHASE AGREEMENT....................................................................... A-1
TECHNOLOGY RIGHTS AGREEMENT.................................................................... B-1
MANUFACTURING AND SUPPLY AGREEMENT............................................................. C-1

In this proxy statement, "IGI", "we", "us" and "our" refer to IGI, Inc.,
unless the context otherwise requires. Our web site addresses include
www.askigi.com, www.Tomlyn.com and www.EvscoPharm.com. References in this proxy
statement to www.askigi.com, askigi.com, www.Tomlyn.com, Tomlyn.com,
www.EvscoPharm.com, EvscoPharm.com, or any variations of the foregoing or any
other uniform resource locator, or URL, are inactive textual references only.
The information on our web sites or at any other URL is not incorporated by
reference into this proxy statement and should not be considered to be a part
of this document.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This proxy statement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties. When used in this proxy
statement, the words "will", "believe", "anticipate", "intend", "estimate",
"should", "project" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. All statements, other than statements of historical
fact included in this proxy statement regarding our strategy, future
operations, use of the cash consideration to be received by IGI under the asset
purchase agreement, financial position, prospects, plans and objectives of
management are forward-looking statements, including those statements set forth
under the headings:

. "Summary";

. "The Sale of the Companion Pet Products Business--Consumer Products
Business";

. "The Sale of the Companion Pet Products Business--Companion Pet Products
Business";

. "The Sale of the Companion Pet Products Business--Sale of the Companion
Pet Products Business";

. "The Sale of the Companion Pet Products Business--Use of Proceeds from the
Sale"; and

. "The Sale of the Companion Pet Products Business--Reasons for the Sale".

We cannot guarantee future results, levels of activity, performance or
achievements and you should not place undue reliance on our forward-looking
statements. Our forward-looking statements do not reflect the potential effect
of any future acquisitions, mergers, dispositions, joint ventures or strategic
alliances. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including:

. our ability to consummate the transactions contemplated by the asset
purchase agreement;

. the authorization by a majority of our stockholders of the sale of assets
contemplated by the asset purchase agreement;

. our ability to realize anticipated benefits and opportunities and to
implement successfully proposed strategies;

. intense competitive pressures affecting our business, generally, and our
consumer products business, in particular;

. the rapidly changing marketplace for our products, generally, and for
companion pet products, in particular;

. the effects of new or improved technologies which may have greater utility
than, be superior to or supersede our technologies, including the Novasome
lipid vesicle encapsulation technology; and

. effects of and delays attendant to government regulation and oversight of
our products and the industries in which we compete.

The forward-looking statements provided by us in this proxy statement
represent our estimates as of the date this document is filed with the
Securities and Exchange Commission. We anticipate that subsequent events and
developments will cause our estimates to change. However, while we may elect to
update our forward-looking statements in the future we specifically disclaim
any obligation to do so. Our forward-looking statements should not be relied
upon as representing our estimates as of any date subsequent to the date this
document is filed with the Securities and Exchange Commission.

THE SPECIAL MEETING OF STOCKHOLDERS

This proxy statement is furnished in connection with the solicitation of
proxies by our board of directors for use at a special meeting of stockholders
to be held on May 31, 2002 and at any adjournment of the meeting.

Date, Time and Place of the Special Meeting

The special meeting will be held on May 31, 2002 at 10:00 a.m., local time,
at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts
02109.

Matter to be Considered at the Special Meeting

At the special meeting and any adjournment of the meeting, our stockholders
will be asked to consider and vote upon the authorization of the sale of assets
contemplated by the asset purchase agreement between IGI, Inc. and Vetoquinol
U.S.A., Inc. A copy of the asset purchase agreement is attached to this proxy
statement as Annex A. The sale of assets and the other transactions
contemplated by the asset purchase agreement are summarized in this proxy
statement beginning on page 20 under the heading "The Asset Purchase Agreement".

Record Date

Our board of directors has fixed the close of business on May 1, 2002 as the
record date for the determination of stockholders entitled to notice of and to
vote at the special meeting and at any adjournment of the meeting.

Voting

As described below, stockholders of record as of the close of business on
May 1, 2002 may cast votes by granting a proxy via a proxy card or in person at
the special meeting. Stockholders of record are stockholders who own IGI common
stock registered in their own name, as opposed to in the name of a broker or
other nominee.

Voting by proxy card. Stockholders of record may grant a proxy by
completing, dating, signing and returning the enclosed proxy card. Stockholders
may revoke this proxy at any time before its exercise by delivering a written
revocation or a subsequently dated proxy to our Secretary or by voting in
person at the special meeting.

Voting in person at the special meeting. Stockholders of record attending
the special meeting may deliver a completed proxy card in person or may vote by
completing a ballot, which will be available at the meeting. Attendance at the
meeting will not, by itself, result in the revocation of a previously submitted
proxy. Even if you are planning to attend the special meeting, we encourage you
to submit your proxy in advance to ensure the representation of your shares at
the meeting.

Stockholders who hold shares registered in the name of a broker or other
nominee may generally only vote pursuant to the instructions given to them by
their broker or other nominee. If you hold shares registered in the name of a
broker or other nominee, generally the nominee may only vote your shares as you
direct the nominee, pursuant to the instructions given to you by the nominee.
However, if the nominee has not timely received your directions, the nominee
may vote on matters for which it has discretionary voting authority. Brokers
will not have discretionary voting authority to vote on the proposal to
authorize the sale of assets contemplated by the asset purchase agreement.
Brokers will have discretionary voting authority to vote on matters incident to
the conduct of the special meeting. If a nominee cannot vote on a matter
because it does not have discretionary voting authority, this is a "broker
non-vote" on that matter. In order to vote their shares by attending the
special meeting, as opposed to directing their broker or nominee to vote their
shares, stockholders who hold shares

registered in the name of a broker or other nominee generally must bring to the
special meeting a legal proxy from the broker or nominee authorizing them to
vote the shares.

The last vote a stockholder submits chronologically (either by proxy card or
by attending the special meeting) will supersede any prior votes cast by that
stockholder.

We request that our stockholders complete, date and sign the proxy card and
promptly return it by mail in the accompanying envelope or direct their broker
or other nominee to vote their shares pursuant to the applicable instructions
provided by the broker or nominee. All properly submitted proxies that we
receive prior to the vote at the special meeting, and that are not revoked,
will be voted in accordance with the instructions indicated on the proxies or,
if no direction is indicated, to authorize the sale of assets contemplated by
the asset purchase agreement.

Votes Required

As of the close of business on May 1, 2002, the record date for the special
meeting, there were [ ] shares of our common stock outstanding and
entitled to vote. The holders of a majority of the outstanding shares of our
common stock entitled to vote must affirmatively vote to authorize the sale of
assets contemplated by the asset purchase agreement in order for the proposal
to be authorized. Stockholders have one vote per share of our common stock
owned on the record date. Therefore, the affirmative vote of at least
[ ] shares is required to authorize the sale of assets contemplated by
the asset purchase agreement.

Stockholders holding an aggregate of [ ], or [ ]%, of the
outstanding shares of our common stock as of the record date for the special
meeting, including all of our directors, have entered into voting agreements
with, and granted irrevocable proxies to Vetoquinol U.S.A. authorizing
designees of Vetoquinol U.S.A., to vote their shares of common stock
outstanding as of the record date for the special meeting to authorize the sale
of assets contemplated by the asset purchase agreement.

Quorum

The required quorum for the transaction of business at the special meeting
is holders, present in person or by proxy, of a majority of the shares of our
stock issued and outstanding on the record date. Abstentions and broker
non-votes each will be included in determining the number of shares present and
voting at the meeting for the purpose of determining the presence of a quorum.
In the event that a quorum is not present at the time the special meeting is
convened, or if for any other reason we believe that additional time should be
allowed for the solicitation of proxies, we may adjourn the special meeting and
the persons named in the enclosed proxy will vote all shares of common stock
for which they have voting authority in favor of that adjournment, unless
authority to do so is withheld by checking the appropriate box on the proxy
card.

Abstentions and Broker Non-Votes

Because authorization of the sale of assets contemplated by the asset
purchase agreement requires the affirmative vote of a majority of the
outstanding shares of our common stock entitled to vote, abstentions and broker
non-votes will have the same effect as votes against the authorization of the
sale of assets contemplated by the asset purchase agreement. In addition, the
failure of a stockholder to return a proxy or to vote in person or to direct
its broker or other nominee to vote its shares will have the effect of a vote
against the authorization of the sale of assets contemplated by the asset
purchase agreement. Brokers holding shares for beneficial owners cannot vote on
the proposal without the owners' specific instructions. Accordingly,
stockholders are encouraged to return the enclosed proxy card marked to
indicate their grant of a proxy or to follow the instructions for voting
provided by their broker or other nominee.

Solicitation of Proxies and Expenses

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

Other Matters

No other matters may be brought before the special meeting, other than
matters incident to the conduct of the meeting.

Recommendation to Stockholders

The matter to be considered at the special meeting is of great importance to
the stockholders of IGI. Accordingly, you are encouraged to read and carefully
consider the information presented in this proxy statement and the agreements
attached as annexes to this proxy statement, and to complete, date, sign and
promptly return the enclosed proxy card in the enclosed postage-paid envelope
or direct your broker or other nominee to vote your shares pursuant to the
applicable instructions provided to you by your broker or other nominee.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of January 25, 2002,
unless otherwise indicated, with respect to the beneficial ownership of shares
of our common stock by:

. each person known to us to own beneficially more than 5% of our
outstanding shares of common stock;

. our directors;

. each of our executive officers; and

. all of our directors and executive officers as a group.

As of January 25, 2002, we had 11,243,720 shares of common stock outstanding.

The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to
which the individual has sole or shared voting power or investment power and
any shares as to which the individual has the right to acquire beneficial
ownership within 60 days after January 25, 2002 through the exercise or
conversion of any stock option, warrant, preferred stock or other right. The
inclusion in the following table of those shares, however, does not constitute
an admission that the named stockholder is a direct or indirect beneficial
owner of those shares. Unless otherwise indicated, to our knowledge based upon
information produced by the persons and entities named in the table, each
person or entity named in the table has sole voting power and investment power,
or shares voting and/or investment power with his or her spouse, with respect
to all shares of capital stock listed as owned by that person or entity.

The address of each of our employees, officers and directors is c/o IGI,
Inc., 105 Lincoln Avenue, Buena, New Jersey 08310.

Shares Beneficially
Owned
--------------------
Number Percent
--------- -------
Name of Beneficial Owner
- ------------------------

5% Stockholders
Vetoquinol U.S.A., Inc......................................... 7,378,756(1) 52.1%(2)
c/o Vetoquinol North America Inc.
2000 Chemin Georges
Laualtrie, Quebec, Canada JOK IHO

Edward B. Hager, M.D........................................... 2,284,313(3) 19.5%
Pinnacle Mountain Farms
Lyndeboro, New Hampshire 03082

American Capital Strategies, Ltd............................... 1,913,013(4) 14.5%
2 Bethesda Metro Center, 14th Floor
Bethesda, Maryland 20814

Frank Gerardi.................................................. 900,000(5) 8.0%
c/o Univest Mgt. Inc. EPSP
149 West Village Way
Jupiter, Florida 33458

Directors and Executive Officers:
Stephen J. Morris............................................ 2,581,349(6) 22.8%
Jane E. Hager................................................ 2,284,313(7) 19.5%
Kenneth E. Jones............................................. 1,913,013(8) 14.5%
Terrence O'Donnell........................................... 240,829(9) 2.1%
Constantine L. Hampers, M.D.................................. 218,929(10) 1.9%
John Ambrose................................................. 100,000(11) *
Domenic N. Golato............................................ 100,000(12) *
Earl R. Lewis................................................ 88,672(13) *
Donald W. Joseph............................................. 51,651(14) *
All executive officers and directors, as a group (9 persons). 7,578,756(15) 52.8%

- --------
* Less than 1%.
(1) Consists of 2,581,349 shares beneficially owned by Stephen J. Morris, an
aggregate of 2,284,313 shares beneficially owned by Edward B. Hager and
Jane E. Hager, 1,913,013 shares beneficially owned by Kenneth E. Jones,
240,829 shares beneficially owned by Terrence O'Donnell, 218,929 shares
beneficially owned by Constantine L. Hampers, 88,672 shares beneficially
owned by Earl R. Lewis and 51,651 shares beneficially owned by Donald W.
Joseph. An aggregate of 1,000,000 of those shares are issuable upon the
exercise of options exercisable within 60 days of January 25, 2002.
Moreover, 1,907,543 of those shares are issuable upon the exercise of
warrants held by American Capital Strategies. Vetoquinol U.S.A. entered
into a voting agreement as of February 6, 2002 with Mr. Morris, Dr. Hager,
Mrs. Hager, Mr. O'Donnell, Dr. Hampers, Mr. Lewis, Mr. Joseph and American
Capital Strategies. Pursuant to the voting agreement, each of those
parties, other than Vetoquinol U.S.A., agreed to vote all shares of common
stock outstanding as of the record date for the special meeting which they
beneficially own to authorize the sale of assets contemplated by the asset
purchase agreement. In addition, each party to the voting agreement, other
than Vetoquinol U.S.A., has granted to Vetoquinol U.S.A. an irrevocable
proxy authorizing designees of Vetoquinol U.S.A. to vote their shares of
common stock outstanding as of the record date for the special meeting to
authorize the sale of assets contemplated by the asset purchase agreement.
(2) As of January 25, 2002, 4,471,213 shares of our common stock subject to the
voting agreement referenced in note (1) above were outstanding,
representing 39.8% of the outstanding shares of our common stock. All of
these shares of our common stock were outstanding as of the record date for
the special meeting and are entitled to vote at the special meeting. The
remaining 2,907,543 shares set forth in the table above as beneficially
owned by Vetoquinol U.S.A. as of January 25, 2002 were not outstanding as
of the record date for the special meeting and are not entitled to be voted
at the special meeting. As of May 1, 2002, the record date for the special
meeting, there were outstanding [ ] shares of our common stock
subject to the voting agreement, representing [ ]% of the outstanding
shares of our common stock as of the record date.

(3) Includes 350,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Dr. Hager.
Also includes 639,815 shares of common stock beneficially owned by Dr.
Hager and Mrs. Jane E. Hager, as co-trustees of the Hager Family Trust, who
share voting and investment control. Dr. Hager disclaims beneficial
ownership of the 639,815 shares of common stock held by the Hager Family
Trust. Also includes 537,681 shares of common stock held by Mrs. Hager and
150,000 shares of common stock issuable upon the exercise of options
exercisable within 60 days of January 25, 2002 held by Mrs. Hager, of which
Dr. Hager disclaims beneficial ownership. Pursuant to the voting agreement
referenced in note (1) above, Dr. Hager has agreed, and has granted to
Vetoquinol U.S.A. an irrevocable proxy authorizing designees of Vetoquinol
U.S.A., to vote all outstanding shares of common stock beneficially owned
by him as of the record date for the special meeting to authorize the sale
of assets contemplated by the asset purchase agreement.
(4) Includes 1,907,543 shares of common stock issuable upon the exercise of
warrants held by American Capital Strategies.
(5) Consists of 825,500 shares of common stock held by Univest Mgt. Inc. EPSP,
24,500 shares of common stock held by Univest Partners and 50,000 shares of
common stock issuable upon the exercise of options exercisable within 60
days of January 25, 2002 held by Mr. Gerardi. Mr. Gerardi is the trustee of
Univest Mgt. Inc. EPSP and the general partner of Univest Partners.
(6) Includes 80,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr. Morris.
Also includes 26,500 shares of common stock held jointly with Mr. Morris's
spouse and 156,040 shares held in an account on behalf of Mr. Morris's
children, over which Mr. Morris has voting and investment control, and
51,280 shares of common stock held in a building fund on behalf of St.
George Greek Orthodox Church of Asbury Park, New Jersey, over which Mr.
Morris has voting and investment control. Pursuant to the voting agreement
referenced in note (1) above, Mr. Morris has agreed, and has granted to
Vetoquinol U.S.A. an irrevocable proxy authorizing designees of Vetoquinol
U.S.A., to vote all outstanding shares of common stock beneficially owned
by him as of the record date for the special meeting to authorize the sale
of assets contemplated by the asset purchase agreement.
(7) Includes 150,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mrs. Hager.
Also includes 639,815 shares of common stock beneficially owned by Dr.
Edward B. Hager and Mrs. Hager, as co-trustees of the Hager Family Trust,
who share voting and investment control. Mrs. Hager disclaims beneficial
ownership of the 639,815 shares of common stock held by the Hager Family
Trust. Also includes 606,817 shares of common stock held by Dr. Hager and
350,000 shares of common stock issuable upon the exercise of options
exercisable within 60 days of January 25, 2002 held by Dr. Hager, of which
Mrs. Hager disclaims beneficial ownership. Pursuant to the voting agreement
referenced in note (1) above, Mrs. Hager has agreed, and has granted to
Vetoquinol U.S.A. an irrevocable proxy authorizing designees of Vetoquinol
U.S.A., to vote all outstanding shares of common stock beneficially owned
by her as of the record date for the special meeting to authorize the sale
of assets contemplated by the asset purchase agreement.
(8) Consists of 5,470 shares of common stock held by American Capital
Strategies and 1,907,543 shares of common stock issuable upon the exercise
of warrants held by American Capital Strategies. Mr. Jones is a principal
of American Capital Strategies. Mr. Jones disclaims beneficial ownership of
the 5,470 shares of common stock held by American Capital Strategies and
1,907,543 shares of common stock issuable upon the exercise of warrants
held by American Capital Strategies. Pursuant to the voting agreement
referenced in note (1) above, Mr. Jones has agreed, and has granted to
Vetoquinol U.S.A. an irrevocable proxy authorizing designees of Vetoquinol
U.S.A., to vote all outstanding shares of common stock beneficially owned
by him as of the record date for the special meeting to authorize the sale
of assets contemplated by the asset purchase agreement.
(9) Includes 190,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr.
O'Donnell. Pursuant to the voting agreement referenced in note (1) above,
Mr. O'Donnell has agreed, and has granted to Vetoquinol U.S.A. an
irrevocable proxy authorizing designees of Vetoquinol U.S.A., to vote all
outstanding shares of common stock beneficially owned by him as of the
record date for the special meeting to authorize the sale of assets
contemplated by the asset purchase agreement.

(10) Includes 170,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Dr.
Hampers. Pursuant to the voting agreement referenced in note (1) above,
Dr. Hampers has agreed, and has granted to Vetoquinol U.S.A. an
irrevocable proxy authorizing designees of Vetoquinol U.S.A., to vote all
outstanding shares of common stock beneficially owned by him as of the
record date for the special meeting to authorize the sale of assets
contemplated by the asset purchase agreement.
(11) Consists of 100,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr. Ambrose.
(12) Consists of 100,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr. Golato.
(13) Consists of 30,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr. Lewis
and 58,672 shares of common stock held jointly with Mr. Lewis's spouse.
Pursuant to the voting agreement referenced in note (1) above, Mr. Lewis
has agreed, and has granted to Vetoquinol U.S.A. an irrevocable proxy
authorizing designees of Vetoquinol U.S.A., to vote all outstanding shares
of common stock beneficially owned by him as of the record date for the
special meeting to authorize the sale of assets contemplated by the asset
purchase agreement.
(14) Includes 30,000 shares of common stock issuable upon the exercise of
options exercisable within 60 days of January 25, 2002 held by Mr. Joseph.
Pursuant to the voting agreement referenced in note (1) above, Mr. Joseph
has agreed, and has granted to Vetoquinol U.S.A. an irrevocable proxy
authorizing designees of Vetoquinol U.S.A., to vote all outstanding shares
of common stock beneficially owned by him as of the record date for the
special meeting to authorize the sale of assets contemplated by the asset
purchase agreement.
(15) Includes an aggregate of 1,200,000 shares of common stock issuable upon
the exercise of options exercisable within 60 days of January 25, 2002 and
1,907,543 shares of common stock issuable upon the exercise of warrants.

Stockholder Proposals for the 2002 Annual Meeting

Written notice of proposals of stockholders submitted outside the processes
of Rule 14a-8 under the Securities Exchange Act of 1934, for consideration at
our 2002 annual meeting of stockholders must have been received by us on or
before March 6, 2002 in order to be considered timely for purposes of Rule
14a-4 under the Securities Exchange Act of 1934. The persons designated in our
proxy card for our 2002 annual meeting of stockholders will be granted
discretionary authority with respect to any stockholder proposal with respect
to which we do not receive timely notice. Stockholder proposals submitted
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, for inclusion
in our proxy materials for our 2002 annual meeting of stockholders must have
been received by our Secretary at our principal offices no later than December
21, 2001.

Householding of Proxy Materials

Some brokers and other nominee record holders may be participating in the
practice of "householding" corporate communications to stockholders such as
proxy statements and annual reports. This means that only one copy of this
proxy statement may have been sent to multiple stockholders in your household.
We will promptly deliver a separate copy of this proxy statement to you if you
call or write us at the following address or phone number: IGI, Inc., 105
Lincoln Avenue, Buena, New Jersey 08310, Telephone: (856) 697-1441. If you want
to receive separate copies of our corporate communications to stockholders such
as proxy statements and annual reports in the future, or if you are receiving
multiple copies and would like to receive only one copy for your household, you
should contact your broker or other nominee record holder, or you may contact
us at the above address and phone number.

THE SALE OF THE COMPANION PET PRODUCTS BUSINESS

Overview of IGI

We are a diversified company engaged in two business segments:

. Consumer Products Business. Production and marketing of cosmetics and
skin care products, and

. Companion Pet Products Business. Production and marketing of companion
pet products such as pharmaceuticals, nutritional supplements and grooming
aids.

Within each of these two business segments, we produce and market products
which incorporate the Novasome lipid vesicle encapsulation technology. This
technology allows for a controlled and sustained release of encapsulated
materials. We use the Novasome lipid vesicle encapsulation technology under a
license agreement which entitles us to their exclusive use in the fields of:

. animal pharmaceuticals, biologicals and other animal health products;

. foods, food applications, nutrients and flavorings;

. cosmetics, consumer products and dermatological over-the-counter and
prescription products, other than some topically delivered hormones;

. fragrances; and

. chemicals, including herbicides, insecticides, pesticides, paints and
coatings, photographic chemicals and other specialty chemicals, and the
processes for making them.

Consumer Products Business

Our consumer products business is focused primarily on the continued
commercialization of the Novasome lipid vesicle encapsulation technology for
skin care applications. These efforts have been directed toward the development
of high quality skin care products that we market through collaborative
arrangements with major cosmetic and consumer products companies. We plan to
continue to work with cosmetics, food, personal care products, and
over-the-counter pharmaceutical companies for commercial applications of this
technology. Because of their ability to encapsulate skin protective agents,
oils, moisturizers, shampoos, conditioners, skin cleansers and fragrances and
to provide both a controlled and a sustained release of the encapsulated
materials, Novasome lipid vesicles are well-suited to cosmetics and consumer
product applications. For example, Novasome lipid vesicles may be used to:

. deliver moisturizers and other active ingredients to the deeper layers of
the skin or hair follicles for a prolonged period;

. deliver or preserve ingredients which impart favorable cosmetic
characteristics described in the cosmetics industry as "feel",
"substantivity", "texture" or "fragrance";

. deliver normally incompatible ingredients in the same preparation, with
one ingredient being shielded or protected from the other by encapsulation
within the Novasome vesicle; and

. deliver pharmaceutical agents.

Revenues from the consumer products business represented approximately 27%
of our revenues in the year ended December 31, 2001, and the assets of the
consumer products business, including corporate assets, as of December 31, 2001
represented approximately 48% of our assets.

Companion Pet Products Business

We sell our companion pet products to the veterinarian market under the
EVSCO Pharmaceuticals trade name and to the over-the-counter pet products
market under the Tomlyn and Luv 'Em labels. The EVSCO line of veterinary
products is used by veterinarians in caring for companion pets such as dogs and
cats and includes

pharmaceuticals such as antibiotics, anti-inflammatories and cardiac drugs, as
well as nutritional supplements, vitamins, insecticides and diagnostics.
Product forms include gels, tablets, creams, liquids, ointments, powders,
emulsions, shampoos and diagnostic kits. EVSCO also produces professional
grooming aids for dogs and cats. The Tomlyn and Luv 'Em product lines include
pet grooming, nutritional and therapeutic products, such as shampoos, grooming
aids, vitamin and mineral supplements, insecticides and over-the-counter
medications. The products are sold directly to pet superstores and through
distributors to independent merchandising chains, shops and kennels. Revenues
from the companion pet products business represented approximately 73% of our
revenues in the year ended December 31, 2001, and the assets of the companion
pet products business as of December 31, 2001 represented approximately 52% of
our assets.

Other Parties to the Sale of the Companion Pet Products Business

Vetoquinol U.S.A., Inc. Vetoquinol U.S.A., Inc. is a Delaware corporation
and is a wholly owned subsidiary of Vetoquinol S.A. Vetoquinol U.S.A. is
principally engaged in the animal health business. The principal executive
office of Vetoquinol U.S.A., Inc. is c/o Vetoquinol North America Inc., 2000
Chemin Georges, Lavaltrie, Quebec, Canada J0K 1H0 (telephone: 450-586-2252).

Vetoquinol S.A. Vetoquinol S.A. is organized under the laws of France and
is a subsidiary of Soparfin S.C.A. Vetoquinol S.A. is principally engaged in
the animal health business. The principal executive office of Vetoquinol S.A.
is 34 rue du Chene Sainte Anne, Magny Vernois, 70200, Lure, France (telephone:
011-333-84-62-55-55).

Sale of the Companion Pet Products Business

On February 6, 2002, we entered into an asset purchase agreement for the
sale of substantially all of the assets of our companion pet products business
to Vetoquinol U.S.A. The assets to be sold include, to the extent they relate
solely to the companion pet products business: inventories, products, product
formulations and specifications, contractual relationships, permits and
licenses, intellectual property rights and accounts receivable. Following the
sale, we will retain the assets used in our consumer products business, as well
as the real property and facilities relating to our companion pet products
business. We will receive cash consideration of $16,700,000 at the closing of
the sale of assets contemplated by the asset purchase agreement. In addition,
specified liabilities of our companion pet products business, aggregating to
approximately $1,474,000 as of December 31, 2001, will be assumed by Vetoquinol
U.S.A. These liabilities will consist primarily of current liabilities and
future obligations under assigned contracts. Among the contracts to be assigned
to Vetoquinol U.S.A. pursuant to the asset purchase agreement are our supply
and license agreements with Corwood Laboratory, Inc. The cash purchase price is
subject to post-closing adjustment as follows:

. the cash purchase price will be decreased on a dollar-for-dollar basis to
the extent the net working capital transferred to Vetoquinol U.S.A. at
closing is less than $3,099,000; and

. the cash purchase price will be increased on a dollar-for dollar basis to
the extent the net working capital transferred to Vetoquinol U.S.A. at
closing exceeds $3,249,000.

Except in limited circumstances, we have generally agreed not to engage
anywhere in the United States and Canada in any enterprise in the business of
manufacturing, packaging, marketing, selling or otherwise distributing animal
health products during the 60-month period following the closing. We are not
restricted from engaging in the business of manufacturing, packaging,
marketing, selling or otherwise distributing animal health products during this
period:

. by acquiring up to 10% of the outstanding common stock of a publicly
traded company engaged in the business of manufacturing, packaging,
marketing, selling or otherwise distributing animal health products;

. by acquiring an interest in any entity that derives 20% or less of its
total sales from the business of manufacturing, packaging, marketing,
selling or otherwise distributing animal health products;

. by acquiring an interest in any entity that derives greater than 20% of
its total sales from the business of manufacturing, packaging, marketing,
selling or otherwise distributing animal health products so long as we
cause, to the extent we are able, that entity to use reasonable commercial
efforts to divest, as soon as reasonably practicable, a portion of its
interest in the business of manufacturing, packaging, marketing, selling
or otherwise distributing animal health products so that it no longer
derives greater than 20% of its total sales from all its businesses from
the business of manufacturing, packaging, marketing, selling or otherwise
distributing animal health products, or, if we cannot cause this
divestiture, that we divest our interest in this entity as soon as
practicable;

. by exercising any of our rights or performing any of our obligations under
the supply agreement contemplated by the asset purchase agreement; and

. by supplying or sublicensing third parties with Novasome lipid vesicle
technology for marketing, sale, distribution or other use in products that
are not shampoos, creme rinses, moisturizing sprays or ear cleansers or
hand cremes for the animal health business.

We will also enter into a sublicense and supply relationship with Vetoquinol
U.S.A. with respect to rights and products relating to the Novasome lipid
vesicle encapsulation technology. We have also agreed to provide Vetoquinol
U.S.A. with specified transitional services and, at Vetoquinol U.S.A.'s
election, use and occupancy of our facility located at 701-711 Harding Road,
Buena, New Jersey on a "triple net" basis.

Vetoquinol U.S.A. will offer employment to 33 of our 52 employees. None of
the employees being hired are directors or executive officers of IGI. All of
the employees to be hired by Vetoquinol U.S.A. are engaged in our companion pet
products business. We have agreed not to solicit or induce any of these
employees to terminate their employment in the companion pet products business
at anytime during the period ending two years following the closing. The asset
purchase agreement does not provide that Vetoquinol U.S.A. will retain any of
the transferred employees for a minimum period of time.

We will indemnify Vetoquinol U.S.A. for damages arising from, among other
things, breaches of our representations and warranties and of our post-closing
agreements under the asset purchase agreement and for specified environmental
liabilities, including any claims which may be made against Vetoquinol U.S.A.
relating to our properties in Buena, New Jersey and our environmental
remediation efforts at those properties. Vetoquinol S.A. has agreed to
guarantee the due and punctual performance of all of Vetoquinol U.S.A.'s
obligations under the asset purchase agreement.

In the event the sale of assets contemplated by the asset purchase agreement
is not approved by the stockholders of IGI, IGI will continue to operate both
the companion pet products business and the consumer products business, and IGI
will not be able to use the proceeds of the sale to eliminate its debt
obligations to American Capital Strategies and Fleet Capital Corporation.
During the year ended December 31, 2001, IGI had total revenues of $15,898,000
and interest expense of $2,133,000, of which approximately $577,000 represents
the amortization of deferred financing costs and debt discount. During 2001,
IGI therefore used 13.4% of its total revenues to service its outstanding debt
obligations. By eliminating its debt obligations under its loan agreements with
American Capital Strategies and Fleet Capital Corporation, IGI's interest
expense will be reduced to approximately $25,000 per year, payable in cash.
This will provide IGI with substantially greater flexibility to apply its cash
generated from operations to the operation and development of its consumer
products business.

Use of Proceeds from the Sale

We intend to use a substantial portion of the cash consideration we will
receive for the sale of assets contemplated by the asset purchase agreement to
pay all of our outstanding debt obligations and applicable prepayment and other
fees under our loan agreements with American Capital Strategies and Fleet
Capital Corporation. As of April 1, 2002, these obligations amounted in the
aggregate to approximately $11,931,000. In addition, we will pay our costs and
expenses associated with the sale of the companion pet products business, which
we anticipate to be approximately $480,000. We have no established plans for
the remaining cash

consideration of approximately $4,289,000, and expect to use it for general
corporate purposes. Upon its repayment of its outstanding obligations under its
loan agreements with American Capital Strategies and Fleet Capital Corporation,
IGI will not be subject to any material outstanding debt covenants.

Background of the Sale

Our board of directors regularly reviews IGI's long-term objectives and
strategic position, particularly in light of changing economic developments and
our access to capital resources. As part of this review, the board of directors
evaluates the operating capabilities and prospects of our business segments and
considers various strategic transactions, including acquisitions, dispositions
and alliances. Most recently, in September 2000, we sold substantially all of
the assets of our poultry vaccine products business.

In October 1999, we were contacted by a consultant retained by a third party
for the purpose of acquiring our companion pet products business. This effort
resulted in an offer in June 2000 by that third party to acquire the companion
pet products business for approximately $15,000,000. In July 2000, the third
party reduced its offer to $11,400,000. We rejected that offer and decided to
continue to operate, rather than sell, the companion pet products business.

In August 2001, Antares International Partners, Inc. contacted Domenic N.
Golato, our Senior Vice President and Chief Financial Officer, to express the
preliminary interest of its client, Vetoquinol S.A., in acquiring our companion
pet products business. At the time, we were not actively soliciting offers with
respect to our companion pet products business. However, the parties entered
into a confidentiality agreement and Vetoquinol S.A. began a preliminary due
diligence investigation. In late September 2001, in a letter to Mr. Golato,
Vetoquinol S.A. requested a meeting to discuss the terms of a potential
acquisition by Vetoquinol S.A. of our companion pet products business.

Also in September 2001, John F. Ambrose, our President and Chief Executive
Officer, received an indication of interest from another third party to acquire
the companion pet products business. The purchase price proposed by the third
party was less than half that of the initial purchase price proposed by
Vetoquinol S.A. Mr. Ambrose contacted the third party and advised it that IGI
had received another offer to purchase the companion pet products business for
a substantially greater purchase price; however, the third party did not
increase its proposed purchase price for the business.

Mr. Ambrose and Mr. Golato advised our board of directors of Vetoquinol
S.A.'s interest and the status of its due diligence investigation, as well as
of the third party's interest, at a board meeting on October 15, 2001. At the
meeting, the board authorized management to pursue the sale of IGI's companion
pet products business. Due to its high level of current interest, as well as
the purchase price proposed by Vetoquinol S.A. in light of IGI's experience in
July 2000 and the September 2001 offer by a third party, the board also
authorized management to, for a limited period, pursue the sale exclusively
with Vetoquinol S.A. Management was instructed to pursue the sale exclusively
with Vetoquinol S.A. only if Vetoquinol S.A.'s offer for the business remained
greater than a minimum amount determined by the board based upon the other
offers IGI had received for the business and if Vetoquinol S.A. requested
exclusivity. On October 17, 2001, by letter to our Chairman of the Board, Earl
R. Lewis, Vetoquinol S.A. reaffirmed its interest in acquiring our companion
pet products business.

On October 25, 2001, at a meeting in Philadelphia, Pennsylvania, Mr.
Ambrose, Mr. Golato and Richard Mixson, our National Sales Manager for EVSCO
Pharmaceuticals, met with representatives of Vetoquinol S.A. and Antares to
discuss the products and sales history of our companion pet products business,
as well as other due diligence inquiries.

Based upon indications made at the October 25, 2001 meeting as to a proposed
range for Vetoquinol S.A.'s offer to acquire the companion pet products
business, on November 2, 2001, IGI agreed to negotiate exclusively

with Vetoquinol S.A. for the sale of our companion pet products business
through December 15, 2001 or later, if the parties continued to negotiate in
good faith. On November 5, 2001, Vetoquinol S.A. confirmed by letter to Mr.
Ambrose its prospective offer range for the companion pet products business.

At a November 20, 2001 meeting of our board of directors, Mr. Ambrose and
Mr. Golato provided the board with an update regarding the status of
discussions with Vetoquinol S.A., including the proposed offer range. The board
instructed management to proceed with negotiations to achieve greater
specificity with respect to the overall terms of Vetoquinol S.A.'s offer and to
advise the board of further developments.

By letter dated December 10, 2001 addressed to IGI's board of directors,
Vetoquinol S.A. advised IGI that after its evaluation of the recent financial
results of the companion pet products business, it was reducing its valuation
of the business by $2,000,000. On December 11, 2001, Mr. Lewis replied to
Vetoquinol S.A. indicating that IGI believed the proposed reduction in the
valuation of the companion pet products business to be inappropriate.
Vetoquinol S.A. responded to Mr. Lewis' letter by contacting him to set up a
meeting to discuss the proposed transaction.

On December 13, 2001, at a meeting in Boston, Massachusetts, Mr. Lewis, Mr.
Ambrose and Mr. Golato and IGI's legal advisors met with representatives of
Vetoquinol S.A. and its financial and legal advisors. At the meeting, several
of the terms for the proposed sale of the companion pet products business were
negotiated, including purchase price, supply arrangements, technology rights,
noncompetition provisions and indemnification terms. With respect to price,
Vetoquinol S.A. offered IGI a choice; either an aggregate purchase price of
$17,000,000 with a $500,000 escrow or an aggregate purchase price of
$16,800,000 with no escrow.

At a December 18, 2001 meeting of our board of directors, Mr. Lewis, Mr.
Ambrose and Mr. Golato advised the board of the results of the December 13,
2001 meeting. At the meeting, the board considered each option as to price
offered by Vetoquinol S.A. at the December 13, 2001 meeting. After
consideration of its experience with escrow arrangements in connection with
IGI's September 2000 disposition of its poultry vaccine products business and
the practicality of receiving the entire consideration at closing, the board
instructed management to pursue the purchase price of $16,800,000 with no
escrow. The board also authorized IGI management to proceed with finalizing the
documentation for the proposed transaction.

Thereafter, Vetoquinol S.A. provided IGI with drafts of an asset purchase
agreement and related agreements. The parties and their advisors held several
conference calls throughout late December 2001 and January 2002 and continued
to negotiate the specific terms of the agreements. During this period,
Vetoquinol S.A. also concluded its due diligence investigation.

On January 22, 2002, at a meeting in Boston, Massachusetts, Mr. Ambrose and
Mr. Golato and IGI's legal advisors met with representatives of Vetoquinol S.A.
and its advisors. At the meeting, the parties further negotiated the terms of
the agreements, including the treatment of specific assets and liabilities,
representations and warranties and details of the supply and technology rights
relationships and noncompetition terms. Following these negotiations, the
parties agreed to a reduction in the purchase price to $16,700,000.

On January 31, 2002, the parties again met, along with their respective
advisors, in Boston, Massachusetts in order to finalize the terms of the
several agreements and to address remaining due diligence issues, including
environmental issues. On February 1, 2002, Vetoquinol S.A. provided revised
drafts of the several agreements.

On February 5, 2002, Mr. Ambrose and Mr. Golato and IGI's legal advisors met
with its board of directors to discuss the final terms of the asset purchase
agreement and the related agreements. At the meeting, the board reviewed in
detail the terms of the asset purchase agreement and the related agreements. In
particular, the board discussed the purchase price, including the absence of an
escrow, the process by which the purchase price was determined, including the
$100,000 reduction in purchase price agreed to at the January 22, 2002 meeting,
and the obligations of IGI to indemnify Vetoquinol U.S.A. With respect to the
process by which the purchase price

was determined, the board discussed the contributions of the companion pet
products business to IGI's overall business, the reports of management on the
negotiations of the terms of the asset purchase agreement, the financial
assurances given to IGI by Vetoquinol S.A. and the due diligence process. The
board also analyzed the "fiduciary out" provisions under which the board, under
limited circumstances, would have the opportunity to negotiate and potentially
recommend to IGI's stockholders a more favorable proposal for the companion pet
products business, if such proposal was not solicited by IGI. The "fiduciary
out" provisions were available to the board for a limited time following the
signing of the asset purchase agreement. IGI's management also provided the
board with an update as to IGI's current outstanding debt obligations and the
prepayment penalties and other fees associated with those obligations. At the
conclusion of the meeting, the board unanimously approved the asset purchase
agreement and the sale of assets contemplated by that agreement and determined
each to be fair and in the best interests of IGI and its stockholders. The
board then authorized IGI's management to finalize and execute the definitive
asset purchase agreement.

After the close of business on February 6, 2002, the parties executed the
asset purchase agreement. IGI announced the agreement on February 7, 2002.

Reasons for the Sale

Our board of directors unanimously determined that the sale of our companion
pet products business pursuant to the asset purchase agreement is fair and in
the best interests of IGI and its stockholders. The decision of the board was
based on several potential benefits of the sale of the companion pet products
business that the board believes will contribute to IGI's success. These
potential benefits include:

. that the sale of the companion pet products business pursuant to the asset
purchase agreement enables IGI to realize immediately the value of that
business in cash in the amount of $16,700,000 and to transfer liabilities
which aggregated to approximately $1,474,000 as of December 31, 2001;

. that the cash consideration to be received by IGI for the sale of its
companion pet products business will be sufficient to allow the repayment
in full of IGI's obligations under its loan agreements with American
Capital Strategies and Fleet Capital Corporation, including prepayment and
related fees. These obligations aggregated to approximately $11,931,000 as
of April 1, 2002;

. that the repayment by IGI of its obligations under its loan agreements
with American Capital Strategies and Fleet Capital Corporation will
substantially reduce IGI's long-term debt obligations, which were
$11,767,000 as of December 31, 2001 and will reduce IGI's interest
expense, which was $2,133,000 in the year ended December, 31 2001, of
which approximately $577,000 represents the amortization of deferred
financing costs and debt discount, to approximately $25,000 per year,
payable in cash. The remaining interest expense is related to additional
long-term debt obligations of approximately $200,000 taken on as of
January 31, 2002;

. the sale of the companion pet products business will permit IGI and its
management to focus their attention, efforts and resources, including the
additional working capital provided by the sale of the companion pet
products business, which is expected to be approximately $4,289,000, on
further developing IGI's consumer products business;

. the sale of the companion pet products business will permit IGI to
substantially reduce its cash investment in inventory, from approximately
$3,000,000 to approximately $100,000, as of December 31, 2001, as IGI's
consumer products inventory does not require as high a level of cash
investment;

. the benefits to IGI associated with its supply relationship with
Vetoquinol U.S.A. to be entered into at the closing, including providing
an additional source of revenue for IGI; and

. the benefits of selling the companion pet products business to Vetoquinol
U.S.A., which will be able to realize the value of the companion pet
products business and employees and continue to favorably service our
customers.

Our board of directors reviewed the following material factors in evaluating
the asset purchase agreement and the sale of the companion pet products
business:

. historical and current market and financial information regarding the
companion pet products business and the financial markets, including a
recent deterioration in the accessibility of the financial markets and
IGI's other businesses;

. the judgment, advice and analyses of our management with respect to the
potential strategic, financial and operational benefits of the sale of the
companion pet products business, including management's favorable
recommendation of the sale;

. the terms of the asset purchase agreement and related agreements,
including the purchase price, the absence of an escrow and the existence
of a fiduciary out allowing for a post-signing market check on the
transaction to permit an unsolicited superior proposal to be considered by
the board; and

. the effects of the sale of the companion pet products business on our
customers, employees and stockholders.

Other than with respect to the matters described above and below under the
heading "Reasons for the Sale", the board of directors did not make any
specific inquiries into the matters supporting the judgment, advice and
analyses of management with respect to the sale of assets contemplated by the
asset purchase agreement.

Our board of directors also identified and considered the following material
potentially negative factors relating to the sale of the companion pet products
business:

. that the closing of the sale of the companion pet products business is
conditioned upon a number of factors, including the authorization of our
stockholders, the receipt of various third party consents and the truth
and accuracy of our representations and warranties, which factors create a
degree of uncertainty as to whether the closing will occur and therefore
restrict management's ability to make strategic decisions with respect to
IGI's business during the period prior to closing;

. that the failure of the sale of the companion pet products business to
occur for any reason could adversely affect that business through loss of
customers, loss of employees and other factors, as these constituencies
may believe that IGI is not commited to that business;

. that the sale of our companion pet products business constitutes a sale of
a substantial portion of our total business and that, as a result, our
future operational performance, including revenues, will be reduced
accordingly and will be dependent solely upon the results of our consumer
products business, which generated only $4,294,000 in revenue in 2001;

. that during the period ending 60 months following the closing, we may not,
subject to limited exceptions, engage anywhere in the United States and
Canada in any enterprise in the business of manufacturing, packaging,
marketing, selling or otherwise distributing animal health products,
thereby restricting our access to opportunities in markets with which we
are highly experienced;

. that we will grant to Vetoquinol U.S.A., the exclusive perpetual,
world-wide, royalty-free right and sublicense, subject to limited
exceptions, to use solely in the business of animal health, rights of IGI
in the Novasome lipid vesicle encapsulation technology solely in
connection with the business of marketing or selling shampoos, creme
rinses, moisturizing sprays, ear cleansers and hand cremes;

. that we have agreed to indemnify Vetoquinol U.S.A. for various losses,
which may effectively reduce the total consideration we receive for the
sale of our companion pet products business;

. that all of our directors and executive officers have interests in the
sale of the companion pet products business that are different from the
interests of our other stockholders, as further described under the
heading "Interests of Directors and Executive Officers of IGI in the Sale"
below;

. that the asset purchase agreement prevents IGI from soliciting other
transactions to acquire our companion pet products business and requires
IGI to pay to Vetoquinol U.S.A. a termination fee of $750,000 in the event
we terminate the asset purchase agreement in response to an unsolicited
proposal for a superior transaction to acquire our companion pet products
business, thereby restricting our ability to affirmatively identify and
consummate a superior transaction;

. that we will be responsible for substantially all pre-closing liabilities
of the companion pet products business, except for current liabilities and
obligations under assigned contracts that will be assumed by Vetoquinol
U.S.A. at the closing, which reduces the benefit of divesting ourselves of
the companion pet products business; and

. that the sale of the companion pet products business will be treated as a
taxable sale of that business for United States federal income tax
purposes, the effects of which treatment would be offset against our net
operating loss carryforwards.

Our board of directors concluded that these factors were outweighed by the
potential benefits to be gained by the sale of the companion pet products
business.

The foregoing discussion of the material factors considered by our board of
directors is not intended to be inclusive of all factors considered by the
board. In view of the wide variety of factors considered in connection with its
evaluation of the sale of the companion pet products business and the
complexity of these matters, the board did not find it useful to and did not
attempt to quantify, rank or otherwise assign relative weights to these
factors. In addition, the board did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to the board's ultimate
determination, but rather, the board conducted an overall analysis of the
factors described above. In considering the factors described above, individual
members of the board may have given different weight to different factors.

No Fairness Opinion

Our board of directors chose not to obtain, nor did it rely upon, the
opinion of any outside financial advisor in:

. evaluating the asset purchase agreement or the sale of our companion pet
products business;

. making its determination that the asset purchase agreement and the sale of
assets contemplated by that agreement are fair and in the best interests
of IGI and IGI's stockholders; or

. making its recommendation that IGI's stockholders authorize the sale of
assets contemplated by the asset purchase agreement.

In determining not to obtain or rely upon an opinion of a financial advisor
in connection with the sale of the companion pet products business, our board
of directors considered:

. that the $16,700,000 purchase price offered by Vetoquinol U.S.A. is
substantially higher than other offers received by IGI for that business,
including the offer made by a third party in September 2001 which was
rejected and which the third party refused to increase;

. that the asset purchase agreement includes a fiduciary out provision
permitting IGI a 25-day period following the date of the asset purchase
agreement to receive an unsolicited superior proposal to acquire the
companion pet products business. IGI was required to notify Vetoquinol
U.S.A. of its receipt of such a superior proposal, but was then permitted
an additional 25-day period after receipt of the proposal to consider and
negotiate the proposal prior to Vetoquinol U.S.A. being able to terminate
the asset purchase agreement. See "The Asset Purchase
Agreement--Additional Agreements of IGI and Vetoquinol U.S.A.--Limitation
on IGI's Ability to Consider Competing Proposals"; and

. the cost attendant to obtaining opinions of financial advisors.

IGI has not received any superior proposals since the date of the asset
purchase agreement.

Recommendation of IGI's Board of Directors

Interests of Directors and Executive Officers of IGI in the Sale

In considering the recommendation of our board of directors with respect to
the sale of assets contemplated by the asset purchase agreement, you should be
aware that all of our directors and executive officers have interests in the
merger that are different from, or are in addition to, the interests of IGI's
stockholders generally in the sale of our companion pet products business.

Upon the closing of the sale of assets contemplated by the asset purchase
agreement, all options held by the executive officers and directors of IGI will
vest in full. The acceleration of options held by John Ambrose results from the
terms of his change in control agreement with IGI, which provides for the full
acceleration of the vesting of outstanding stock options upon the approval by
IGI's stockholders of a sale of substantially all of the assets of IGI. The
acceleration of options held by Domenic N. Golato results from the terms of his
employment agreement with IGI, which provides for the full acceleration of the
vesting of outstanding stock options upon the approval by IGI's stockholders of
a sale of substantially all of the assets of IGI. The acceleration of options
held by our directors results from the terms of our 1999 Director Stock Option
Plan, which provides for the full acceleration of the vesting of outstanding
stock options upon the sale of substantially all of the assets of IGI. As of
February 6, 2002, the date the asset purchase agreement was signed, this
acceleration would have resulted in the acceleration of vesting of an aggregate
of options to purchase approximately 795,000 shares of our common stock, with a
per share weighted average exercise price of $0.69. On April 15, 2002 the per
share closing price of our common stock on the American Stock Exchange was
$0.69.

Per Per Share
Per Share Weighted
Share Weighted Average Total Gain
Weighted Average Exercise in Value of
Average Exercise Price of Total
Exercise Price of Total Total Options to
Price of Total Total Options to Options to be
Total Total Vested Vested be be Accelerated
Options Options Options Options Accelerated Accelerated Upon
Held as of Held as as of Held as Upon Upon Closing as
Directors and Executive Officers 2/6/02 of 2/6/02 2/6/02 of 2/6/02 Closing Closing of 4/15/02
-------------------------------- ---------- --------- ------- --------- ----------- ----------- -----------

John Ambrose........................ 350,000 $0.75 100,000 $1.06 250,000 $0.63 $25,500
Domenic N. Golato................... 300,000 0.72 100,000 0.84 200,000 0.66 17,000
Earl R. Lewis....................... 245,000 0.82 30,000 1.00 215,000 0.79 600
Terrence O'Donnell.................. 220,000 3.08 190,000 3.46 30,000 0.65 1,200
Constantine L. Hampers, M.D......... 195,000 2.89 170,000 3.22 25,000 0.65 1,000
Jane E. Hager....................... 165,000 3.30 150,000 3.56 15,000 0.65 600
Stephen J. Morris................... 95,000 1.42 80,000 1.56 15,000 0.65 600
Donald W. Joseph.................... 45,000 0.94 30,000 1.09 15,000 0.65 600
Kenneth E. Jones.................... 30,000(1) 0.73 0 -- 30,000(1) 0.73 600
All directors and executive officers
as a group (9 persons)............ 1,645,000 1.62 850,000 2.49 795,000 0.69 47,700

- --------
(1) Consists of options to purchase 30,000 shares of common stock held by
American Capital Strategies. Mr. Jones is a principal of American Capital
Strategies. Mr. Jones disclaims beneficial ownership of the options to
purchase 30,000 shares of common stock held by American Capital Strategies.

Material United States Federal Income Tax Consequences and Accounting Treatment
of the Sale

The sale of assets contemplated by the asset purchase agreement will be a
taxable sale of the assets of our companion pet products business. We will
recognize gain on the difference between the purchase price, increased by the
liabilities assumed by Vetoquinol U.S.A., and our tax basis in the assets and
will pay income tax accordingly. We anticipate that we will be able to offset
all taxable gain we experience for United States federal income tax purposes
against our net operating loss carryforwards and that therefore any federal
income tax liability resulting from the asset sale will not reduce the amount
of cash available for corporate purposes. The closing of the sale of assets
contemplated by the asset purchase agreement will not be a taxable event for
our stockholders under applicable United States federal income tax laws.

We will account for the sale of our companion pet products business as a
discontinued operation.

Listing of Our Common Stock on the American Stock Exchange

We have been advised by the American Stock Exchange that we are no longer in
compliance with its continuing listing standards. Consistent with the
instructions of the American Stock Exchange, we have presented to that exchange
a plan for future compliance with its continuing listing standards. Based upon
that plan, the exchange has not delisted our common stock, notwithstanding our
present failure to comply with its continuing listing standards. The exchange
is monitoring our compliance with our plan on a monthly basis. The consummation
of the sale of our companion pet products business and the related pay-off of
our outstanding long-term debt are integral components of our plan. If we
consummate the sale of our companion pet products business and pay off our
outstanding debt obligations to American Capital Strategies and Fleet Capital
Corporation, the American Stock Exchange will continue to monitor our
compliance with our plan on a monthly basis and will review our overall
compliance with its continuing listing standards in March 2003 in light of our
financial results for fiscal 2002. In the event the sale of our companion pet
products business pursuant to the asset agreement is not consummated, we will
not be in compliance with our plan, as presented to the American Stock
Exchange, and the exchange will delist our common stock.

No Rights of Appraisal

Under Delaware law, you will not be entitled to exercise appraisal rights in
connection with the sale of assets contemplated by the asset purchase agreement.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated balance sheet of
IGI as of December 31, 2001 gives effect to:

. the elimination of those assets and liabilities of our companion pet
products business to be sold to or assumed by Vetoquinol U.S.A. pursuant
to the asset purchase agreement; and

. the related pro forma adjustments, as described in the notes to the
unaudited pro forma condensed consolidated balance sheet.

The unaudited pro forma condensed consolidated balance sheet is presented as
though the closing of the sale of assets contemplated by the asset purchase
agreement occurred on December 31, 2001.

The following unaudited pro forma condensed consolidated statements of
operations of IGI for the three years ended December 31, 2001 give effect to:

. the elimination of the results of operations of our companion pet products
business; and

. the related pro forma adjustments, as described in the notes to the
unaudited pro forma condensed consolidated statement of operations.

The unaudited pro forma condensed consolidated statements of operations are
presented as though the sale of assets contemplated by the asset purchase
agreement occurred on January 1, 2001. The unaudited pro forma condensed
consolidated financial statements of operations for the two years ended
December 31, 2000 and 1999 are presented to reflect the companion pet products
business as a discontinued operation.

The pro forma adjustments are based on preliminary estimates, currently
available information and assumptions that we believe are reasonable. The
unaudited pro forma financial information presented below is not necessarily
indicative of the financial position or results of operations that we would
have obtained had such events occurred as of the dates assumed, or of the
future results of IGI.

IGI issued to American Capital Strategies warrants to purchase up to
1,907,543 shares of our common stock in connection with a financing transaction
we originally entered into in October 1999. Under our loan agreement with
American Capital Strategies, the warrants issued to American Capital Strategies
are subject to a make-whole feature. The make-whole feature requires IGI to
compensate American Capital Strategies in the event that, following the
occurrence of specified events, American Capital Strategies realizes proceeds
from the sale of common stock obtained upon exercise of the warrants that are
less than the fair value of that common stock on the date American Capital
Strategies provided IGI with notice of its intent to sell that common stock.
Under the make-whole feature, IGI is required to compensate American Capital
Strategies the full amount of the difference between the aggregate fair market
value of the shares of common stock on the date of American Capital Strategies'
notice to IGI and the actual aggregate proceeds, less related sale expenses,
received by American Capital Strategies from the sale of those shares. At IGI's
option, it may compensate American Capital Strategies under the make-whole
feature in either cash or IGI common stock. The make-whole feature becomes
effective upon the occurrence of specified events, including the earliest to
occur of the following:

. October 29, 2004;

. the date of payment in full of IGI's outstanding indebtedness under its
loan agreement with American Capital Strategies;

. the date of payment in full of IGI's outstanding indebtedness under its
loan agreement with Fleet Capital Corporation;

. the sale of IGI; or

. the sale of 30% or more of IGI's assets.

The occurrence of each of the sale of assets contemplated by the asset
purchase agreement, the use of the proceeds from that sale to repay in full
IGI's outstanding indebtedness under its loan agreement with American Capital
Strategies and the use of the proceeds from that sale to repay in full IGI's
outstanding indebtedness under its loan agreement with Fleet Capital
Corporation will cause the make-whole provision to be effective. The potential
impact on IGI of the make-whole provision will not be known until American
Capital Strategies gives notice to IGI of its intent to sell common stock
obtained upon exercise of the warrants, and therefore, that potential impact is
not incorporated within the unaudited pro forma condensed consolidated balance
sheet and statements of operations and their related notes set forth below.

The unaudited pro forma condensed consolidated balance sheet and statements
of operations of IGI should be read in conjunction with the related notes and
with the historical consolidated financial statements of IGI and the related
notes. The historical consolidated financial statements of IGI and the related
notes are included in this proxy statement, beginning on page F-1.

IGI, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
(IN THOUSANDS)

Pro Forma
Adjustments Related Adjusted Pro
Historical at to the Sale of Forma at
December 31, Companion Pet December 31,
2001 Products Business 2001
------------- ------------------- ------------

ASSETS
Current assets:
Cash and equivalents......................................... $ 10 $ 4,122 (b) $ 4,132
Accounts receivable, less allowance for doubtful
accounts................................................... 1,713 (1,427)(a) 286
Licensing and royalty income receivable...................... 255 255
Inventories, net............................................. 3,059 (2,970)(a) 89
Prepaid expenses and other current assets.................... 260 (126)(a) 134
-------- -------- --------
Total current assets..................................... 5,297 (401) 4,896

Property, plant and equipment, net........................... 4,143 (751)(d) 3,392
Deferred financing costs..................................... 659 (659)(c) --
Other assets................................................. 440 (323)(a),(d) 117
-------- -------- --------
Total assets............................................. $ 10,539 $ (2,134) $ 8,405
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Revolving credit facility.................................... $ 2,326 $ (2,326)(b) $ --
Current portion of long-term debt............................ 7,478 (7,478)(b),(c) --
Accounts payable............................................. 2,071 (1,298)(a) 773
Accrued payroll.............................................. 134 (41)(a) 93
Accrued interest............................................. 111 (111)(b) --
Other accrued expenses....................................... 1,033 (135)(a) 898
Income taxes payable......................................... 12 300 (e) 312
-------- -------- --------
Total current liabilities................................ 13,165 (11,089) 2,076

Deferred income................................................. 620 620
-------- -------- --------
Total liabilities........................................ 13,785 (11,089) 2,696

Detachable stock warrants....................................... 1,145 1,145

Stockholders' equity (deficit):
Common stock................................................. 112 112
Additional paid-in capital................................... 22,230 22,230
Accumulated deficit.......................................... (26,733) 8,955 (f) (17,778)
-------- -------- --------
Total stockholders' equity (deficit)..................... (4,391) 8,955 4,564
-------- -------- --------
Total liabilities and stockholders' equity (deficit)..... $ 10,539 $ (2,134) $ 8,405
======== ======== ========

See accompanying notes to the unaudited pro forma condensed consolidated
balance sheet.

IGI, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001
(IN THOUSANDS)

(a) Adjustments to reflect the sale of certain assets, and the assumption of
certain liabilities, of the companion pet products business.

(b) The proceeds from the sale of the companion pet products business
pursuant to the asset purchase agreement are estimated at $16,700. Of these
proceeds, $11,878 will be utilized to pay down debt and related accrued
interest, $480 will be utilized to pay for transaction costs and professional
fees, and $220 will be utilized to pay a pre-payment penalty on the early
extinguishment of debt.

(c) Adjustments to expense the deferred financing costs and the unamortized
debt discount upon the early extinguishment of the related debt.

(d) Adjustments to reflect the write down to net realizable value of certain
assets of the companion pet products business that are not being acquired by
Vetoquinol U.S.A. Such assets will not be utilized by IGI in its continuing
operations after the sale.

(e) Adjustment to reflect alternative minimum tax on the gain from the sale.

(f) Comprised of the after-tax gain on the sale of the companion pet
products business pursuant to the asset purchase agreement, offset by the loss
on early extinguishment of debt and the write down to net realizable value of
certain assets which are not being acquired by Vetoquinol U.S.A. Such assets
will not be utilized by IGI in its continuing operations after the sale.

Sale of Companion Pet Products Business
---------------------------------------

Gross proceeds.................................................... $16,700
Closing costs - legal, accounting, etc............................ (480)
Proceeds, net of costs............................................ -------
16,220

Assets purchased......................................... $ 4,523
Liabilities assumed...................................... (1,474)
-------
Net book value of assets acquired................................. (3,049)
Write off of goodwill and deferred design costs................... (323)
Pretax gain on sale............................................... -------
Income taxes...................................................... 12,848
Net gain on sale.................................................. (300)
-------
12,548
Early Extinguishment of Debt
----------------------------
Write off of American Capital Strategies debt discount... (1,963)
Write off of deferred financing costs.................... (659)
American Capital Strategies prepayment fee............... (220)
-------
Loss on early extinguishment of debt.............................. (2,842)

Write Down to Net Realizable Value
----------------------------------
Property, plant and equipment written down to net realizable value (751)
-------
Impact on accumulated deficit..................................... $ 8,955
=======

IGI, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Pro Forma
Adjustments
Related to the Adjusted Pro
Sale of the Forma for the
Historical Results for Companion Pet Year Ended
the Year Ended Products December 31,
December 31, 2001 Business (d) 2001
---------------------- -------------- -------------

Revenues:
Sales, net................................... $14,832 $(11,604)(a) $ 3,228
Licensing and royalty income................. 1,066 1,066
------- --------- -------
Total revenues........................... 15,898 (11,604) 4,294
Cost and expenses:
Cost of sales................................ 8,767 (7,655)(a) 1,112
Selling, general and administrative expenses. 5,332 (2,539)(a) 2,793
Product development and research expenses.... 536 536
Non-recurring charges........................ 1,424 (819)(a) 605
------- --------- -------
Operating loss.................................. (161) (591) (752)

Interest expense................................ 2,133 (2,133)(b) --
------- --------- -------
Loss from continuing operations before taxes.... (2,294) 1,542 (752)
Benefit (provision) for income taxes............ 271 (300)(c) (29)
------- --------- -------
Loss from continuing operations................. $(2,023) $ 1,242 $ (781)
======= ========= =======
Loss per share from continuing operations:
Basic and diluted net loss per common share.. $ (0.18) $ (0.07)
======= =======
Average number of common shares:
Basic and diluted............................ 10,957 10,957
======= =======

See accompanying notes to the unaudited pro forma condensed consolidated
statement of operations.

IGI, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)

(a) Adjustments to eliminate results of operations of the companion pet
products business for the year ended December 31, 2001.

(b) Adjustment to interest expense to reflect the reduction of indebtedness
using the proceeds from the sale of the companion pet products business
pursuant to the asset purchase agreement. No interest income has been assumed
on the excess proceeds resulting from the sale of the companion pet products
business pursuant to the asset purchase agreement.

(c) Adjustment to reflect alternative minimum tax. Subsequent to December
31, 2001, the tax law changed. Based on the provisions of the new tax law, the
alternative minimum tax will not be applicable to this transaction.

(d) The extraordinary loss on the early extinguishment of debt, the write
down to net realizable value of certain assets of the companion pet products
business that are not being acquired by Vetoquinol U.S.A., Inc. and the gain on
the sale of the companion pet products business pursuant to the asset purchase
agreement have been excluded from the pro forma adjustments.

IGI, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Pro Forma
Adjustments
Related to the Adjusted Pro
Sale of the Forma for the
Historical Results for Companion Pet Year Ended
the Year Ended Products December 31,
December 31, 2000 Business 2000
---------------------- -------------- -------------

Revenues:
Sales, net.................................. $16,799 $(12,700)(a) $ 4,099
Licensing and royalty income................ 2,453 2,453
------- -------- -------
Total revenues............................ 19,252 (12,700) 6,552
Cost and expenses:
Cost of sales............................... 10,566 (9,173)(a) 1,393
Selling, general and administrative expenses 7,990 (2,691)(a) 5,299
Product development and research expenses... 853 853
------- -------- -------
Operating loss............................... (157) (836) (993)
Interest expense............................. (2,754) (2,754)
------- -------- -------
Loss from continuing operations before taxes. (2,911) (836) (3,747)
Provision for income taxes................... (5,864) (5,864)
------- -------- -------
Loss from continuing operations.............. $(8,775) $ (836) $(9,611)
======= ======== =======
Loss per share from continuing operations:
Basic and diluted net loss per common share. $ (0.86) $ (0.94)
======= =======
Average number of common shares:
Basic and diluted........................... 10,205 10,205
======= =======

(a) Adjustments to eliminate results of operations of the companion pet
products business for the year ended December 31, 2000.

IGI, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Pro Forma
Adjustments Adjusted Pro
Related to the Forma for the
Historical Results for Sale of the Year Ended
the Year Ended Companion Pet December 31,
December 31, 1999 Products Business 1999
---------------------- ----------------- -------------

Revenues:
Sales, net.................................. $18,664 $(13,595)(a) $ 5,069
Licensing and royalty income................ 1,869 1,869
------- -------- -------
Total revenues.......................... 20,533 (13,595) 6,938
Cost and expenses:
Cost of sales............................... 8,799 (6,427)(a) 2,372
Selling, general and administrative expenses 8,519 (3,306)(a) 5,213
Product development and research expenses... 668 (12)(a) 656
------- -------- -------
Operating profit (loss)..................... 2,547 (3,850) (1,303)
Interest expense............................. (4,109) (4,109)
Other income (expense), net.................. 31 31
------- -------- -------
Loss from continuing operations before taxes. (1,531) (3,850) (5,381)
Benefit for income taxes..................... 401 1,309(b) 1,710
------- -------- -------
Loss from continuing operations.............. $(1,130) $ (2,541) $(3,671)
======= ======== =======
Loss per share from continuing operations:
Basic and diluted net loss per common share. $ (0.12) $ (0.38)
======= =======
Average number of common shares:
Basic and diluted........................... 9,605 9,605
======= =======

(a) Adjustments to eliminate results of operations of the companion pet
products business for the year ended December 31, 1999.
(b) Calculated using the statutory tax rate of 34%.

THE ASSET PURCHASE AGREEMENT

The following is a summary of the material provisions of the asset purchase
agreement, a copy of which is attached as Annex A to this proxy statement and
is incorporated by reference into this summary. While we believe that the
summary covers the material terms of the asset purchase agreement, this summary
may not contain all of the information that is important to you. We urge you to
read the asset purchase agreement in its entirety for a complete description of
the terms and conditions of the asset sale.

Asset Sale

On February 6, 2002, we entered into an asset purchase agreement for the
sale of substantially all of the assets of our companion pet products business
to Vetoquinol U.S.A., Inc., a wholly owned subsidiary of Vetoquinol S.A. of
Lure, France. In addition to IGI and Vetoquinol U.S.A., Vetoquinol S.A. is also
a party to the asset purchase agreement, but solely with respect to specific
provisions of the agreement. In particular, Vetoquinol S.A. has unconditionally
guaranteed the due and punctual performance of all of Vetoquinol U.S.A.'s
obligations under the asset purchase agreement.

Purchased Assets

Except for assets specifically excluded in the asset purchase agreement,
Vetoquinol U.S.A. will purchase all of the assets used solely in our companion
pet products business. These assets expressly include:

. all inventories solely of the companion pet products business;

. all items of personal property used solely in connection with the
companion pet products business;

. all product formulations, specifications, processes, trade secrets and
similar property relating solely to the companion pet products business;

. all books, records, files and other data maintained by IGI and its
subsidiaries relating solely to the companion pet products business;

. agreements, personal property leases, contracts, licenses, leases,
commitments, understandings, binding obligations and arrangements either
specifically identified or entered into in the ordinary course of business
of the companion pet products business between the date of the asset
purchase agreement and the closing date;

. all approvals, consents, permits, licenses, registrations and other
similar authorizations from any governmental entity used, held for use or
intended to be used solely in the operation of the companion pet products
business;

. all sales and promotional literature and advertising materials relating
solely to the companion pet products business;

. all labels, logos, graphics, associated artwork, packaging and related
materials relating solely to the companion pet products business;

. all rights of IGI in all intellectual property relating solely to the
companion pet products business;

. all accounts receivable of IGI relating solely to the companion pet
products business;

. all other receivables relating solely to the companion pet products
business, including refunds, credits, allowances, rebates and other debt
items owing by suppliers, vendors and others furnishing goods or providing
services to the companion pet products business;

. all prepaid expenses, advances or deposits and other prepaid items
relating solely to the companion pet products business;

. all goodwill of IGI relating solely to the companion pet products business;

. the domain names "Tomlyn.com" and "EvscoPharm.com" and the content at the
domain names and Internet web sites of IGI relating solely to the
companion pet products business;

. all claims, causes of action, judgments, indemnity or other rights that
were or could have been instituted by IGI against any third party arising
solely out of or relating solely to the companion pet products business
arising before, on or after the closing; and

. all products of the companion pet products business manufactured,
packaged, marketed, sold or otherwise distributed on or prior to the
closing date.

Excluded Assets

Vetoquinol U.S.A. will not acquire any of the following assets:

. except where incorporated into the inventory and as provided in the
technology rights agreement to be entered into pursuant to the asset
purchase agreement, all right, title and interest of IGI in the Novasome
lipid vesicle encapsulation technology and records related to the Novasome
technology;

. except where covered by the assumed contracts, all manufacturing
equipment, racking and any hazardous substance stored in conjunction with
the companion pet products business located at our facility at 701-711
Harding Road, Buena, New Jersey, which we refer to as the "plant";

. all right, title and interest of IGI in or to any real property, other
than set forth in the transition services agreement that may be entered
into pursuant to the asset purchase agreement;

. all cash, short term investments and cash equivalents held by IGI;

. all agreements, contracts, leases, licenses, commitments, understandings,
instruments or any other binding obligations or arrangements which are not
specifically assumed by Vetoquinol U.S.A. under the asset purchase
agreement;

. all insurance policies of IGI and any rights under those insurance
policies;

. all books, records, files and data of IGI that are not related solely to
the companion pet products business or which were prepared in connection
with the asset purchase agreement;

. all claims, causes of action, judgments, indemnity or other rights arising
out of or relating to any of the assets or liabilities not acquired or
assumed by Vetoquinol U.S.A.;

. all tax refunds, credits or overpayments;

. all rights of IGI arising under the asset purchase agreement;

. any domain name or Internet website other than "Tomlyn.com" and
"EvscoPharm.com";

. the corporate name of IGI or any derivations and any related trademarks,
service marks, logos, artwork or related marks; and

. those financial records that do not relate solely to the companion pet
products business, which IGI has agreed to make available to Vetoquinol
U.S.A. and its representatives for a period following the closing date.

Purchase Price

Cash Purchase Price. The purchase price to be paid by Vetoquinol U.S.A. for
the assets to be acquired under the asset purchase agreement consists of
$16,700,000 to be paid in cash at closing. The cash purchase price is subject
to post-closing adjustment as follows:

. the cash purchase price will be decreased on a dollar-for-dollar basis to
the extent the net working capital transferred to Vetoquinol U.S.A. at
closing is less than $3,099,000; and

. the cash purchase price will be increased on a dollar-for dollar basis to
the extent the net working capital transferred to Vetoquinol U.S.A. at
closing exceeds $3,249,000.

Assumed Liabilities. In addition to the cash purchase price, Vetoquinol
U.S.A. will assume at closing all of the following liabilities:

. all current liabilities of the companion pet products business;

. all liabilities and obligations of IGI under the contracts acquired by
Vetoquinol U.S.A. pursuant to the asset purchase agreement that arise and
relate to any period on or after the closing;

. all obligations for the repair, replacement or return of companion pet
products manufactured or sold in the ordinary course of the companion pet
products business prior to the closing date;

. with respect to companion pet products sold in the ordinary course of the
companion pet products business prior to the closing date, all liabilities
and obligations for product liability claims during the first two years
following closing that are not covered by our anticipated insurance
coverage and all liabilities and obligations for product liability claims
after two years following the closing;

. all liabilities and obligations relating solely to the companion pet
products business, in each case to the extent arising out of and relating
to any period on and after the closing date, other than those to which
Vetoquinol U.S.A is entitled to be indemnified under the asset purchase
agreement; and

. subject to specified exceptions, liabilities, debts, obligations and
claims which do not exceed $100,000 in the aggregate.

Vetoquinol U.S.A. will not assume any liabilities under the asset purchase
agreement other than the assumed liabilities identified above.

Closing

The closing of the sale of assets contemplated by the asset purchase
agreement will take place as soon as practicable, but in no event later than
five business days after the satisfaction or waiver of the conditions to
closing provided for in the asset purchase agreement, or at another time agreed
upon between IGI and Vetoquinol U.S.A.

Representations and Warranties

Representations and Warranties by IGI. The asset purchase agreement
contains representations and warranties by IGI to Vetoquinol U.S.A. relating to:

. the corporate organization of IGI and similar corporate matters;

. the authorization, execution, delivery, performance and enforceability of
the asset purchase agreement;

. the absence of conflicts, breaches or defaults under our corporate
charter, bylaws and other agreements and documents and applicable laws;

. financial statements and undisclosed liabilities;

. the absence since November 30, 2001 of a material adverse effect or the
occurrence of other specified events with respect to the companion pet
products business;

. tax matters;

. the absence of any workers' claims for injury, illness or disability;

. litigation matters;

. compliance with applicable laws;

. environmental matters;

. intellectual property matters;

. contracts assumed under the asset purchase agreement;

. the absence of material outstanding bonds or other surety arrangements;

. accounts receivable and payable;

. matters relating to governmental approvals, consents, permits, licenses,
registrations, authorizations and clearances;

. suppliers and customers;

. real property;

. transactions with affiliates;

. companion pet products;

. employees and employee benefits matters;

. inventory;

. title to the assets to be acquired pursuant to the asset purchase
agreement;

. the sufficiency of the assets to be acquired pursuant to the asset
purchase agreement;

. our license agreement under which we have rights to use the Novasome lipid
vesicle encapsulation technology; and

. our capitalization.

Representations and Warranties by Vetoquinol U.S.A. The asset purchase
agreement also contains representations and warranties by Vetoquinol U.S.A. to
IGI relating to:

. the corporate organization of Vetoquinol U.S.A. and Vetoquinol S.A. and
similar corporate matters;

. the authorization, execution, delivery, performance and enforceability of
the asset purchase agreement;

. the absence of conflicts, violations, breaches or defaults under the
organizational documents and other agreements and documents of, and laws
applicable to, Vetoquinol U.S.A. and Vetoquinol S.A;

. brokers and related fees; and

. financing matters.

Survival of Representations and Warranties. The representations and
warranties in the asset purchase agreement will survive the closing and
terminate 15 months after the closing date with the following exceptions:

. IGI's representations and warranties relating to tax matters will survive
the closing until 30 days after the expiration of the applicable statute
of limitations;

. IGI's representations and warranties relating to the corporate
organization of IGI and similar corporate matters will not terminate;
. IGI's representations and warranties relating to the authorization,
execution, delivery, performance and enforceability of the asset purchase
agreement will not terminate;

. IGI's representations and warranties regarding title to the assets to be
acquired pursuant to the asset purchase agreement will not terminate;

. Vetoquinol U.S.A.'s representations and warranties relating to the
corporate organization of Vetoquinol U.S.A. and Vetoquinol S.A. and
similar corporate matters will not terminate; and

. Vetoquinol U.S.A.'s representations and warranties relating to the
authorization, execution, delivery, performance and enforceability of the
asset purchase agreement will not terminate.

Additional Agreements of IGI and Vetoquinol U.S.A.

Conduct of the Companion Pet Products Business by IGI. IGI has agreed
during the period between the date of the asset purchase agreement and the
closing date to use commercially reasonable efforts to:

. conduct the companion pet products business in the usual, regular and
ordinary course in substantially the same manner as previously conducted,
except as contemplated by the asset purchase agreement;

. preserve intact the current business organization of the companion pet
products business; and

. keep available the services of the current officers and employees employed
in connection with the companion pet products business.

IGI has also agreed that during the period between the date of the asset
purchase agreement and the closing date, without the prior written consent of
Vetoquinol U.S.A., it will not:

. acquire any assets for use in connection with the companion pet products
business that are material to the companion pet products business, except
purchases of inventory or other assets in the ordinary course of business
consistent with past practice;

. make any change in accounting methods, principles or practices, other than
pursuant to a change in generally accepted accounting principles or a
statement of any appropriate accounting authority, materially affecting
the reported combined consolidated assets, liabilities or results of
operations of the companion pet products business;

. sell, lease, license, pledge or otherwise dispose of or subject to any
material lien or encumbrance any asset to be purchased pursuant to the
asset purchase agreement, except sales of inventory and excess or obsolete
assets in the ordinary course of business consistent with past practice;

. make any material change, revision, amendment or other modification to any
companion pet product labeling;

. make any material change, revision or other modification to the
formulation of any of the companion pet products, other than in the
ordinary course of business consistent with past practice;

. make any change, or announce any prospective change, in prices or other
sales incentives in connection with the sale of any of the companion pet
products to distributors or customers of the companion pet products
business, other than in the ordinary course of business consistent with
past practice;

. waive any material claims or rights related to the companion pet products
business and included in the purchased assets; or

. authorize, or cause, commit or agree to take, any of the above actions.

Agreement not to Compete. We have agreed that during the period ending 60
months after the closing date, we will not, independently or through any other
person:

. engage anywhere in the United States and Canada in any enterprise in the
business of manufacturing, packaging, marketing, selling or otherwise
distributing animal health products; or

. acquire or own any interest in any entity engaged in the business of
manufacturing, packaging, marketing, selling or otherwise distributing
animal health products and which derives sales from that business in an
amount greater than 20% of its total sales from all of its businesses.

The asset purchase agreement does not prevent us from:

. engaging in any business anywhere in the world outside the United States
and Canada;

. acquiring up to 10% (in the aggregate) of the outstanding common stock of
any publicly traded company engaged in the business of manufacturing,
packaging, marketing, selling or otherwise distributing animal health
products;

. manufacturing, packaging, marketing, selling, distributing or otherwise
using or licensing Novasome lipid vesicle encapsulation technology or
other technology developed or acquired by IGI for use in products other
than animal health products;

. exercising any of our rights or performing any of our obligations under
the manufacturing and supply agreement to be entered into pursuant to the
asset purchase agreement; or

. supplying or sublicensing third parties with Novasome lipid vesicle
encapsulation technology for marketing, sale, distribution or other use in
products that are not shampoos, creme rinses, moisturizing sprays, ear
cleansers or hand cremes for the animal health business.

Limitation on IGI's Ability to Consider Competing Proposals. Except as
otherwise provided in the asset purchase agreement, from the date of the asset
purchase agreement through the closing date, IGI has agreed not to:

. solicit, initiate or affirmatively encourage the submission of a
"competing proposal"; or

. participate in any discussions or negotiations regarding, or furnish to
any individual or entity any information with respect to, or take any
other action designed to facilitate any inquiries or the making of any
proposal that constitutes, or could reasonably be expected to lead to, any
competing proposal.

To the extent a bona fide competing proposal, which did not result from a
breach of the asset purchase agreement, was made to or received by IGI after
the date of the asset purchase agreement and prior to March 3, 2002 and that
the board of directors of IGI determined in good faith was likely to lead to a
"superior proposal", IGI must have provided to Vetoquinol U.S.A.:

. contemporaneous written notice of IGI's intent to furnish information or
enter into negotiations or discussions with the individual or entity that
made the superior proposal;

. a copy of the confidentiality agreement entered into between IGI and the
individual or entity that made the superior proposal; and

. a copy of the material terms and conditions of the initial competing
proposal.

Then IGI could have:

. furnished information about IGI pursuant to a customary confidentiality
agreement to the individual or entity that made the competing proposal; and

. participated in discussions or negotiations, including solicitation of a
revised proposal, with that individual or entity.

If a superior proposal that did not result from a breach of the asset
purchase agreement was made to or received by IGI after the date of the asset
purchase agreement and before March 3, 2002 and IGI intended to pursue
negotiations or discussions with a third party with respect to the superior
proposal, IGI must have provided written notice to Vetoquinol U.S.A. of its
intention to pursue those negotiations or discussions, including an indication
of the material terms of the superior proposal. IGI must also have provided
Vetoquinol U.S.A. with written notice if it terminated those negotiations or
discussions.

Vetoquinol U.S.A. would have been entitled to terminate the asset purchase
agreement beginning on the date 25 days after the date Vetoquinol U.S.A.
received written notice from IGI of IGI's intention to pursue

negotiations or discussions with a third party related to a superior proposal
and ending on the date Vetoquinol U.S.A. received written notice from IGI that
it terminated those negotiations or discussions. If Vetoquinol U.S.A.
terminated the asset purchase agreement, the voting agreement entered into
among Vetoquinol U.S.A. and several of our stockholders and directors would
have become void. In addition, if Vetoquinol U.S.A. terminated the asset
purchase agreement after the date 14 days after the date Vetoquinol U.S.A.
became entitled to terminate the asset purchase agreement, IGI would have been
required to pay to Vetoquinol U.S.A. the amount of any and all reasonable costs
and expenses incurred by Vetoquinol U.S.A. in connection with the asset
purchase agreement and the transactions contemplated by the asset purchase
agreement.

The board of directors of IGI, in response to a superior proposal that did
not result from a breach of the asset purchase agreement and that IGI received
on or before March 3, 2001, could have:

. withdrawn or modified its recommendation to IGI's stockholders to
authorize the sale of assets contemplated by the asset purchase agreement;
or

. authorized IGI to terminate the asset purchase agreement.

However, the board of directors of IGI could not have taken either of these
actions unless:

. IGI provided notice of the superior proposal to Vetoquinol U.S.A on or
prior to March 3, 2002;

. Vetoquinol U.S.A. did not make a counteroffer to IGI that the board of
directors of IGI determined in good faith was at least as favorable as the
superior proposal on or prior to five business days after its receipt of
written notice from IGI of IGI's intention to pursue negotiations or
discussions with a third party related to a superior proposal; and

. the board of directors of IGI determined in good faith after consultation
with outside counsel, that to act in a manner consistent with its
fiduciary obligations it was necessary for IGI's board of directors to
withdraw or modify its recommendation to IGI's stockholders to authorize
the sale of assets contemplated by the asset purchase agreement or that it
was in the best interests of IGI's stockholders to authorize IGI to
terminate the asset purchase agreement.

Prior to any termination of the asset purchase agreement by the board of
directors of IGI pursuant to the rights described above, notwithstanding
whether or not Vetoquinol U.S.A. made any matching offer, IGI would have been
required to pay to Vetoquinol U.S.A. a termination fee in the amount of
$750,000, in addition to any and all costs and expenses incurred by Vetoquinol
U.S.A. in connection with the asset purchase agreement and the transactions
contemplated by the asset purchase agreement. Any termination of the asset
purchase agreement pursuant to these provisions would also have made the voting
agreement entered into among Vetoquinol U.S.A. and several of our stockholders
and directors void.

A superior proposal was not received by IGI prior to or after March 3, 2002.

Stockholder Meeting. IGI has agreed to prepare and mail as promptly as
practicable this proxy statement. IGI has agreed to, as promptly as practicable
following the date of the asset purchase agreement, duly call, give notice of,
and hold a meeting of its stockholders related to the authorization of the sale
of assets contemplated by the asset purchase agreement. Subject to the asset
purchase agreement and its fiduciary duties, IGI's board of directors has
agreed to recommend to its stockholders authorization of the sale of assets
contemplated by the asset purchase agreement.

Transition Services Agreement. Prior to the closing date, IGI and
Vetoquinol U.S.A. have agreed to negotiate in good faith toward a mutually
acceptable transition services agreement detailing the terms and conditions of
transitional services contemplated to be provided by IGI to Vetoquinol U.S.A.
following the

closing. IGI and Vetoquinol U.S.A. have agreed that the services to be covered
by the transition services agreement will include:

. computer and information technology support, telephone services and other
transitional services as Vetoquinol U.S.A. and IGI may mutually determine;
and

. at Vetoquinol U.S.A.'s election to permit Vetoquinol U.S.A. to use and
occupy the plant on an exclusive basis for the three-month period
immediately following the closing, with the option to continue occupancy
for two successive additional six-month periods, such use and occupancy to
be on a "triple-net" basis and on other commercially reasonable terms.

The execution of a transition services agreement is not a condition to the
closing of the transactions contemplated by the asset purchase agreement. If a
transition services agreement is not entered into, IGI has agreed to provide
Vetoquinol U.S.A. with the transitional services described above for a
reasonable period, not to exceed 60 days after the closing at reasonable prices
and to permit Vetoquinol U.S.A.'s use and occupancy of the plant following the
closing under terms consistent with those described above.

Transferred Employees and Employee Matters. Vetoquinol U.S.A. has agreed to
offer employment, commencing on the closing date to substantially all of the
employees of the companion pet products business and a limited number of other
employees of IGI. IGI has agreed that in general during the period ending two
years after the closing, it will not attempt to solicit or induce any former
IGI employee to terminate his or her employment with the companion pet products
business to be sold to Vetoquinol U.S.A. pursuant to the asset purchase
agreement.

Environmental Matters. IGI has agreed to obtain and provide to Vetoquinol
U.S.A., by the closing date, at its sole cost and expense, an appropriate
determination, waiver or approval from the New Jersey Department of
Environmental Protection with respect to the transactions contemplated by the
asset purchase agreement.

Intellectual Property Matters. IGI and Vetoquinol U.S.A. have agreed that
Vetoquinol U.S.A., in its sole discretion, will be entitled to control the
filing and recording of the assignments of the intellectual property
contemplated by the asset purchase agreement.

IGI has agreed to grant to Vetoquinol U.S.A., as of the closing date, a
royalty free, perpetual, non-exclusive license to use in the companion pet
products business any patents, trade secrets, know-how, processes and other
technology, other than the Novasome lipid vesicle encapsulation technology,
that is not included in the assets to be purchased pursuant to the asset
purchase agreement but is used as of the closing date both in the companion pet
products business and in a business of IGI and its subsidiaries other than the
companion pet products business. This license may be assigned in whole or in
part, without IGI's consent, in connection with a sale or transfer of all or
any portion of the companion pet products business.

Products Liability Insurance. IGI has agreed to maintain one or more
insurance policies providing coverage for up to an aggregate amount of
$1,000,000 per occurrence/ $2,000,000 aggregate with a $25,000 deductible per
claim with respect to any products liability claims relating to products sold
in the ordinary course of the companion pet products business prior to the
closing and made against IGI during each of the two years following the closing
date.

Release of Liens. IGI has agreed to cause the release of all liens and
encumbrances recorded against or applicable to the assets to be purchased
pursuant to the asset purchase agreement.

Maintenance of the Plant. IGI has agreed during the period prior to the
closing to:

. maintain the plant in substantially the same condition it existed on the
date of the asset purchase agreement, reasonable wear and tear excepted;

. operate the companion pet products business in compliance with all
applicable laws in all material respects; and

. maintain in full force and effect all, or substantially similar, property
and liability insurance policies on the plant in effect as of the date of
the asset purchase agreement.

Access to Information. IGI has agreed during the period prior to the
closing to provide Vetoquinol U.S.A. with reasonable access during normal
business hours and in a manner so as not to interfere with the normal business
operations of IGI and its subsidiaries to all of its properties, books,
contracts, commitments, personnel and records to the extent relating to the
companion pet products business, and during the same period IGI has agreed to
furnish promptly to Vetoquinol U.S.A.:

. a copy of each material report, schedule and other document to the extent
relating to the companion pet products business filed by IGI during this
period with any governmental entity;

. a copy of any and all material correspondence to or from any governmental
entity to the extent relating to the companion pet products business;

. detailed monthly financial data for the companion pet products business;
and

. all other information concerning the companion pet products business as
Vetoquinol U.S.A. may reasonably request.

Supplements to Disclosures. IGI has agreed during the period prior to the
closing to supplement or amend the representations, warranties and disclosures
it made to Vetoquinol U.S.A. in the asset purchase agreement in order to make
that information timely, complete and accurate.

Advise of Changes. IGI and Vetoquinol U.S.A. have agreed to advise the
other party of any fact, occurrence, change or other event prior to the closing
which would have been required to be disclosed by the asset purchase agreement
or which would make a representation or warranty in the asset purchase
agreement untrue.

Advertising and Promotional Materials. IGI has agreed to permit Vetoquinol
U.S.A. to use any and all product labels and advertising and promotional
materials bearing the name, logo and product identification numbers of IGI
until they are exhausted so long as they are properly identified as Vetoquinol
U.S.A.'s in accordance with applicable laws and regulations.

Other Actions. IGI and Vetoquinol U.S.A. have agreed not to take any action
that would, or that could reasonably be expected to, result in:

. any of their respective representations and warranties set forth in the
asset purchase agreement becoming untrue or inaccurate in any material
respect; or

. any of the conditions to the closing not being satisfied;

Accessible Financial Records. IGI has agreed that during the six year
period following the closing date it will provide Vetoquinol U.S.A. reasonable
access to all books, records, files and other data of IGI of a financial nature
relating to the companion pet products business that have not been transferred
to Vetoquinol U.S.A. because they do not relate solely to the companion pet
products business.

Transfer Taxes and Fees. IGI and Vetoquinol U.S.A. have agreed that all
transfer, stamp, documentary, sales, use, registration, withholding and similar
taxes and related fees required to be paid in connection with the asset
purchase agreement will be divided equally between IGI and Vetoquinol U.S.A.
but that Vetoquinol U.S.A. will be responsible for all fees related to the
transfer of intellectual property and governmental permits and registrations.

Confidentiality. IGI has agreed not to disclose any information of a
confidential or non-public nature relating to the companion pet products
business.

Conditions to Closing

Conditions to Obligations of IGI and Vetoquinol U.S.A. The respective
obligations of IGI and Vetoquinol U.S.A. to effect and complete the closing are
subject to the satisfaction or waiver by each party on or prior to the closing
date of the following conditions:

. there must be no temporary restraining order, preliminary or permanent
injunction or other order issued by any governmental entity or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by the asset purchase agreement;

. instruments of conveyance and agreements to be entered into at closing
must have been executed and delivered; and

. the sale of assets contemplated by the asset purchase agreement must have
been authorized by the holders of a majority of the outstanding shares of
our capital stock.

Conditions to Obligations of Vetoquinol U.S.A. The obligations of
Vetoquinol U.S.A. to effect and complete the closing are subject to the
satisfaction or waiver of the following additional conditions:

. with specified exceptions, the representations and warranties of IGI set
forth in the asset purchase agreement must be materially true and correct
as of the closing date;

. we must have performed in all material respects all of our covenants and
obligations required to be performed by us under the asset purchase
agreement on or prior to the closing date;

. we must have obtained the consents of third parties under agreements to
which we are a party or that we will assign to Vetoquinol U.S.A. pursuant
to the asset purchase agreement, including the consents of American
Capital Strategies, Ltd. and Fleet Capital Corporation under our loan
agreements with each of those entities;

. we must have obtained an appropriate determination, waiver or approval
from the New Jersey Department of Environmental Protection with respect to
the transactions contemplated by the asset purchase agreement;

. no suit, action or proceeding by any governmental entity or any other
person may be pending challenging the sale of assets contemplated by the
asset purchase agreement or seeking to limit the ownership or operation by
Vetoquinol U.S.A. of the companion pet products business; and

. Vetoquinol U.S.A. must have received an opinion of our counsel with
respect to the asset purchase agreement.

Conditions to Obligations of IGI. The obligations of IGI to effect and
complete the closing are subject to the satisfaction or waiver of the following
additional conditions:

. with specified exceptions, the representations and warranties of
Vetoquinol U.S.A. set forth in the asset purchase agreement must be
materially true and correct as of the closing date;

. Vetoquinol U.S.A. must have performed in all material respects all of its
covenants and obligations required to be performed by it under the asset
purchase agreement on or prior to the closing date;

. we must have obtained the consents of third parties under agreements to
which we are a party or that we will assign to Vetoquinol U.S.A. pursuant
to the asset purchase agreement, including the consents of American
Capital Strategies and Fleet Capital Corporation, Ltd. under our loan
agreements with each of those entities;

. no suit, action or proceeding by any governmental entity or any other
person may be pending challenging the sale of assets or seeking to limit
the ownership or operation by Vetoquinol U.S.A. of the companion pet
products business; and

. we must have received an opinion of Vetoquinol U.S.A.'s counsel with
respect to the asset purchase agreement.

Expenses and Termination

Expenses. The asset purchase agreement provides that, except as otherwise
specifically provided in the asset purchase agreement, all fees and expenses
incurred in connection with the transactions contemplated by the asset purchase
agreement will be paid by the party incurring those fees or expenses.

Termination. The asset purchase agreement may be terminated at any time
prior to the closing:

. by mutual written consent of IGI and Vetoquinol U.S.A.;

. by either IGI or Vetoquinol U.S.A., if the closing does not occur without
the fault of the terminating party by June 30, 2002;

. by either IGI or Vetoquinol U.S.A., if any governmental entity takes any
final action permanently enjoining, restraining or otherwise prohibiting
the transactions contemplated by the asset purchase agreement;

. by either IGI or Vetoquinol U.S.A., if the stockholders of IGI do not
authorize the sale of assets contemplated by the asset purchase agreement,
in which event IGI shall promptly pay up to $300,000 of the reasonable
costs and expenses of Vetoquinol U.S.A. incurred in connection with the
asset purchase agreement; or

. by Vetoquinol U.S.A., in the event Vetoquinol U.S.A. receives notice under
the asset purchase agreement of a supplement or amendment to any
disclosure made by IGI which discloses any change or effect which
constitutes a material adverse effect.

Subject to limited exceptions, if the asset purchase agreement is
terminated, then it will be of no further effect and there will be no liability
on the part of IGI or Vetoquinol U.S.A. to the other, and all rights and
obligations of the parties under the asset purchase agreement will cease.
However, no party will be relieved from its obligations to the extent that the
asset purchase agreement is terminated due to any material breach of a
representation, warranty or covenant of that party contained in the asset
purchase agreement.

Indemnification

After the closing, except in the case of fraud by the breaching party,
indemnification will provide the exclusive remedy for any misrepresentation,
breach of warranty, covenant or other agreement, or other claims arising out of
the asset purchase agreement.

IGI has agreed to indemnify Vetoquinol U.S.A. against any loss, liability,
claim, damage or actual out-of-pocket expense suffered or incurred by
Vetoquinol U.S.A. to the extent arising from:

. any breach of any representation or warranty of IGI contained in the asset
purchase agreement;

. any breach of any covenant or agreement of IGI contained in the asset
purchase agreement requiring performance after the closing date;

. specified environmental matters;

. any broker's or other similar fee or commission in connection with the
transactions contemplated by the asset purchase agreement based upon
arrangements made by IGI; and

. the failure of Vetoquinol U.S.A. to obtain protections afforded by
compliance with the notification and other requirements of the bulk
transfer statutes in force in the jurisdictions, if any, in which
compliance would be required in connection with the transactions
contemplated by the asset purchase agreement.

With limited exceptions, IGI will not be required to indemnify or hold
harmless Vetoquinol U.S.A. for breaches of our representations and warranties
in the asset purchase agreement unless the aggregate amount of all losses
incurred by Vetoquinol U.S.A. exceeds $200,000 and then only for the excess
over $200,000. Our indemnification obligations to Vetoquinol U.S.A. for
breaches of our representations and warranties in the asset purchase agreement
are limited to a maximum of $8,350,000.

Vetoquinol U.S.A. has agreed to indemnify IGI against any loss, liability,
claim, damage or actual out-of-pocket expense suffered or incurred by IGI to
the extent arising from:

. any breach of any representation or warranty of Vetoquinol U.S.A.
contained in the asset purchase agreement;

. any breach of any covenant or agreement of Vetoquinol U.S.A. contained in
the asset purchase agreement requiring performance after the closing date;

. any of the assets acquired or liabilities assumed by Vetoquinol U.S.A.
pursuant to the asset purchase agreement; and

. the operation of the companion pet products business on and after the
closing date.

With limited exceptions, Vetoquinol U.S.A. will not be required to indemnify
or hold harmless IGI for breaches of Vetoquinol U.S.A.'s representations and
warranties in the asset purchase agreement unless the aggregate amount of all
losses incurred by IGI exceeds $200,000 and then only for the excess over
$200,000. Vetoquinol U.S.A.'s indemnification obligations to IGI for breaches
of Vetoquinol U.S.A.'s representations and warranties in the asset purchase
agreement are limited to a maximum of $8,350,000.

Other Agreements

The following are summaries of the material provisions of the technology
rights agreement and the manufacturing and supply agreement to be entered into
on or prior to closing pursuant to the asset purchase agreement. A copy of the
technology rights agreement is attached to this proxy statement as Annex B and
is incorporated by reference into the summary below, and a copy of the
manufacturing and supply agreement is attached to this proxy statement as Annex
C and is incorporated by reference into the summary below. While we believe
that these summaries cover the material terms of the technology rights
agreement and the manufacturing and supply agreement, these summaries may not
contain all of the information that is important to you. We urge you to read
the technology rights agreement and the manufacturing and supply agreement in
their entirety for a complete description of the terms and conditions of the
transactions contemplated by these agreements.

Technology Rights Agreement. Vetoquinol U.S.A. and IGI have agreed to enter
into the technology rights agreement, a copy of which is attached to this proxy
statement as Annex B, on or before the closing of the sale of the companion pet
products business contemplated by the asset purchase agreement. Under the
technology rights agreement, IGI will grant to Vetoquinol U.S.A. the exclusive,
perpetual, world-wide, royalty-free right and sublicense, subject to limited
exceptions, to use solely in the business of animal health, rights of IGI in
the Novasome lipid vesicle encapsulation technology solely in connection with
the business of marketing or selling shampoos, creme rinses, moisturizing
sprays, ear cleansers and hand cremes. The right and sublicense granted by the
technology rights agreement specifically excludes the manufacture, formulation
or other production of the products identified above. Vetoquinol U.S.A. will
also receive a license to use specified trademarks relating to its other rights
granted under the technology rights agreement.

Manufacturing and Supply Agreement. Vetoquinol U.S.A. and IGI have agreed
to enter into the manufacturing and supply agreement, a copy of which is
attached to this proxy statement as Annex C, on or before the closing of the
sale of the companion pet products business contemplated by the asset purchase
agreement. Under the manufacturing and supply agreement, IGI will agree to
supply Vetoquinol U.S.A. through December 13, 2015 with products and
ingredients based upon the Novasome lipid vesicle encapsulation technology for
use solely in shampoos, creme rinses, moisturizing sprays, ear cleansers and
hand cremes in the animal health business. IGI will also agree to give
Vetoquinol U.S.A. a right of first negotiation to become the exclusive
purchaser from IGI of any new technology or product incorporating the Novasome
lipid vesicle encapsulation technology developed by IGI for use in the animal
health business.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the Securities and
Exchange Commission's public reference room in Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference room. Our Securities and
Exchange Commission filings are also available to the public from commercial
document retrieval services and at the web site maintained by the Securities
and Exchange Commission at http://www.sec.gov.

You should rely only on the information contained in this proxy statement
when voting your shares. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy statement.
You should not assume that the information contained in this proxy statement is
accurate as of any date subsequent to the date of this proxy statement.

By order of the board of directors,

Domenic N. Golato
Secretary

May , 2002

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report......................................................................... F-2

Report of Independent Accountants.................................................................... F-3
Consolidated Balance Sheets, December 31, 2001 and 2000.............................................. F-4
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999........... F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2001, 2000
and 1999........................................................................................... F-7
Notes to Consolidated Financial Statements........................................................... F-8

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors
IGI, Inc.:

We have audited the accompanying consolidated balance sheets of IGI, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IGI, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has negative working capital and a stockholders'
deficit as of December 31, 2001. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

KPMG LLP

Philadelphia, Pennsylvania March 1, 2002, except as to
the second paragraph of Note 15, which is as of March 13, 2002

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of IGI, Inc.:

In our opinion, the consolidated statements of operations, of cash flows and of
stockholders' equity (deficit) for the year ended December 31, 1999 present
fairly, in all material respects, the results of operations and cash flows of
IGI, Inc. and its subsidiaries for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index on page 20 presents fairly, in all material respects, the
information set forth therein with respect to the year ended December 31, 1999
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. We have not audited the consolidated financial statements of IGI, Inc.
for any period subsequent to December 31, 1999.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements (which appear in IGI, Inc.'s Annual Report on Form 10-K/A
for the year ended December 31, 1999, which was filed on September 1, 2000), on
June 26, 2000, the Company received waivers as to certain debt covenant
violations, which waivers expire at the earlier of September 22, 2000, or upon
termination of an agreement to sell one of the Company's businesses. The
Company expects to complete the sale before September 22, 2000, however the
sale of this business is subject to certain contingencies, including approval
of the transaction by the Company's shareholders. If the waivers expire, a
significant amount of the Company's outstanding debt would be callable.
Accordingly, substantial doubt exists about the Company's ability to continue
as a going concern. Management's plans in regard to this matter are also
discussed in Note 8 to the financial statements (which appear in IGI, Inc.'s
Annual Report on Form 10-K/A for the year ended December 31, 1999, which was
filed on September 1, 2000). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
April 12, 2000, except as to Note 8,
which is as of August 18, 2000

F-3

IGI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands, except share and per share information)

2001 2000
-------- --------

ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 10 $ 69
Restricted cash.................................................................... -- 102
Accounts receivable, less allowance for doubtful accounts of $259 and $280 in 2001
and 2000, respectively........................................................... 1,713 2,482
Licensing and royalty income receivable............................................ 255 413
Inventories........................................................................ 3,059 2,585
Prepaid expenses and other current assets.......................................... 260 140
-------- --------
Total current assets........................................................... 5,297 5,791
-------- --------
Property, plant and equipment, net.................................................... 4,143 5,343
Deferred financing costs.............................................................. 659 829
Other assets.......................................................................... 440 424
-------- --------
Total assets................................................................... $ 10,539 $ 12,387
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit facility.......................................................... $ 2,326 $ 2,401
Current portion of long-term debt.................................................. 7,478 7,384
Accounts payable................................................................... 2,071 2,359
Accrued payroll.................................................................... 134 106
Accrued interest................................................................... 111 254
Other accrued expenses............................................................. 1,033 1,728
Income taxes payable............................................................... 12 15
-------- --------
Total current liabilities...................................................... 13,165 14,247
-------- --------
Deferred income....................................................................... 620 223
-------- --------
Total liabilities.............................................................. 13,785 14,470
-------- --------

Detachable stock warrants............................................................. 1,145 1,192
Stockholders' deficit:
Common stock, $.01 par value, 50,000,000 shares authorized; 11,243,720 and
10,343,073 shares issued in 2001 and 2000, respectively.......................... 112 104
Additional paid-in capital......................................................... 22,230 22,508
Accumulated deficit................................................................ (26,733) (24,993)
Less treasury stock, 0 and 66,698 shares at cost, in 2001 and 2000, respectively...... -- (894)
-------- --------
Total stockholders' deficit.................................................... (4,391) (3,275)
-------- --------
Total liabilities and stockholders' deficit................................. $ 10,539 $ 12,387
======== ========

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

F-4

IGI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2001, 2000 and 1999
(in thousands, except share and per share information)

2001 2000 1999
----------- ----------- ----------

Revenues:
Sales, net................................................. $ 14,832 $ 16,799 $ 18,664
Licensing and royalty income............................... 1,066 2,453 1,869
----------- ----------- ----------
Total revenues......................................... 15,898 19,252 20,533
Cost and Expenses:
Cost of sales.............................................. 8,767 10,566 8,799
Selling, general and administrative expenses............... 5,332 7,990 8,519
Product development and research expenses.................. 536 853 668
Non-recurring charges...................................... 1,424 -- --
----------- ----------- ----------
Operating profit (loss)....................................... (161) (157) 2,547
Interest expense, net......................................... 2,133 2,754 4,109
Other income, net............................................. -- -- 31
----------- ----------- ----------
Loss from continuing operations before provision (benefit) for
income taxes and extraordinary item......................... (2,294) (2,911) (1,531)
Provision (benefit) for income taxes.......................... (271) 5,864 (401)
----------- ----------- ----------

Loss from continuing operations before extraordinary item..... (2,023) (8,775) (1,130)
----------- ----------- ----------
Discontinued operations:
Loss from operations of discontinued business, net of tax.. -- (1,978) (841)
Gain on disposal of discontinued business.................. 283 114 --
----------- ----------- ----------
Loss before extraordinary item................................ (1,740) (10,639) (1,971)
Extraordinary gain (loss) from early extinguishment of debt,
net of tax.................................................. -- (630) 387
Cumulative effect of accounting change........................ -- (168) --
----------- ----------- ----------
Net loss...................................................... (1,740) (11,437) (1,584)

Mark to market for detachable stock warrants.................. 47 -- --
----------- ----------- ----------
Net loss attributable to common stock......................... $ (1,693) $ (11,437) $ (1,584)
=========== =========== ==========

Basic and Diluted Loss Per Common Share
Continuing operations before extraordinary item............ $ (.18) $ (.86) $ (.12)
Discontinued operations.................................... .03 (.18) (.09)
----------- ----------- ----------
(.15) (1.04) (.21)
Extraordinary gain (loss).................................. -- (.06) .04
Cumulative effect of accounting change..................... -- (.02) --
----------- ----------- ----------
Net loss................................................... $ (.15) $ (1.12) $ (.17)
=========== =========== ==========
Weighted average common stock
Outstanding - basic and diluted........................ 10,956,553 10,204,649 9,604,768

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

F-5

IGI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2001, 2000 and 1999
(in thousands)

2001 2000 1999
-------- -------- --------

Cash flows from operating activities:
Net loss............................................................................ $ (1,740) $(11,437) $ (1,584)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Gain on sale of discontinued operations.......................................... (283) (114) --
Depreciation and amortization.................................................... 449 682 738
Amortization of deferred financing costs and debt discount....................... 577 690 123
Extraordinary (gain) loss on early extinguishment of debt, net of tax............ -- 630 (387)
Non-recurring impairment of long lived asset charges............................. 605 -- --
Non-recurring charges resulting from EVSCO plant shutdown........................ 417 -- --
Gain on sale of assets........................................................... -- -- (30)
Provision for accounts and notes receivable and inventories...................... 142 162 60
Recognition of deferred revenue.................................................. (135) (242) (203)
Deferred income taxes............................................................ -- 5,850 (407)
Interest expense (income) related to subordinated note agreements................ 180 148 --
Interest expense related to put feature of warrants.............................. -- (358) 854
Warrants issued to lenders under prior extension agreements...................... -- -- 223
Stock based compensation expense:
Non-employee stock options.................................................... -- 39 49
Directors' stock issuance..................................................... 79 84 116
Changes in operating assets and liabilities:
Restricted cash.................................................................. 102 (102) --
Accounts receivable.............................................................. 784 (303) 317
Inventories...................................................................... (733) 1,244 (698)
Receivables due under royalty agreements......................................... 158 19 8
Prepaid expenses and other assets................................................ (84) 142 292
Accounts payable and accrued expenses............................................ (873) 81 1,045
Deferred revenue................................................................. 535 220 275
Short-term notes payable, operating.............................................. -- (408) (814)
Income taxes payable............................................................. (3) -- (1)
Discontinued operations - working capital changes and non-cash charges........... -- (1,090) 407
-------- -------- --------
Net cash provided by (used in) operating activities.................................... 177 (4,063) 383
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................................................................ (219) (237) (280)
Capital expenditures for discontinued operations.................................... -- (315) (784)
Proceeds from sale of assets........................................................ 151 -- 40
(Increase) decrease in other assets................................................. (137) (86) 25
Proceeds from sale of discontinued operations....................................... 237 12,000 --
-------- -------- --------
Net cash provided by (used in) investing activities.................................... 32 11,362 (999)
-------- -------- --------
Cash flows from financing activities:
Borrowings under term loan and capital expenditures facility........................ -- 257 7,000
Borrowings under Subordinated Note agreement, net of discount....................... -- -- 4,158
Cash proceeds from issuance of warrants to lenders.................................. -- -- 2,842
Borrowings under revolving credit agreement......................................... 18,787 33,413 11,584
Repayment of revolving credit agreement............................................. (18,862) (36,720) (5,876)
Repayment of debt................................................................... (517) (4,652) (18,657)
Payment of deferred financing costs................................................. -- (65) (1,659)
Proceeds from issuance of shares under stock subscription agreement................. 250 -- --
Proceeds from exercise of common stock options and purchase of common stock......... 74 121 --
Change in book overdraft............................................................ -- -- 572
-------- -------- --------
Net cash used in financing activities.................................................. (268) (7,646) (36)
-------- -------- --------
Net decrease in cash and cash equivalents.............................................. (59) (347) (652)
Cash and cash equivalents at beginning of year......................................... 69 416 1,068
-------- -------- --------
Cash and cash equivalents at end of year............................................... $ 10 $ 69 $ 416
======== ======== ========
Supplemental cash flow information:
Cash payments for interest.......................................................... $ 968 $ 757 $ 2,153
Cash receipt for taxes.............................................................. 268 -- 1

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

F-6

IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 2001, 2000 and 1999 (in thousands, except
share information)

Common Stock
-----------------
Additional
Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock
---------- ------ ---------- ----------- --------

Balance, January 1, 1999........................................... 9,648,931 $ 97 $19,961 $(11,972) $(2,163)
Issuance of stock pursuant to Directors' Stock Plan................ 66,509 1 115
Partial settlement of amounts due to former officer in lieu of cash 417,744 4 720
Value of stock options issued to non-employees..................... 49
Value of warrants issued under second extension agreement.......... 223
Issuance of stock to 401(k) planIssuance of stock to 401(k) plan... (440) 522
Net loss........................................................... (1,584)
---------- ---- ------- -------- -------
Balance, December 31, 1999......................................... 10,133,184 102 20,628 (13,556) (1,641)
Issuance of stock pursuant to Directors' Stock Plan................ 50,398 1 83
Value of stock options issued to non-employees..................... 39
Amendment to detachable stock warrants to remove put feature....... 3,338
Reclassification of detachable stock warrants...................... (1,192)
Issuance of stock to 401(k) plan................................... (670) 747
Litigation settlement costs........................................ 35,000 48
Partial settlement of amounts due to former officer in lieu of cash 63,448 1 114
Stock options exercised............................................ 34,125 83
Employee stock purchase plan....................................... 26,918 37
Net loss........................................................... (11,437)
---------- ---- ------- -------- -------
Balance, December 31, 2000......................................... 10,343,073 104 22,508 (24,993) (894)
Issuance of stock pursuant to Directors' Stock Plan................ 129,989 1 78
Settlement of amounts due to former officer in lieu of cash........ 125,625 1 128
Issuance of stock to 401(k) plan................................... (849) 894
Stock options exercised............................................ 80,000 1 39
Employee stock purchase plan....................................... 65,033 34
Adjustment of detachable stock warrants............................ 47
Issuance of stock pursuant to stock subscription agreement......... 500,000 5 245
Net loss........................................................... (1,740)
---------- ---- ------- -------- -------
Balance, December 31, 2001......................................... 11,243,720 $112 $22,230 $(26,733) $ --
========== ==== ======= ======== =======

Total
Stockholders'
Equity (Deficit)
----------------

Balance, January 1, 1999........................................... $ 5,923
Issuance of stock pursuant to Directors' Stock Plan................ 116
Partial settlement of amounts due to former officer in lieu of cash 724
Value of stock options issued to non-employees..................... 49
Value of warrants issued under second extension agreement.......... 223
Issuance of stock to 401(k) planIssuance of stock to 401(k) plan... 82
Net loss........................................................... (1,584)
--------
Balance, December 31, 1999......................................... 5,533
Issuance of stock pursuant to Directors' Stock Plan................ 84
Value of stock options issued to non-employees..................... 39
Amendment to detachable stock warrants to remove put feature....... 3,338
Reclassification of detachable stock warrants...................... (1,192)
Issuance of stock to 401(k) plan................................... 77
Litigation settlement costs........................................ 48
Partial settlement of amounts due to former officer in lieu of cash 115
Stock options exercised............................................ 83
Employee stock purchase plan....................................... 37
Net loss........................................................... (11,437)
--------
Balance, December 31, 2000......................................... (3,275)
Issuance of stock pursuant to Directors' Stock Plan................ 79
Settlement of amounts due to former officer in lieu of cash........ 129
Issuance of stock to 401(k) plan................................... 45
Stock options exercised............................................ 40
Employee stock purchase plan....................................... 34
Adjustment of detachable stock warrants............................ 47
Issuance of stock pursuant to stock subscription agreement......... 250
Net loss........................................................... (1,740)
--------
Balance, December 31, 2001......................................... $ (4,391)
========

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

F-7

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of the Business

IGI, Inc. ("IGI" or the "Company") is a diversified company that is
currently engaged in two business segments. During 2000, the Company sold its
Vineland division, which produced and marketed poultry vaccines and related
products. The two ongoing business segments as of December 31, 2001 are:

... Consumer Products

IGI's Consumer Products business is primarily focused on the continued
commercial use of the Novasome(R) microencapsulation technologies for skin care
applications. These efforts have been directed toward the development of high
quality skin care products marketed by the Company or through collaborative
arrangements with cosmetic and consumer products companies. Revenues from the
Company's Consumer Products business are principally based on formulations
using the Novasome(R) microencapsulation technology.

Estee Lauder, a significant customer of the Consumer Products division,
accounted for $2,725,000 or 17% of 2001 revenues, $3,692,000 or 19% of 2000
revenues, and $4,237,000 or 21% of 1999 revenues.

... Companion Pet Products

The Companion Pet Products division sells its products to the veterinarian
market under the EVSCO Pharmaceuticals trade name and to the over-the-counter
("OTC") pet products market under the Tomlyn and Luv'Em labels.

EVSCO products are sold through distributors to veterinarians. The EVSCO
line of veterinary products is used by veterinarians in caring for dogs and
cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories and
cardiac drugs, as well as nutritional supplements, vitamins, insecticides and
diagnostics. Product forms include gel, tablets, creams, liquids, ointments,
powders, emulsions, shampoos and grooming aids.

The Tomlyn product line includes pet grooming, nutritional and therapeutic
products, such as shampoos, grooming aids, vitamin and mineral supplements,
insecticides and OTC medications. The products are sold directly to pet
superstores and through distributors to independent merchandising chains, shops
and kennels. Most of the Company's veterinary products are sold through
distributors.

On February 7, 2002, the Company announced that it had entered into a
definitive agreement for the sale of substantially all of the assets of its
Companion Pet Products division to Vetoquinol U.S.A., Inc., an affiliate of
Vetoquinol, S.A. of Lure, France. Under the terms of the agreement, the Company
will receive at closing cash consideration of $16,700,000. In addition,
specified liabilities of the Company's Companion Pet Products division will be
assumed by Vetoquinol U.S.A. The cash consideration is subject to certain
post-closing adjustments.

The transaction also contemplates a sublicense by the Company to Vetoquinol
U.S.A. of specified rights relating to the patented Novasome(R)
microencapsulation technology for use in specified products and product lines
in the animal health business, as well as a supply relationship under which the
Company will supply to Vetoquinol U.S.A. certain products relating to the
patented Novasome(R) microencapsulation technology.

The closing of the transactions contemplated by the agreement is subject to
the authorization of the Company's stockholders and other customary closing
conditions. The Company anticipates recording a significant gain upon the
closing of the transactions. The Company will account for the Companion Pet
Product division as a discontinued operation after shareholder approval has
been obtained.

F-8

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Principles of Consolidation

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

Cash Equivalents

Cash equivalents consist of short-term investments, which, at the date of
purchase, have maturities of 90 days or less.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents and accounts
receivable. The Company limits credit risk associated with cash and cash
equivalents by placing its cash and cash equivalents with two high credit
quality financial institutions. Accounts receivable includes customers in
several key geographic areas, such as Thailand, Korea, Japan and other Far
Eastern countries. These countries have from time to time experienced varying
degrees of political unrest and currency instability. Because of the volume of
business transacted by the Company in these areas, continuation or recurrence
of such unrest or instability could adversely affect the businesses of its
customers in these areas or the Company's ability to collect its receivables
from such customers, which in either case could adversely impact the Company's
future operating results. In order to minimize risk, the Company maintains
credit insurance for the majority of its international accounts receivable and
all sales are denominated in U.S. dollars to minimize currency fluctuation risk.

Inventories

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

Property, Plant and Equipment

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

Useful Lives
------------
Buildings and improvements. 10-30 years

Machinery and equipment.... 3-10 years

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

Other Assets and Deferred Financing Costs

Other assets include cost in excess of net assets acquired of $325,000,
related to the Company's 1994 acquisition of a petcare business, which is being
amortized on a straight-line basis over 40 years. At December 31, 2001,
goodwill, net of amortization, was $190,000. Deferred financing costs include
fees paid to the lenders and external legal counsel to assist the Company in
obtaining new financing. These costs are being amortized over the term of the
related debt.

In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. In
performing such review for recoverability, the Company compares expected future
cash flows of assets to the carrying value of long-lived assets and related

F-9

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

identifiable intangibles. If the expected future cash flows (undiscounted) are
less than the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying value of the assets and
their estimated fair value, with fair values being determined using projected
discounted cash flows at the lowest level of cash flows identifiable in
relation to the assets being reviewed.

Accounting for Environmental Costs

Accruals for environmental remediation are recorded when it is probable a
liability has been incurred and costs are reasonably estimable. The estimated
liabilities are recorded at undiscounted amounts. It is the Company's practice
to reflect environmental insurance recoveries in the results of operations for
the year in which the litigation is resolved through settlement or other
appropriate legal process.

Income Taxes

The Company records income taxes under the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to operating
loss and tax credit carryforwards and differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded based on a determination of the ultimate
realizability of future deferred tax assets.

Stock-Based Compensation

Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of grant over the amount the employee is required to pay to acquire
the stock (the intrinsic value method). Such amount, if any, is accrued over
the related vesting period, as appropriate. Since the Company uses the
intrinsic value method, it makes pro forma disclosures of net loss and loss per
share as if the fair-value based method of accounting had been applied.

Financial Instruments

The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, revolving credit facility and long-term
debt. The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates their fair value based on their short duration.
The carrying value of the revolving credit facility and long-term debt
approximates their fair value based on rates offered to companies with similar
financial circumstances.

Revenue Recognition

Sales, net of appropriate cash discounts, product returns and sales
reserves, are recorded upon shipment of products. Revenues earned under
research contracts or sublicensing and supply agreements are either recognized
when the related contract provisions are met, or, if under such contracts or
agreements the Company has continuing obligations, the revenue is initially
deferred and then recognized over the life of the agreement.

Product Development and Research

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

F-10

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Loss per Common Share

Basic net loss per share of Common Stock is computed based on the weighted
average number of shares of Common Stock outstanding during the period. Diluted
net loss per share of Common Stock is computed using the weighted average
number of shares of Common Stock and potential dilutive common stock
equivalents outstanding during the period. Potential dilutive common stock
equivalents include shares issuable upon the exercise of options and warrants.
Due to the Company's net loss for the years ended December 31, 2001, 2000 and
1999, the effect of the Company's potential dilutive common stock equivalents
was anti-dilutive for each year; as a result, the basic and diluted weighted
average number of Common Shares outstanding and net loss per Common Share are
the same. Potentially dilutive common stock equivalents which were excluded
from the net loss per share calculations due to their anti-dilutive effect
amounted to 4,880,543 for 2001, 4,997,869 for 2000, and 5,424,743 for 1999.

Comprehensive Income

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined to include all
changes in stockholders' equity during a period except those resulting from
investments by owners and distributions to owners. Since inception, the Company
has not had transactions that are required to be reported in other
comprehensive income. Comprehensive loss for each period presented is equal to
the net loss for each period as presented in the Consolidated Statements of
Operations.

Reclassifications

Certain previously reported amounts have been reclassified to conform with
the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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 and other assets,
provisions for income taxes and related deferred tax asset valuation
allowances, and accruals for environmental cleanup and remediation costs.
Actual results could differ from those estimates.

Recent Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated or completed after
June 30, 2001. SFAS No. 141 also specifies criteria that must be met for
intangible assets acquired in a purchase method business combination to be
recognized and reported separately from goodwill, noting that any purchase
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142, which will be effective January 1, 2002, requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121.

As of the January 1, 2002 adoption date of SFAS No.142, unamortized goodwill
of approximately $190,000 will be subject to the transition provisions of SFAS
Nos. 141 and 142. Amortization expense related to goodwill was $8,400 for the
year ended December 31, 2001. The Company does not believe that SFAS No. 141
and 142 will have a significant impact on its financial position, results of
operation or liquidity.

F-11

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121 and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS No. 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142.

The Company is required to adopt SFAS No. 144 effective January 1, 2002.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's consolidated financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from SFAS No. 121. The provisions of the Statement for assets held
for sale or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities. Therefore,
management cannot determine the potential effects that adoption of SFAS No. 144
will have on the Company's consolidated financial statements.

2. Going Concern

The consolidated financial statements have been prepared on the
going-concern basis of accounting, which assumes the Company will realize its
assets and discharge its liabilities in the normal course of business. The
Company has experienced recurring losses from operations, and has negative
working capital and a stockholders' deficit as of December 31, 2001. The
Company is currently highly leveraged, and the availability of alternative
funding sources is limited. If the Company's operating results deteriorate or
the Company is not successful in renegotiating its financial covenants, default
could result under the existing loan agreements. Any such default that is not
resolved could result in the curtailment of certain of the Company's business
operations, sale of certain assets or the commencement of bankruptcy or
insolvency proceedings by the Company or its creditors.

Management's plans with regards to the Company's liquidity issues include an
on-going expense reduction program (including the outsourcing of some of its
manufacturing capability) and the expansion of the product line produced by its
Consumer Products division. In addition, as described in Note 1, the Company
has entered into an agreement related to the sale of substantially all assets
used in the Companion Pet Products division and the assumption by the buyer of
certain liabilities related to the Companion Pet Products division. The
transaction, which is subject to shareholder approval, is currently anticipated
to close in late April or early May 2002. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash from
operations or other sources in order to meet its obligations as they become
due. There can be no assurance, however, that management's plan will be
successful.

3. Discontinued Operations

On September 15, 2000, the shareholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities of
the Vineland division, which produced and marketed poultry vaccines and related
products. The buyer assumed liabilities of approximately $2,300,000, and paid
the Company

F-12

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

cash in the amount of $12,500,000, of which $500,000 was placed in an escrow
fund to secure potential obligations of the Company relating to final purchase
price adjustments and indemnification. In March 2001, the Company negotiated a
resolution and received approximately $237,000 of the escrowed funds. In
addition, the Company reduced an accrual by $46,000 for costs related to the
sale. The Company's results reflect a $283,000 and $114,000 gain on the sale of
the Vineland division for the years ended December 31, 2001 and 2000,
respectively. The Vineland division incurred an operating loss of $1,978,000
and $841,000 for the years ended December 31, 2000 and 1999, respectively.

4. Non-recurring Charges

In the first quarter of 2001, the Company for various business reasons
decided to outsource the manufacturing for the Companion Pet Products division.
The Company reached its decision to accelerate the outsourcing process
(originally anticipated to be completed by June 2001) due primarily to the
discovery on March 2, 2001 of the presence of environmental contamination
resulting from an unknown heating oil leak at the Companion Pet Products
manufacturing site, at which time the Company ceased its manufacturing
operations at the facility. On March 6, 2001, the Company signed a supply
agreement with a third party to manufacture products for the Companion Pet
Products division. On March 8, 2001, the Company terminated the employment of
the manufacturing personnel only at this facility.

During 2001, the Company recorded non-recurring charges related to the
cessation and shutdown of the manufacturing operations at the Companion Pet
Products facility of $991,000 offset by a grant from the State of New Jersey
for $81,000 for a net charge of $910,000 ($91,000 has been reflected as a
component of cost of sales, with the remainder reflected as a single line item
in the accompanying consolidated statement of operations). The Company applied
to the New Jersey Economic and Development Authority (NJEDA) and the New Jersey
Department of Environmental Protection (NJDEP) for a grant and loan to provide
partial funding for the costs of investigation and remediation of the
environmental contamination discovered at the Companion Pet Products facility.
On June 26, 2001, the Company was awarded a $81,000 grant and a $246,000 loan.
The $81,000 grant was received in the third quarter of 2001. The loan, which
will require monthly principal payments, has a term of ten years at a rate of
interest of the Federal discount rate at the date of the closing with a floor
of 5%. The Company received the funding from the loan during the first quarter
of 2002.

During September 2001, the Company committed to a plan of sale for its
corporate office building. An impairment charge of $605,000 was recorded in the
third quarter of 2001 to reflect the difference between the selling price, less
related selling costs, and the net book value of the building. The Company sold
the building during February 2002.

The composition and activity of the non-recurring charges are as follows
(amounts in thousands):

Net accrual at
Reduction of Cash December 31,
Description Amount assets expenditures 2001
- ----------- ------ ------------ ------------ --------------

Impairment of property and equipment............ $ 314 $ (314) $ -- $ --
Environmental clean up costs, net of State grant 469 -- (187) 282
Impairment of corporate office building......... 605 (605) -- --
Write off of inventory.......................... 91 (91) -- --
Plant shutdown costs............................ 21 (11) (10) --
Severance....................................... 15 -- (15) --
------ ------- ----- ------
$1,515 $(1,021) $(212) $ 282
====== ======= ===== ======

F-13

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Supply and Sublicensing Agreements

In December 1998, the Company entered into a ten-year supply and sales
agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and
distribution of the Company's WellSkin(TM) line of skin care products. The
agreement provided that Genesis would pay the Company, in four equal annual
installment payments, a $1,000,000 trademark and technology transfer fee which
would be recognized as revenue over the life of the agreement. In addition,
Genesis agreed to pay the Company a royalty on its net sales with certain
guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM)
inventory and associated marketing materials for $200,000. The Company
recognized $541,000 and $280,000 of income related to this agreement for the
years ended December 31, 2000 and 1999, respectively.

On February 14, 2001, the agreement with Genesis was terminated and replaced
with a new manufacturing and supply agreement and an assignment of the
trademark for the WellSkin(TM) line of skin care products. The manufacturing
and supply agreement expires on December 13, 2005 and contains two ten-year
renewal options. The Company received a lump sum payment of $525,000 for the
assignment of the trademark, which will be recognized ratably over the term of
the arrangement. The Company recognized $105,000 of income related to this
agreement for the year ended December 31, 2001.

The Company entered into a ten-year sublicense agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J
with a sublicense to produce and sell Novasome(R) microencapsulated retinoid
products and provides for the payment of royalties to the Company on net sales
of such products. J&J began selling such products and making royalty payments
in the first quarter of 1998. The Company recognized $856,000, $1,487,000 and
$1,210,000 of royalty income related to this agreement for the years ended
December 31, 2001, 2000 and 1999, respectively.

In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a
division of Ethicon, Inc., worldwide rights for the use of the Novasome(R)
technology for certain products and distribution channels. The agreement
provided for an up-front sublicense fee of $150,000. In addition, the agreement
provided for additional payments of $50,000 in June 1999, October 1999 and June
2000, as well as future royalty payments based on JJM's sales of sublicensed
products. The Company assessed the impact of Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", on this agreement, and recorded
a cumulative adjustment of $168,000 as of January 1, 2000. The cumulative
adjustment relates to the recognition of the up-front sublicense fee and the
three $50,000 payments over the estimated economic life of the agreement. The
Company recognized $105,000, $55,000 and $126,000 of income from this agreement
for the years ended December 31, 2001, 2000 and 1999, respectively.

In January 2000, the Company entered into a Feasibility and Option Agreement
with Church & Dwight Co., Inc. The agreement provided that the Company would
develop stable Novasome(R) systems for use in oral care applications. The
Company completed its obligation in 2000, and provided the product to Church &
Dwight, who tested the stability, efficiency and consumer acceptance of the
product. The Company recognized $0 and $60,000 of income related to the
agreement for the years ended December 31, 2001 and 2000, respectively. If
Church & Dwight chooses to proceed with this product, the Company will need to
enter into a definitive sublicense and supply agreement with Church & Dwight.

In January 2000, the Company also entered into an agreement with Fujisawa
Pharmaceutical, Co. Ltd. The purpose of this agreement was for IGI to
incorporate its Novasome(R) technology into a new formulation of their topical
products. This project was completed in stages with amounts being paid to the
Company with the successful completion of each stage. The agreement was in
effect for a 15 month period. The Company recognized $0 and $250,000 of income
relating to this product for the years ended December 31, 2001 and 2000,
respectively.

F-14

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Prime Pharmaceutical Corporation ("Prime"). The
purpose of the agreement was to develop a facial lotion, facial cr?me and scalp
treatment for the treatment of psoriasis. The project has been completed in
stages with amounts being paid to the Company with the successful completion of
each stage. In addition, the Company has agreed to rebate $3.60 per kilogram
for the first 12,500 kilograms of product manufactured for and sold to Prime.
The Company recognized $40,000 of income related to the project in 2001.

6. Supplemental Cash Flow Information

During the years ended December 31, 2001, 2000, and 1999 the Company had the
following non-cash financing and investing activities:

2001 2000 1999
---- ---- ----
(in thousands)

Issuance of stock to settle amounts due to former officer (see Note 17) 129 115 724
Issuance of stock for litigation settlement............................ -- 48 --
Issuance of stock to 401(k) plan....................................... 45 77 82
Issuance of Subordinated Note for interest (see Note 10)............... 205 148 --
Mark to market adjustment on warrants.................................. 47 -- --
Issuance of stock pursuant to Directors' Stock Plan.................... 79 84 116

7. Inventories

Inventories as of December 31, 2001 and 2000 consisted of:

2001 2000
------ ------
(in thousands)

Finished goods $2,177 $1,458
Raw materials. 882 1,127
------ ------
$3,059 $2,585
====== ======

The above amounts are net of reserves for obsolete and slow moving inventory
of $210,000 and $300,000 as of December 31, 2001 and 2000, respectively.

8. Property, Plant and Equipment

Property, plant and equipment, at cost, as of December 31, 2001 and 2000
consisted of:

2001 2000
------- -------
(in thousands)

Land.............................. $ 300 $ 338
Buildings......................... 4,485 5,569
Machinery and equipment........... 2,456 4,657
------- -------
7,241 10,564
Less accumulated depreciation..... (3,098) (5,221)
------- -------
Property, plant and equipment, net $ 4,143 $ 5,343
======= =======

The Company recorded depreciation expense related to continuing operations
of $367,000, $627,000 and $598,000 in 2001, 2000 and 1999, respectively.

F-15

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Notes Payable

The Company issued a $200,000 promissory note to another entity in December
1998. The note, which bore interest at a rate of 11%, was paid in December
1999. The Company also issued another promissory note to this entity for
$608,000, which bore interest at 11%. Principal and interest amounts were
payable semi-annually; the Company made the first payment of $200,000 in
December 1999 and the remaining $408,000 was paid in 2000.

10. Debt

Debt as of December 31, 2001 and 2000 consisted of:

2001 2000
------- -------
(in thousands)

Revolving credit facility...................................... $ 2,326 $ 2,401
Term loan under Senior Debt Agreement.......................... 2,088 2,605
Notes under Subordinated Debt Agreement........................ 7,353 7,148
------- -------
11,767 12,154
Less unamortized debt discount under Subordinated Debt
Agreement (see Note 11)...................................... 1,963 2,369
------- -------
Revolving credit facility and current portion of long-term debt $ 9,804 $ 9,785
======= =======

According to the revised terms of the debt agreements, aggregate annual
principal payments due on debt for the years subsequent to December 31, 2001
are as follows:

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

2002............... $ 492
2003............... 592
2004............... 3,330
2005............... 0
2006 and thereafter 7,353
-------
$11,767
=======

On October 29, 1999, the Company entered into a $22,000,000 senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation
("Fleet Capital") and a $7,000,000 subordinated debt agreement ("Subordinated
Debt Agreement") with American Capital Strategies, Ltd. ("ACS"). To secure all
of its obligations under these agreements, the Company granted the lenders a
security interest in all of the assets and properties of the Company and its
subsidiaries.

These agreements enabled the Company to retire approximately $18,600,000 of
outstanding debt with its former bank lenders, Fleet Bank, NH, and Mellon Bank,
N.A. In connection with the repayment of the loans, the Company's former bank
lenders agreed to return to the Company, for cancellation, warrants held by
them for the purchase of 810,000 shares of the Company's Common Stock at
exercise prices ranging from $2.00 to $3.50. Also, approximately $611,000 of
accrued interest was waived by the former bank group and is classified as an
extraordinary gain from the early extinguishment of debt in the 1999
Consolidated Statement of Operations.

Upon the sale of the Vineland division in 2000, the amount of debt pursuant
to the Senior Debt Agreement was reduced. The Senior Debt Agreement provided
for i) a revolving line of credit facility of up to $12,000,000, which

F-16

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

was reduced to $5,000,000 after the sale of the Vineland division, based upon
qualifying accounts receivable and inventory, ii) a $7,000,000 term loan, which
was reduced to $2,700,000 after the sale of the Vineland division, and iii) a
$3,000,000 capital expenditures credit facility, which was paid in full and
cancelled after the sale of the Vineland division. The borrowings under the
revolving line of credit bear interest at the prime rate plus 1.0% or the
London Interbank Offered Rate plus 3.25% (5.3% at December 31, 2001). The
borrowings under the term loan credit facility bear interest at the prime rate
plus 1.5% or the London Interbank Offered Rate plus 3.75% (5.8% at December 31,
2001). As of December 31, 2001, borrowings under the revolving line of credit
and term loan were $2,326,000 and $2,088,000, respectively. Provisions under
the revolving line of credit require the Company to maintain a lockbox with the
lender, allowing Fleet Capital to sweep cash receipts from customers and pay
down the revolving line of credit. Drawdowns on the revolving line of credit
are made when needed to fund operations. Upon renegotiation of the covenants
for the term loan, Fleet Capital agreed to change the repayment terms to
monthly payments starting February 2001. Minimum principal payments owed to
Fleet Capital for the years ended December 31, 2002, 2003 and 2004 are
$492,000, $592,000 and $1,004,000, respectively.

Borrowings under the Subordinated Debt Agreement bear interest, payable
monthly, at the rate of 12.5%, ("cash portion of interest on subordinated
debt"), plus an additional interest component at the rate of 2.25%,
("additional interest component") which is payable at the Company's election in
cash or in Company Common Stock; if not paid in this fashion, the additional
interest component is capitalized to the principal amount of the debt.
Borrowings under the subordinated notes were $7,353,000, offset by unamortized
debt discount of $1,963,000, as of December 31, 2001 and $7,148,000, offset by
unamortized debt discount of $2,369,000, as of December 31, 2000. The
Subordinated Debt Agreement matures in October 2006. In connection with the
Subordinated Debt Agreement, ACS received warrants to purchase 1,907,543 shares
of IGI Common Stock at an exercise price of $.01 per share (see Note 11,
"Detachable Stock Warrants").

ACS has the right to designate for election to the Company's Board of
Directors that number of directors that bears the same ratio to the total
number of directors as the number of shares of Company Common Stock owned by it
plus the number of shares issuable upon exercise of its warrants bear to the
total number of outstanding shares of Company Common Stock on a fully-diluted
basis, provided that so long as it owns any Common Stock, or warrants or any of
its loans are outstanding, it shall have the right to designate at least one
director or observer on the Board of Directors. ACS designated their member to
the board of Directors at the May 16, 2001 annual meeting of shareholders.

On September 15, 2000, the shareholders of the Company approved and the
Company consummated the sale of the assets of the Vineland division. In
exchange for receipt of such assets, the buyer assumed certain Company
liabilities, equal to approximately $2,300,000 in the aggregate, and paid the
Company cash in the amount of $12,500,000, of which $500,000 was placed in an
escrow fund to secure potential obligations of the Company relating to final
purchase price adjustments and indemnification. The Company applied a portion
of the proceeds from the sale of the Vineland division to the outstanding
balance on the revolving credit facility, capital expenditure loan and term
loan, totaling approximately $10,875,000. The Company's operating results
reflect a $630,000 extraordinary loss on the early extinguishment of debt,
representing the write off of a portion of the deferred financing costs, due to
the reduction in the Company's borrowing base under the Senior Debt Agreement.

The Senior Debt Agreement and the Subordinated Debt Agreement, as amended,
contain various affirmative and negative covenants, such as minimum tangible
net worth and minimum fixed charge coverage ratios. Due to the Company's
non-compliance as of December 31, 2001 with certain of the covenants, the
Company has classified all debt owed to ACS and Fleet Capital as current
liabilities.

F-17

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. Detachable Stock Warrants

In connection with the October 29, 1999 refinancing, specifically the
$7,000,000 Subordinated Debt Agreement, the Company issued warrants to purchase
1,907,543 shares of IGI Common Stock at an exercise price of $.01 per share to
ACS.

These warrants contained a right (the "put") to require the Company to
repurchase the warrants or the Common Stock acquired upon exercise of such
warrants at their then fair market value under certain circumstances, including
the earliest to occur of the following: a) October 29, 2004; b) the date of
payment in full of the Senior Debt and Subordinated Debt and all senior
indebtedness of the Company; or c) the sale of the Company or 30% or more of
its assets. The repurchase was to be settled in cash or Common Stock, at the
option of ACS. Due to the put feature and the potential cash settlement which
was outside of the Company's control, the warrants were recorded as a liability
which was marked-to-market, with changes in the market value being recognized
as a component of interest expense in the period of change.

The warrants issued to ACS were valued at issuance date utilizing the
Black-Scholes model and initially recorded as a liability of $2,842,000. A
corresponding debt discount was recorded at issuance, representing the
difference between the $7,000,000 proceeds received by the Company and the
total obligation, which includes principal of $7,000,000 and the initial
warrant liability of $2,842,000. The debt discount is being amortized to
interest expense over the term of the Subordinated Debt Agreement. The Company
recognized $358,000 of non-taxable interest income, and $854,000 of
non-deductible interest expense for the years ended December 31, 2000 and 1999,
respectively, associated with the mark-to-market adjustment of the warrants.

On April 12, 2000, ACS amended its Subordinated Debt Agreement with the
Company whereby the put provision associated with the original warrants was
replaced by a make-whole feature. The make-whole feature requires the Company
to compensate ACS, in either Common Stock or cash, at the option of the
Company, in the event that ACS ultimately realizes proceeds from the sale of
the Common Stock obtained upon exercise of its warrants that are less than the
fair value of the Common Stock upon exercise of such warrants. Fair value of
the Common Stock upon exercise is defined as the 30-day average value prior to
notice of intent to sell. ACS must exercise reasonable effort to sell or place
its shares in the marketplace over a 180-day period, beginning with the date of
notice by ACS, before it can invoke the make-whole provision. As a result of
the April 12, 2000 amendment, the remaining liability at April 12, 2000 of
$3,338,000 was reclassified to equity.

As noted above, the make-whole feature requires the Company to compensate
ACS for any decrease in value between the date that ACS notifies the Company
that they intend to sell some or all of the stock and the date that ACS
ultimately disposes the underlying stock, assuming that such disposition occurs
in an orderly fashion over a period of not more than 180 days. The shortfall
can be paid using either cash or shares of the Company's Common Stock, at the
option of the Company. Due to accounting guidance that was issued in September
2000, the Company has reflected the detachable stock warrants outside of
stockholders' deficit as of December 31, 2001 and 2000, since the ability to
satisfy the make-whole obligation using shares of the Company's Common Stock is
not totally within the Company's control.

12. Stock Options, Warrants and Common Stock

Under the 1989 and 1991 Stock Option Plans, options have been granted to key
employees, directors and consultants to purchase a maximum of 500,000 and
2,600,000 shares of Common Stock, respectively. Options, having a maximum term
of 10 years, have been granted at 100% of the fair market value of the
Company's stock at the time of grant. Both incentive stock options and
non-qualified stock options have been granted under the 1989 Plan and the 1991
Plan. Incentive stock options are generally exercisable in cumulative
increments over

F-18

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

four years commencing one year from the date of grant. Non-qualified options
are generally exercisable in full beginning six months after the date of grant.

In October 1998, the Company adopted the 1998 Directors Stock Plan. Under
this plan, 200,000 shares of the Company's Common Stock are reserved for
issuance to non-employee directors, in lieu of payment of directors' fees in
cash. In 2001, 2000 and 1999, 129,989, 50,398 and 66,509 shares of Common Stock
were issued as consideration for directors' fees, respectively. The Company
recognized $79,000, $84,000 and $116,000 of expense related to these shares
during the years ended December 31, 2001, 2000 and 1999, respectively.

In December 1998, the Company's Board of Directors adopted the 1999 Employee
Stock Purchase Plan ("ESPP"). An aggregate of 300,000 shares of Common Stock
may be issued pursuant to the ESPP. All employees of the Company and its
subsidiaries, including officers or directors who are also an employee, are
eligible to participate in the ESPP. Shares under this plan are available for
purchase at 85% of the fair market value of the Company's stock on the first or
last day of the offering period, whichever is lower. The ESPP is implemented
through offerings; the first offering commenced August 26, 1999 and terminated
December 31, 1999. The Company issued 26,918 shares pursuant to this initial
offering. Each offering thereafter begins on the first day of each year and
ends on the last day of each year. The Company issued 65,033 shares in 2001
under the ESPP and anticipates issuing approximately 31,000 shares in 2002 for
the 2001 plan year.

In March 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan ("1999 Plan"). The 1999 Plan replaced all previously authorized
stock option plans, and no additional options may be granted under those plans.
Under the 1999 Plan, options may be granted to all of the Company's employees,
officers, directors, consultants and advisors to purchase a maximum of
1,200,000 shares of Common Stock. A total of 1,076,250 options (net of
cancellations), having a maximum term of 10 years, have been granted at 100% of
the fair market value of the Company's stock at the time of grant. Options
outstanding under the 1999 Plan are generally exercisable in cumulative
increments over four years commencing one year from date of grant.

In September 1999, the Company's Board of Directors approved the 1999
Director Stock Option Plan. The 1999 Director Stock Option Plan provides for
the grant of stock options to non-employee directors of the Company at an
exercise price equal to the fair market value per share on the date of the
grant. An aggregate of 675,000 shares have been approved and authorized for
issuance pursuant to this plan. In May of 2001, additional 800,000 shares were
approved for issuance under this plan, bringing the total to 1,475,000
available for issue under this plan. A total of 775,000 options have been
granted to non-employee directors through December 31, 2001. The options
granted under the 1999 Director Stock Option Plan vest in full twelve months
after their respective grant dates and have a maximum term of ten years.

F-19

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

1989, 1991 and 1999 Plans
-------------------------------------
Price Per Weighted
Shares Share Average Price
---------- ----------- -------------

January 1, 1999 shares
Under option......... 1,973,665 $1.94-$9.88 $4.68
Granted.............. 1,447,000 $1.56-$2.00 $1.62
Exercised............ -- --
Cancelled............ (173,465) $2.00-$8.58 $3.67
----------
December 31, 1999 shares
Under option......... 3,247,200 $1.56-$9.88 $3.37
Granted.............. 629,700 $ .50-$2.75 $1.15
Exercised............ (34,125) $2.00-$2.44 $2.42
Cancelled............ (1,022,449) $1.56-$9.88 $1.92
----------
December 31, 2000 shares
Under option......... 2,820,326 $ .50-$8.58 $2.87
Granted.............. 1,002,000 $ .52-$ .80 $ .70
Exercised............ (80,000) $ .50 $ .50
Cancelled............ (1,039,326) $ .50-$8.58 $2.08
----------
December 31, 2001 shares
Under option......... 2,703,000 $ .50-$8.58 $2.30
==========
Exercisable options at:
December 31, 1999.... 1,909,866 $4.52
========== =====
December 31, 2000.... 2,149,268 $3.32
========== =====
December 31, 2001.... 1,705,942 $3.21
========== =====

The Company uses the intrinsic value method to account for stock options
issued to employees and to directors. The Company uses the fair value method to
account for stock options issued to consultants. The Company has recorded
compensation expense of $0, $39,000 and $49,000 in 2001, 2000 and 1999,
respectively, for options granted to consultants.

If compensation cost for all grants under the Company's stock option plans
had been determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased to the pro
forma loss amounts indicated below:

2001 2000 1999
------- -------- -------
(in thousands, except per
share information)

Net loss--as reported........ $(1,693) $(11,437) $(1,584)
Net loss--pro forma.......... (2,146) (12,521) (1,943)
Loss per share--as reported..
Basic and diluted..... $ (.15) $ (1.12) $ (.17)
Loss per share--pro forma....
Basic and diluted..... $ (.20) $ (1.23) $ (.21)

F-20

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The pro forma information has been determined as if the Company had
accounted for its employee and director stock options under the fair value
method. The fair value for these options was estimated at the grant date using
the Black-Scholes option-pricing model with the following assumptions for 2001,
2000 and 1999:

Assumptions 2001 2000 1999
----------- ----------- ----------- -------------

Dividend yield............. 0% 0% 0%
Risk free interest rate.... 4.45%-5.30% 5.33%-6.74% 4.93%-6.36%
Estimated volatility factor 217.19% 216.07% 59.52%-63.73%
Expected life.............. 7 years 7 years 6-9 years

The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2001:

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

$ .50 to $ .99 1,057,000 9.46 $ .68 100,000 $ .51
$1.00 to $ 1.99 776,750 7.92 $1.62 747,128 $1.62
$2.00 to $ 2.99 332,250 4.56 $2.31 322,314 $2.30
$3.00 to $ 3.99 67,000 6.08 $3.67 66,500 $3.68
$4.00 to $ 4.99 -- -- --
$5.00 to $ 5.99 140,000 3.94 $5.76 140,000 $5.76
$6.00 to $ 6.99 180,000 3.40 $6.67 180,000 $6.67
$7.00 to $ 7.99 60,000 2.46 $7.78 60,000 $7.78
$8.00 to $ 8.58 90,000 3.41 $8.43 90,000 $8.43
--------- ---------
$ .50 to $ 8.58 2,703,000 7.29 $2.30 1,705,942 $3.21
========= =========

In addition to the stock options disclosed above, the Company granted a
warrant to purchase 150,000 shares of the Company's Common Stock to an
investment banking company during June 2000 as consideration for professional
services. The warrant is fully vested and exercisable for five years from the
date of grant at $1.375 per share, the fair market value on the date of grant.
The fair value of the warrant was estimated to be $206,000 based on the
Black-Scholes option-pricing model. The full amount was expensed during 2000.
The Company has included the fair value of the warrant in other accrued
expenses at December 31, 2001 and 2000, pending exercise of the warrant.

In 2001, the Company issued 500,000 shares to a private investor in exchange
for $250,000, pursuant to a stock subscription agreement. The value received
per share approximated the quoted value of the Common Stock at the time of the
sale.

13. Income Taxes

Total tax provision (benefit) for the years ended December 31, 2001, 2000
and 1999 is as follows:

2001 2000 1999
----- ------ -----
(in thousands)

Loss from continuing operations.............. $(271) $5,864 $(401)
Loss from operations of discontinued business -- -- (200)
Extraordinary item........................... -- -- 224
----- ------ -----
Total tax provision (benefit)................ $(271) $5,864 $(377)
===== ====== =====

F-21

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The provision (benefit) for income taxes attributable to loss from
continuing operations before income taxes and extraordinary items included in
the Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999 is as follows:

2001 2000 1999
----- ------ -----
(in thousands)

Current tax expense (benefit):
Federal.................................. $ -- $ -- $ --
State and local.......................... (271) 14 6
----- ------ -----
Total current tax expense................... (271) 14 6
----- ------ -----
Deferred tax expense (benefit)..............
Federal.................................. -- 5,133 (337)
State and local.......................... -- 717 (70)
----- ------ -----
Total deferred tax expense (benefit)........ -- 5,850 (407)
----- ------ -----
Total expense (benefit) for income taxes. $(271) $5,864 $(401)
===== ====== =====

During the year ended December 31, 2001, the Company sold some of its New
Jersey operating loss carryforwards in exchange for net proceeds of $289,000.

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

2001 2000 1999
----- ------ -----
(in thousands)

Statutory benefit........................................................ $(688) $ (972) $(521)
Non-deductible/taxable interest relating to mark-to-market of put warants
(see Note 11).......................................................... -- (122) 290
Other non-deductible expenses............................................ 12 36 48
State income taxes, net of federal benefit............................... (179) 482 (42)
Research and development tax credits..................................... -- (23) (19)
(Decrease) increase in valuation allowance............................... 584 6,459 (106)
Other, net............................................................... -- 4 (51)
----- ------ -----
$(271) $5,864 $(401)
----- ------ -----

Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 2001 and 2000, consisted of the following:

2001 2000
------- -------
(in thousands)

Property, plant and equipment................ $ 145 $ (88)
Prepaid license agreement.................... 762 1,016
Deferred royalty payments.................... 236 1
Tax operating loss carryforwards............. 6,584 6,637
Tax credit carryforwards..................... 726 711
Reserves..................................... 254 331
Inventory.................................... 178 158
Non-employee stock options................... 168 179
Other future deductible temporary differences 573 476
Other future taxable temporary differences... (32) (40)
------- -------
9,594 9,471
Less: valuation allowance.................... (9,594) (9,471)
------- -------
Deferred taxes, net.......................... $ -- $ --
======= =======

F-22

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company evaluates the recoverability of its deferred tax assets based on
its history of operating earnings, its plan to sell the benefit of certain
state net operating losses, its expectations for the future, and the expiration
dates of the net operating loss carryforwards. During 2001 and 2000, a number
of events occurred which negatively impacted the earnings and cash flow of the
Company and will continue to impact the Company in the future. These events
included the sale of the Vineland division for a lesser amount than was
originally anticipated, the substantial operating loss incurred by the Vineland
division prior to its disposal, and the decrease in the operating profits of
the Companion Pet Product division in 2000, due in part to regulatory issues
with the FDA and the NJDEP at the Companion Pet Product manufacturing facility.
As a result, the Company has concluded that it is more likely than not that it
will be unable to realize the gross deferred tax assets in the foreseeable
future and has established a valuation reserve for all such deferred tax assets.

Operating loss and tax credit carryforwards for tax reporting purposes as of
December 31, 2001 were as follows:

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

Federal:
Operating losses (expiring through 2021)....................... $17,272
Research tax credits (expiring through 2021)................... 590
Alternative minimum tax credits (available without expiration). 28
State:
Net operating losses--New Jersey (expiring through 2008)....... 9,821
Research tax credits--New Jersey (expiring through 2008)....... 108

Federal net operating loss carryforwards that expire through 2021 have
significant components expiring in 2007 (15%), 2018 (22%), 2019 (11%), 2020
(39%) and 2021 (7%).

14. Commitments and Contingencies

The Company leases machinery and equipment under non-cancelable operating
lease agreements expiring at various dates in the future. Rental expense
aggregated approximately $112,000 in 2001, $232,000 in 2000 and $362,000 in
1999. Future minimum rental commitments under non-cancelable operating leases
as of December 31, 2001 are as follows:

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

2002 $56
2003 56
2004 54
2005 52
2006 24

15. U.S. Regulatory Proceedings

On March 24, 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding investigations and proceedings that
they had initiated earlier. The terms of the settlement agreement provided that
the Company enter a plea of guilty to a misdemeanor and pay a fine of $15,000
and restitution in the amount of $10,000. In addition, the Company was assessed
a penalty of $225,000 and began making monthly payments to the Treasury
Department which will continue through the period ending January 31, 2002. The
expense of settling with these agencies was reflected in the 1998 results of
operations. Further, in response to these events, the Company restated the
Company's consolidated financial statements for the two years ended December
31, 1996 and the nine months ended September 30, 1997. The settlement did not
affect the inquiry being conducted by the U.S. Securities and Exchange
Commission ("SEC"), nor did it affect possible governmental action against
former employees of the Company.

F-23

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In April 1998, the SEC advised the Company that it was conducting an inquiry
and requested information and documents from the Company, which the Company
voluntarily provided to the SEC. On March 13, 2002, the Company reached a
settlement with the staff of the SEC to resolve matters arising with respect to
the investigation of the Company. Under the settlement, the Company neither
admits nor denies that the Company violated the financial reporting and
record-keeping requirements of Section 13 of the Securities and Exchange Act of
1934, as amended, for the three years ended December 31,1997. Further, the
Company agreed to the entry of an order to cease and desist from any such
violation in the future. No monetary penalty was assessed.

The SEC's investigation and the settlement focused on alleged fraudulent
actions taken by former members of the Company's management. Upon becoming
aware of the alleged fraudulent activity, IGI, through its Board of Directors,
immediately commenced an internal investigation, which led to the termination
of employment of those responsible. IGI cooperated fully with the staff of the
SEC and disclosed to the SEC the results of the internal investigation.

Other Pending Matters

On April 6, 2000, officials of the New Jersey Department of Environmental
Protection inspected the Company's storage site in Buena, New Jersey and issued
Notices of Violation relating to the storage of waste materials in a number of
trailers at the site. The Company established a disposal and cleanup schedule
and removed waste materials from the site. The Company is cooperating with the
authorities and does not expect to incur any material fines or penalties. The
Company expensed $160,000 in 2000 related to the disposal and cleanup process.

On March 2, 2001, the Company discovered the presence of environmental
contamination resulting from an unknown heating oil leak at its Companion Pet
Products manufacturing site. The Company immediately notified the New Jersey
Department of Environmental Protection and the local authorities, and hired a
contractor to assess the exposure and required clean up. Based on the initial
information from the contractor, the Company originally estimated the cost for
the cleanup and remediation to be $310,000. In September 2001, the contractor
updated the estimated total cost for the cleanup and remediation to be
$550,000, of which $282,000 remains accrued as of December 31, 2001. As a
result of the increase in estimated costs, the Company recorded an additional
$240,000 of expense during the third quarter of 2001.

16. Export Sales

Export revenues by the Company's domestic operations accounted for
approximately 14% of the Company's total revenues in 2001 and 11% in 2000 and
1999, respectively. The following table shows the geographical distribution of
the Company's total revenues:

2001 2000 1999
------- ------- -------
(in thousands)

Latin America....... $ 165 $ 188 $ 214
Asia/Pacific........ 1,372 1,151 1,018
Europe.............. 741 836 1,055
Africa/Middle East.. 26 38 36
------- ------- -------
2,304 2,213 2,323
United States/Canada 13,594 17,039 18,210
------- ------- -------
Total revenues...... $15,898 $19,252 $20,533
======= ======= =======

Net accounts receivable balances from export sales as of December 31, 2001
and 2000 approximated $548,000 and $598,000, respectively.

F-24

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

17. Certain Relationships and Related Party Transactions

In 1999 and 1998, the Company's former Chief Executive Officer chose to
defer payment of his salary until the Company's cash flow stabilized.
Compensation earned for which payment was to be deferred under this plan was
$460,000 and $379,000 for 1999 and 1998, respectively.

On September 15, 1999, the Company agreed to pay a portion of the Company's
obligation using shares of Company Common Stock. Total payments through
December 31, 1999 resulted in the issuance of 417,744 shares, valued at
$724,000. The shares were valued using the then trading price of the Company's
stock at the date of stock issuance.

At December 31, 1999, accrued compensation totaling $115,000 remained
outstanding, which represented compensation earned but not yet paid. The
Company paid this amount in the first quarter of 2000 by issuing 63,448 shares
in satisfaction of the remaining 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.

18. Employee Benefits

The Company has a 401(k) contribution plan, pursuant to which employees who
have completed six months of employment with the Company or its subsidiaries as
of specified dates, may elect to contribute to the plan, in whole percentages,
up to 18% of compensation. Employees' contributions are subject to a minimum
contribution by participants of 1% of compensation and a maximum contribution
of $10,500 for 2001. The Company matches 25% of the first 5% of compensation
contributed by participants and contributes, on behalf of each participant, $4
per week of employment during the year. The Company contribution is in the form
of either Common Stock or cash, which is vested immediately. The Company has
recorded charges to expense related to this plan of approximately $31,000,
$69,000 and $77,000 in 2001, 2000 and 1999, respectively.

19. Business Segments

The Company has two reportable segments: Consumer Products and Companion Pet
Products. Products from each of the segments serve different markets and use
different channels of distribution.

F-25

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Summary data related to the Company's reportable segments for the three
years ended December 31, 2001 appears below:

Consumer Companion
Products Pet Products Corporate Consolidated
-------- ------------ --------- ------------
(in thousands)

2001
Revenues...................... $4,294 $11,604 $ -- $15,898
Operating profit (loss)....... 2,454 591 (3,206) (161)
Depreciation and amortization. 192 165 92 449
Identifiable assets........... 3,049 5,450 2,040 10,539
Capital expenditures.......... 51 156 12 219
2000
Revenues...................... $6,552 $12,700 $ -- $19,252
Operating profit (loss)....... 4,094 836 (5,087) (157)
Depreciation and amortization. 243 251 188 682
Identifiable assets........... 3,647 5,697 3,043 12,387
Capital expenditures.......... 2 235 -- 237
1999
Revenues...................... $6,938 $13,595 $ -- $20,533
Operating profit (loss)....... 3,913 3,850 (5,216) 2,547
Depreciation and amortization. 188 384 183 738
Identifiable assets........... 3,885 6,994 10,157 21,036
Capital expenditures.......... 57 188 35 280

Note:

(A) Unallocated corporate expenses are principally general and
administrative expenses.
(B) Corporate assets primarily represent fixed assets, deferred tax assets,
cash and cash equivalents and deferred financing costs.
(C) Transactions between reportable segments are not material.
(D) The summary data for the three years ended December 31, 2001 only
represents continuing operations.

20. Quarterly Consolidated Financial Data (Unaudited)

Following is a summary of the Company's quarterly results for each of the
quarters in the years ended December 31, 2001 and 2000 (in thousands, except
per share information).

March 31, June 30, September 30, December 31,
2001 2001 2001 2001 Total
--------- -------- ------------- ------------ -------

Total revenues........................... $4,108 $4,256 $4,006 $3,528 $15,898
Operating profit (loss).................. (86) 819 (412) (482) (161)
Income (loss) from continuing operations. (636) 278 (929) (736) (2,023)
Net income (loss)........................ (368) 293 (929) (736) (1,740)
Basic and diluted income (loss) per share
Continuing operations................. (.08) .05 (.09) (.07) (.18)
Net income (loss)..................... (.05) .05 (.09) (.07) (.15)

F-26

IGI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

March 31, June 30, September 30, December 31,
2000 2000 2000 2000 Total
--------- -------- ------------- ------------ --------

Total revenues........................... $ 5,260 $5,203 $ 4,288 $4,501 $ 19,252
Operating profit (loss).................. 781 (109) (1,382) 553 (157)
Income (loss) from continuing operations. (822) 595 (8,715) 167 (8,775)
Net income (loss)........................ (1,219) 505 (10,803) 80 (11,437)
Basic and diluted income (loss) per share
Continuing operations................. (.08) .05 (.85) .02 (.86)
Net income (loss)..................... (.12) .04 (1.05) .01 (1.12)

F-27

Annex A

ASSET PURCHASE AGREEMENT

ASSET PURCHASE AGREEMENT (together with the Annexes, Schedules and Exhibits
attached hereto, this "Agreement"), dated as of February 6, 2002 by and between
VETOQUINOL U.S.A., Inc., a Delaware corporation (the "Buyer"), and IGI, INC., a
Delaware corporation (the "Seller"). Capitalized terms used in this Agreement
are defined or otherwise referenced in Section 10.03.

W I T N E S S E T H:

WHEREAS, the Seller is in the business of the production and marketing of
companion pet products (the "Products") such as pharmaceuticals, nutritional
supplements and grooming aids and formulations under the names EVSCO
Pharmaceuticals, Tomlyn and Luv 'Em (collectively, the "Pet Business"); and

WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to
purchase from the Seller, the Purchased Assets, and the Buyer has agreed to
assume the Assumed Liabilities, in each case in connection with the Pet
Business and upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual representations and
warranties and covenants made herein, the Buyer and the Seller, each intending
to be legally bound, hereby agree as follows:

ARTICLE I

PURCHASE AND SALE OF ASSETS

SECTION 1.01. Purchase and Sale of Assets.

(a) At the Closing provided for in Section 2.01, on the terms and subject to
the conditions set forth in this Agreement, the Seller shall, or shall cause
its Subsidiaries to, sell, convey, transfer, assign and deliver to the Buyer,
free and clear of any and all Liens and Encumbrances, and the Buyer shall
purchase and acquire from the Seller or its Subsidiaries, as applicable, all of
the right, title and interest of the Seller or its Subsidiaries, as applicable,
in and to all of the assets used solely in the Pet Business existing on the
Closing Date other than the Excluded Assets (collectively, the "Purchased
Assets"). The Purchased Assets include the following:

(i) all inventories solely of the Pet Business including, without
limitation, raw materials, work in progress, consigned goods, finished
goods, packaging and labels (including, without limitation, any of the
foregoing owned by the Seller and held for the benefit of the Seller or its
Subsidiaries and in the possession of third party manufacturers, suppliers,
dealers or others in transit) (the "Inventory"),

(ii) except as provided in Section 1.01(b)(ii), all items of personal
property used solely in connection with the Pet Business including, without
limitation, the personal property set forth on Schedule 1.01(a)(ii);

(iii) except for the Novasome Technology and as provided in Section
1.01(b)(i), all past and current product formulations, specifications,
processes, trade secrets, inventions for which no patents are pending,
industrial rights and technological know-how owned by the Seller or any of
its Subsidiaries relating solely to the Products, any of the Purchased
Assets, or the Pet Business (excepting the Novasome Technology and as
provided in Section 1.01(b)(i), the "Technology") including, but not limited
to, those set forth on Schedule 1.01(a)(iii);

A-1

(iv) to the extent maintained by the Seller or any of its Subsidiaries,
all books, records, files and other data of the Seller or any of its
Subsidiaries (including those stored electronically) other than Accessible
Financial Records, in each case relating solely to any of the Products, the
Purchased Assets or the Pet Business, including, but not limited to,
customer lists, customer purchasing histories, price lists, distribution
lists, supplier lists, inventory reports of raw materials, packaging, goods
in process and finished goods, production data, manufacturing and quality
control records and procedures, customer complaint and inquiry files,
research and development files, records, data and laboratory books, medical
reports, files relating to the safety and effectiveness of each of the
Products, adverse reaction reports, Product Registrations and regulatory
files (including, but not limited to, all correspondence with any
Governmental Entity), sales materials and records, strategic plans, internal
financial statements, marketing and promotional surveys, material and
research, trademark and Intellectual Property files and import and export
records; provided that the Seller may maintain and retain copies of all such
materials;

(v) the agreements, personal property leases, contracts, licenses,
leases, commitments, understandings, instruments, binding obligations and
arrangements (oral or written) (A) set forth (or, in the case of oral
contracts a description of the material terms of which are set forth) in
Schedule 1.01(a)(v) or (B) that are entered into in the ordinary course of
the Pet Business between the date hereof and the Closing Date (the "Assumed
Contracts");

(vi) to the extent their transfer is permitted by Applicable Law, all
approvals, consents, permits, licenses, registrations, authorizations and
clearances of any Governmental Entity including, without limitation, all
Product Registrations, FDA approvals, product clearances and any other
product registrations issued or granted to the Seller or any of its
Subsidiaries relating, in each case, solely to any of the Products, the
Purchased Assets or the Pet Business (the "Permits") including, but not
limited to, the Permits set forth on Schedule 1.01(a)(vi);

(vii) all current and historical sales and promotional literature and
other material of the Seller or any of its Subsidiaries relating solely to
the Products, the Purchased Assets or the Pet Business, including, but not
limited to, promotional pamphlets and brochures, samples, historical and
current television, radio and other media advertising, historical and
current print advertising and all artwork relating to sales and promotional
literature; provided that the Seller may maintain and retain copies of all
such materials;

(viii) all labels, logo's, graphics and associated artwork, all current
and historical packaging, and all litho screens, master silk screens,
printing plates and associated tooling and material, in each case owned by
the Seller or any of its Subsidiaries and relating solely to the Products,
the Purchased Assets or the Pet Business including, but not limited to,
those set forth on Schedule 1.01(a)(viii); provided that the Seller may
maintain and retain copies of all such materials;

(ix) except as set forth in Section 1.01(b)(i), all rights of the Seller
in all Intellectual Property relating solely to any of the Products, the
Purchased Assets or the Pet Business, including the goodwill associated
therewith, and the Seller's or its Subsidiaries' right to sue for, and
remedies against, past, present or future infringements thereof, and rights
of priority and protection of interest therein;

(x) all accounts receivable of the Seller or any of its Subsidiaries as
of the Closing Date relating solely to the Pet Business (whether or not
invoices have been issued), and any and all insurance policies and letters
of credit relating to the payment thereof or to customer credit;

(xi) all "other receivables" of the Seller or any of its Subsidiaries as
of the Closing Date relating solely to the Pet Business, which shall include
refunds, credits, allowances, rebates and other debt items owing by
suppliers, vendors and others furnishing goods or providing services to the
Pet Business;

(xii) all prepaid expenses, advances or deposits with or paid to third
parties of the Seller or any of its Subsidiaries relating solely to the Pet
Business;

(xiii) all goodwill of the Seller and its Affiliates relating solely to
the Pet Business;

A-2

(xiv) the domain names "Tomlyn.com" and "EvscoPharm.com", and the content
at the domain names and Internet web sites set forth on Schedule 3.11(a) of
the Disclosure Schedule to the extent such content relates solely to any of
the Products, the Purchased Assets or the Pet Business;

(xv) except as provided in Section 1.01(b)(vi), all claims, causes of
action, judgments, indemnity or other rights that were or could have been
instituted by the Seller or any of its Subsidiaries against any third party
(collectively, "Claims"), arising solely out of or relating solely to (A)
any of the Purchased Assets arising before, on or after the Closing or (B)
the conduct of the Pet Business as conducted before, on and after the
Closing; and

(xvi) except for the Novasome Technology, all Products of the Pet
Business manufactured, packaged, marketed, sold or otherwise distributed on
or prior to the Closing Date and owned by the Pet Business on the Closing
Date, including any Discontinued Products so owned on the Closing Date,
including those listed in Schedule 1.01(a)(xvi).

(b) Notwithstanding anything in this Agreement to the contrary, specifically
excluded from the Purchased Assets are the right, title and interest of the
Seller, or any of its Subsidiaries, in or to any of following (collectively,
the "Excluded Assets"):

(i) except to the extent incorporated in the Inventory as of the Closing
Date and as provided in the Technology Rights Agreement, all right, title
and interest of the Seller or any of its Subsidiaries in or to the Novasome
Technology and any and all books, records, files and other data of the
Seller or any of its Subsidiaries (including those stored electronically),
relating to the Novasome Technology;

(ii) all manufacturing equipment (the "Manufacturing Equipment") and
racking and any Hazardous Substance stored in conjunction with the Pet
Business located at Seller's facility (the "Plant") at 701-711 Harding Road,
Buena, New Jersey including the items set forth in Schedule 1.01(b)(ii),
except for such Manufacturing Equipment as is covered by the Assumed
Contracts;

(iii) all right, title and interest of the Seller or any of its
Subsidiaries in or to any real property, including but not limited to the
Plant, other than to the extent set forth in the Transition Services
Agreement, if any;

(iv) all cash, short term investments and cash equivalents held by the
Seller or any of its Subsidiaries;

(v) all agreements, contracts, leases, licenses, commitments,
understandings, instruments or any other binding obligation or arrangement
(oral or written) to which the Seller or any of its Subsidiaries is a party
or by which any of the Purchased Assets is bound or subject or which relates
in any manner to the Pet Business and, which in each case, is not an Assumed
Contract (except those relating to the Permits that the Buyer specifically
assumes);

(vi) all insurance policies of the Seller or any of its Subsidiaries and
any rights thereunder;

(vii) all books, records, files and data (including those stored
electronically) of the Seller or any of its Subsidiaries (A) not relating
solely to any of the Products, the Purchased Assets or the Pet Business, or
(B) prepared in connection with this Agreement or the other Transaction
Agreements or the transactions contemplated hereby and thereby (including
all minute books and corporate records of the Seller and its Subsidiaries);

(viii) all claims, causes of action, judgments, indemnity or other rights
arising out of or relating to any of the Excluded Assets or Retained
Liabilities;

(ix) all refunds, credits or overpayments with respect to Taxes;

(x) all rights of the Seller and any of its Subsidiaries arising under
this Agreement or the other Transaction Agreements or the transactions
contemplated hereby and thereby;

A-3

(xi) any domain name other than "Tomlyn.com" and "EvscoPharm.com", and
any Internet web site other than those set forth on Schedule 3.11(a);

(xii) the corporate name of the Seller, any derivations thereof and any
trademarks, service marks, logo's, artwork or other marks related thereto;

(xiii) those assets set forth on Schedule 1.01(b)(xiii);

(xiv) the Accessible Financial Records; and

(xv) any asset, property, right, contract or other agreement that is not
included within the Purchased Assets.

SECTION 1.02. Purchase Price.

(a) In consideration of the sale, conveyance, transfer, assignment and
delivery of the Purchased Assets by the Seller or its Subsidiaries, as
applicable, pursuant to Section 1.01(a), the Buyer agrees to (i) pay to the
Seller in accordance with Section 1.03, US $16,700,000 (Sixteen Million Seven
Hundred Thousand Dollars) in the aggregate (subject to the adjustments, if any,
contemplated by Section 1.06, the "Purchase Price") in cash at Closing, and
(ii) undertake, assume and agree to perform, and otherwise pay, satisfy and
discharge the following liabilities, obligations, claims, demands, expenses,
damages or responsibilities, if any, of any of the Seller or its Subsidiaries
whether known or unknown, absolute, accrued, contingent or otherwise and
whether due or to become due (the "Assumed Liabilities") and no others:

(i) All Current Liabilities reflected on the Final Statement of Working
Capital;

(ii) all liabilities and obligations of the Seller or any of its
Subsidiaries under the Assumed Contracts to the extent included in the
Purchased Assets and which are either Current Liabilities reflected on the
Final Statement of Working Capital or which arise and relate to any period
on or after the Closing; and

(iii) all obligations for the repair, replacement or return of Products
manufactured or sold in the ordinary course of the Pet Business prior to the
Closing Date;

(iv) those liabilities and obligations set forth on Schedule 1.02(a)(iv);

(v) (A) during each twelve-month period beginning on each of the Closing
Date and the first anniversary date thereof (each a "Products Liability
Period"), those liabilities and obligations relating to products liability
claims made during such Products Liability Period and relating to Products
sold in the ordinary course of the Pet Business prior to the Closing Date
(the "Products Liability Claims"), to the extent the aggregate amount of
such liabilities and obligations in such Products Liability Period exceeds
Two Million Dollars (net of any liability or obligation assumed under
subsection (B) hereof in such Products Liability Period), but only to the
extent of such excess; (B) during any Products Liability Period, those
liabilities and obligations relating to Products Liability Claims made
during such Products Liability Period for which the Seller is not entitled
to any insurance recovery because of a deductible in any policy providing
insurance coverage for Products Liability Claims, provided that the maximum
liability of the Buyer under this sub-section (B) with respect to any
Products Liability Claim shall not exceed $25,000; (C) with respect to any
period after the second Products Liability Period, all liabilities and
obligations relating to any Products Liability Claims made during such
period; and (D) any and all liabilities and obligations for product
liability claims made at any time relating to Products manufactured but not
sold in the ordinary course of the Pet Business prior to the Closing Date.

(vi) all liabilities and obligations relating solely to the Products, the
Purchased Assets or the Pet Business, in each case to the extent arising out
of and relating to any period on and after the Closing Date and not
otherwise included in the Retained Liabilities other than those with respect
to which the Buyer is entitled to indemnification pursuant to Section
9.01(a)(iii), (iv) or (v); and

A-4

(vii) liabilities, debts, obligations and claims (other than those
relating to Taxes, Indebtedness, violations of Applicable Laws, including
Environmental Laws, the Excluded Assets, the Retained Liabilities or the
Assumed Liabilities set forth in the preceding clauses (i)-(vi)) which do
not exceed $100,000 in the aggregate.

(b) On the terms and subject to the conditions set forth in this Agreement,
the Bill of Sale and the Instrument of Assignment and Assumption, at the
Closing, the Seller or its Subsidiaries shall assign to the Buyer all of their
rights under the Assumed Contracts and the Permits and all of their obligations
under the Assumed Contracts and the Permits, in each case to the extent such
obligations arise on or after the Closing, and the Buyer shall accept the
assignment of all of the Seller's or its Subsidiaries' rights thereunder and
shall assume all of the Seller's or its Subsidiaries' obligations thereunder,
to the extent such obligations arise on or after the Closing; provided,
however, that the Seller or its Subsidiaries shall assign such rights and
obligations only to the extent that such rights and obligations are assignable
under such Assumed Contracts and Permits and Applicable Law, and no action
hereunder shall constitute an assignment thereof, except to such extent and
provided, further, that to the extent the consent of any Person to the
assignment, or notice to a third party of the assignment, is required pursuant
to the terms of such Assumed Contract, Permit or Applicable Law, no assignment
or attempted assignment will be deemed to have been effected by the provisions
of this Agreement without such consent or notice or waiver thereof. To the
extent that such an Assumed Contract or Permit and Applicable Law permit such
an assignment and the notice to or consent of any Person is required, the
Seller or its Subsidiaries shall use commercially reasonable efforts to deliver
to, and obtain from, the applicable Person the required consent or notice in
accordance with the terms and conditions of the applicable Assumed Contract or
Permit and of Applicable Law, and shall use commercially reasonable efforts to
obtain any such required consents, upon terms substantially similar to those
enjoyed by the Seller or its Subsidiaries under such Assumed Contract or
Permit, prior to the Closing Date. To the extent that Applicable Law does not
permit the Seller or its Subsidiaries to assign any Assumed Contract that would
otherwise constitute a Purchased Asset, the Seller or its Subsidiary that is a
party to such Contract shall (i) provide to the Buyer, at the request of the
Buyer, the benefits of any such Contract, and (ii) enforce and perform, at the
request and reasonable expense of the Buyer and to the extent commercially
reasonable, for the account of the Buyer, any rights or obligations of the
Seller or its Subsidiaries arising from any such Contract against or in respect
of any third party, including the right to elect to terminate any Contract in
accordance with the terms thereof upon the advice of the Buyer, or otherwise
enter into with the Buyer such other reasonable arrangements sufficient to
provide equivalent benefits and burdens to the Buyer; provided that the Buyer
shall reimburse the Seller or its Subsidiaries for reasonable out-of-pocket
expenses incurred by the Seller or its Subsidiaries in connection with entering
into any such other arrangement. The Buyer shall, to the extent permitted by
Applicable Law, perform and fulfill on a subcontractor basis or otherwise the
obligations of the Seller and its Subsidiaries pursuant to the preceding
sentence.

(c) Notwithstanding anything in this Agreement to the contrary, the Buyer
shall not assume, and the Seller shall be responsible for the payment,
satisfaction, performance and discharge of all liabilities, obligations,
claims, demands, expenses, damages or responsibilities of the Seller or any of
its Subsidiaries other than the Assumed Liabilities, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due
(collectively, the "Retained Liabilities").

SECTION 1.03. Payment of Purchase Price. At the Closing, the Buyer shall
deliver to the Seller US $16,700,000 (Sixteen Million Seven Hundred Thousand
Dollars) (the "Closing Payment") in immediately available funds by wire
transfer to an account or accounts designated by the Seller.

SECTION 1.04. Allocation of Purchase Price. Promptly following the Closing,
the amount of the Purchase Price plus all Assumed Liabilities shall be
allocated by the parties in accordance with Section 1060 of the Code. Neither
the Seller nor the Buyer shall take any position on any return, declaration,
report or information return or statement relating to Taxes inconsistent with
such allocation, unless so required by Applicable Law or as a result of the
application of Section 1.06(g). Notwithstanding any other provision of this
Agreement, the agreement reached by the Seller and the Buyer pursuant to this
Section 1.04 shall survive indefinitely.

A-5

SECTION 1.05. Further Assurances.

(a) At the Closing and from time to time after the Closing, at the
reasonable request of the Buyer and without further consideration, the Seller
shall promptly execute and deliver, or cause its Subsidiaries to promptly
execute and deliver, to the Buyer such agreements, certificates and other
instruments of sale, conveyance, assignment and transfer, and take such other
action, as may be reasonably requested by the Buyer (i) more effectively to
sell, convey, assign and transfer to and vest in the Buyer (or to put the Buyer
in possession of) any of the Purchased Assets or (ii) to assist the Buyer in
registering the Buyer's rights in the Intellectual Property with the
appropriate Governmental Entities in any jurisdiction as may be requested by
the Buyer. In addition, at the Closing and from time to time after the Closing,
at the reasonable request of the Buyer and without further consideration, the
Seller shall take, or cause to be taken, all actions, and do, or cause to be
done, and assist and cooperate with the Buyer in doing, all things necessary,
proper or advisable in connection with the preparation and filing with the
appropriate Governmental Entities of all documents required to be prepared and
filed in connection with the transfer of the Permits and the Product
Registrations to the Buyer pursuant to this Agreement.

(b) Notwithstanding anything in this Agreement to the contrary, but subject
to the final sentence of Section 1.05(a), neither the Seller nor any of its
Affiliates shall be responsible for or obligated to undertake the provision of
any notice or other correspondence, the submission of any application, form,
listing registration or any amendment, modification or supplement thereto or
the taking of any action by the Buyer, the Parent or any of their respective
Affiliates necessary, proper or advisable for the Buyer to make use or enjoy
the benefits, privileges and rights associated with, or to own, the Purchased
Assets, including without limitation, the Products and the Permits, nor shall
any of the Seller or its Affiliates be liable for any failure by the Buyer, the
Parent or any of their respective Affiliates to so provide, submit or otherwise
act or for any consequences associated with any failure to so provide, submit
or otherwise act.

SECTION 1.06. Post Closing Adjustment.

(a) Preliminary Statement of Working Capital. On or prior to the date which
is ninety (90) days after the Closing Date, the Seller shall cause its
independent accountants, KPMG LLP, to prepare a statement (which shall have
been prepared pursuant to audit-like procedures) of the items comprising the
Net Working Capital of the Pet Business (the "Preliminary Statement of Working
Capital") setting forth (i) the Current Assets and Current Liabilities of the
Pet Business and (ii) the Net Working Capital of the Pet Business, in each case
as of 11:59 p.m. (Eastern Time) on the date immediately preceding the Closing
Date. For purposes of this Agreement, (A) "Current Assets" shall mean the
current assets of the Pet Business that are included in the Purchased Assets,
as determined in accordance with United States Generally Accepted Accounting
Principles ("U.S. GAAP") (consistently applied with the preparation of the
Unaudited Financial Statements, except as set forth on Schedule 1.06(a))
including the aggregate of Inventory (net of reserves) and accounts receivable
(net of reserves) and (B) "Current Liabilities" shall mean the current
liabilities of the Pet Business other than Retained Liabilities, as determined
in accordance with U.S. GAAP (consistently applied with the preparation of the
Unaudited Financial Statements, except as set forth on Schedule 1.06(a))
including accounts payable and accrued payroll and other accrued expenses,
and (C) "Net Working Capital" shall mean Current Assets minus Current
Liabilities. The Preliminary Statement of Working Capital shall be prepared in
accordance with U.S. GAAP applied on a basis consistent with those applied by
the Seller in connection with the Pet Business prior to the Closing Date
(except as set forth on Schedule 1.06(a)) and shall reflect the results of the
physical inventory count to be performed by or on behalf of the Buyer within
seven (7) Business Days after the Closing Date. The parties acknowledge and
agree that for purposes of determining Net Working Capital, (i) the cost of
inbound freight and outbound freight shall be included in Inventory, (ii)
overhead costs are calculated based upon the number of units sold, rather than
the number of units produced, consistent with the Seller's past practice since
January 1, 2002 and (iii) the percentage of the amount of reserves for
Inventory (such percentage to be computed by comparing the dollar amount of
Inventory reserves to the dollar amount of Inventory) shall be at least 95% of
the amount of the percentage of the amount of such Inventory reserves on the
Reference Balance Sheet (such percentage to be

A-6

computed by comparing the dollar amount of the Inventory reserves to the dollar
amount of Inventory on the Reference Balance Sheet), but determined without
regard to reserves for items fully reserved for on the Reference Balance Sheet
that are not included in Current Assets on the Preliminary Statement of Working
Capital.

(b) Review of Preliminary Statement of Working Capital. On or prior to the
date on which the Preliminary Statement of Working Capital is due (as
contemplated by Section 1.06(a)), the Seller shall deliver to the Buyer the
Preliminary Statement of Working Capital. The Buyer and its independent
accountants, Grant Thornton LLP ("Buyer's Accountants"), may review the
Preliminary Statement of Working Capital and in such review may make inquiry of
the Seller and with prior notice to the Seller, its representatives, including
KPMG LLP. The Seller will make available to the Buyer and to the Buyer's
Accountants and their respective representatives, all books and records owned
by the Seller relating to the Preliminary Statement of Working Capital
reasonably necessary in connection with their review thereof (excluding the
work papers of KPMG LLP to the extent not permitted by KPMG LLP). All such
books and records and the contents thereof shall be deemed to be Confidential
Material for purposes of the Confidentiality Agreement. The Preliminary
Statement of Working Capital shall be binding and conclusive upon, and deemed
accepted by, the Buyer unless the Buyer shall have notified the Seller in
writing of any objections thereto consistent with the provisions of this
Section 1.06 within forty-five (45) days after the Buyer's receipt thereof,
which notice shall specify in reasonable detail each item on the Preliminary
Statement of Working Capital that the Seller disputes and the basis for such
dispute (such written notice, an "Objection Notice"). All items in the
Preliminary Statement of Working Capital not disputed in the Objection Notice
in the manner described in the preceding sentence shall be deemed binding and
conclusive and accepted by the Buyer.

(c) Disputes. Disputes between the Buyer and the Seller relating to the
Preliminary Statement of Working Capital that cannot be resolved by the Buyer
and the Seller within sixty (60) days after receipt by the Seller of the
Objection Notice may be referred thereafter for a written decision at the
request of either the Buyer or the Seller to a single partner of Deloitte &
Touche LLP or at such other accounting firm as may be agreed to by both the
Buyer and the Seller (the "Arbiter"). Promptly, but no later than ninety (90)
days after its acceptance of its appointment as Arbiter, such Arbiter shall
determine, based on presentations by the Buyer and the Seller, and, to the
extent the Arbiter deems necessary, by independent review, those items in
dispute on the Preliminary Statement of Working Capital and shall render a
written report as to the resolution of each dispute and the resulting
calculation of the Final Statement of Working Capital. The Arbiter shall have
exclusive jurisdiction over, and resort to the Arbiter as provided in this
Section 1.06(c) shall be the sole recourse and remedy of the parties against
one another or any other Person with respect to, any disputes arising out of or
relating to the Preliminary Statement of Working Capital; and the Arbiter's
determination shall be conclusive and binding on all of the parties hereto and
shall be enforceable in a court of law. The Arbiter shall have the authority to
determine only that an item in dispute on the Preliminary Statement of Working
Capital shall be different from that set forth in the Preliminary Statement of
Working Capital to the extent (i) that, except to the extent provided in
Schedule 1.06(a), (A) the item was not prepared or included in accordance with
U.S. GAAP, or (B) if the item was prepared or included in accordance with U.S.
GAAP, that U.S. GAAP was not applied on a basis consistent with that applied by
the Seller in connection with the preparation of the Reference Balance Sheet,
or (ii) that the item shall not comply with the final sentence of Section
1.06(a) (in the case of which, the Arbiter shall make a determination with
respect to such item solely as provided in such final sentence). The fees of
the Arbiter shall be borne fifty percent (50%) by the Seller and fifty percent
(50%) by the Buyer.

(d) Final Statement of Working Capital. The Preliminary Statement of
Working Capital shall become final and binding upon the parties hereto upon the
earliest of (i) the failure by the Buyer to object thereto within the period
permitted under, and otherwise in accordance with the requirements of, Section
1.06(b), (ii) the written agreement between the Buyer and the Seller with
respect thereto and (iii) the decision by the Arbiter with respect to disputes
under Section 1.06(c). The Preliminary Statement of Working Capital, as
adjusted pursuant to the written agreement of the parties hereto or the
decision of the Arbiter, when final and binding, is referred to herein as the
"Final Statement of Working Capital".

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(e) Adjustments to Purchase Price. As soon as practicable (but not more
than five (5) Business Days) after the determination of the Final Statement of
Working Capital in accordance with this Section 1.06:

(i) subject to Section 1.06(f), there shall be an immediate downward
adjustment in the Purchase Price equal to the excess, if any, of (A)
$3,174,000 over (B) the Net Working Capital of the Pet Business as set forth
on the Final Statement of Working Capital, in which case the Seller shall
immediately pay to the Buyer in United States Dollars an amount equal to
such adjustment in immediately available funds by wire transfer to an
account or accounts designated by the Buyer;

(ii) subject to Section 1.06(f), there shall be an immediate upward
adjustment to the Purchase Price equal to the excess, if any, of (A) the Net
Working Capital of the Pet Business as set forth on the Final Statement of
Working Capital over (B) $3,174,000 in which case the Buyer shall
immediately pay to the Seller in United States Dollars an amount equal to
such adjustment in immediately available funds by wire transfer to an
account or accounts designated by the Seller.

(f) Minimum Adjustment. Any adjustment to Purchase Price provided for in
this section is hereinafter referred to as the "Purchase Price Adjustment".
Notwithstanding the foregoing in Section 1.06(e), no Purchase Price Adjustment
shall be made by either party unless the amount of such Purchase Price
Adjustment is equal to or greater than $75,000 and then only to the extent of
such excess.

(g) Allocation of Adjustment to Purchase Price. The Buyer and the Seller
shall agree as to the adjustment to the allocation determined in accordance
with Section 1.04 occasioned by any adjustment to the Purchase Price pursuant
to this Section 1.06. Subject to the foregoing, for purposes of such adjustment
to the allocation (i) any adjustment to the value of any Purchased Asset
pursuant to this Section 1.06 shall give rise to a corresponding adjustment to
the allocation to such asset and (ii) any adjustment to the amount of any
Assumed Liability shall give rise to a corresponding adjustment to the
allocation to the goodwill of the Pet Business.

ARTICLE II

CLOSING

SECTION 2.01. Closing, Date. The closing of the transaction contemplated
hereby (the "Closing") shall take place at the offices of Bingham Dana LLP, 150
Federal Street, Boston, Massachusetts, as soon as practicable, but in no event
later than five (5) Business Days after satisfaction (or waiver) of the
conditions set forth in Article VII (except for the conditions which by their
terms are to be satisfied at or immediately prior to the Closing) or such other
time or date as the Buyer and the Seller agree in writing. The time and date
upon which the Closing occurs is herein referred to as the "Closing Date". The
Closing shall be deemed effective as of the opening of business on the Closing
Date.

SECTION 2.02. Instruments of Conveyance, Transfer, Assumption, Etc.

(a) The Seller shall execute and deliver, or cause its Subsidiaries,
mortgagees or lessees, as appropriate, to execute and deliver, to the Buyer at
the Closing:

(i) the Bill of Sale, the Assignment of Trademarks and such other
instruments of conveyance as the Buyer may reasonably request in order to
effect the sale of the Purchased Assets contemplated hereby;

(ii) a receipt for the Purchase Price;

(iii) the Technology Rights Agreement;

(iv) the Supply Agreement;

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(v) an affidavit, sworn to under penalty of perjury, setting forth
Seller's name, address and federal tax identification number and stating
that the Seller is not a "foreign person" within the meaning of Section 1445
of the Internal Revenue Code of 1986, as amended, and the decisions,
regulations and rulings pertaining thereto (the "Code");

(vi) such other documents and certificates as may be required to evidence
the Seller's or its Subsidiaries' authority, and the authority of the person
or persons executing documents on behalf of the Seller or its Subsidiaries,
to consummate the transactions contemplated by this Agreement;

(vii) a certificate of the Secretary of the Seller and each of its
Subsidiaries certifying that the resolutions adopted by the Seller's or its
Subsidiaries' Board of Directors attached thereto were duly and validly
adopted and are in full force and effect;

(viii) a certificate of the Secretary of each of the Seller and its
Subsidiaries as to the incumbency of certain of such Seller's or
Subsidiaries' officers and certifying that the copies the Seller's or its
Subsidiaries' Charter and bylaws attached thereto are true and correct;

(ix) each of the certificates and other documents contemplated by Section
7.02 hereof; and

(x) such other agreements, certificates and other instruments required to
be delivered by the Seller or its Subsidiaries under this Agreement or any
of the other Transaction Agreements or as the Buyer or its counsel may
reasonably request to consummate the transactions contemplated by this
Agreement or the other Transaction Agreements.

(b) The Buyer shall execute and deliver to the Seller at the Closing:

(i) by wire transfer in immediately available funds to the account or
accounts designated by the Seller, the Closing Payment;

(ii) the Instrument of Assignment and Assumption and such other
instruments as the Seller may reasonably request in order to effect the
assumption by the Buyer of the Assumed Liabilities;

(iii) a receipt for the Bill of Sale and the other instruments of
conveyance described in Section 2.02(i);

(iv) the Technology Rights Agreement;

(v) the Supply Agreement;

(vi) a certificate of the Secretary of each of the Buyer and the Parent
certifying that the resolutions adopted by the Buyer's and the Parent's
Boards of Directors attached thereto were duly and validly adopted and are
in full force and effect;

(vii) a certificate of the Secretary of each of the Buyer and the Parent
as to the incumbency of certain officers of the Buyer and the Parent
certifying that the copies of the Buyer's and the Parent's Charter and
bylaws, as the case may be, attached thereto are true and correct;

(viii) each of the certificates and other documents contemplated by
Section 7.03 hereof, and

(ix) such other agreements, certificates and other instruments required
to be delivered by the Buyer under this Agreement or any of the other
Transaction Agreements, or as the Seller or its counsel may reasonably
request to carry out the purpose of this Agreement or the other Transaction
Agreements.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE SELLER

The Seller represents and warrants to the Buyer that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule provided by the Seller to the Buyer on the date hereof (the
"Disclosure Schedules"). The disclosures in any section, subsection, schedule
or subschedule of the Disclosure Schedule shall (notwithstanding any specific
schedule references in this Article III) qualify and apply to any and all other
sections, subsections, schedules and subschedules of the Disclosure Schedule,
unless a reasonable person would determine that the disclosure contained in
such section, subsection, schedule or subschedule could not qualify or apply to
any such other sections, subsections, schedules and subschedules of the
Disclosure Schedule. For purposes of this Agreement, the phrase "to the
knowledge of the Seller", "a matter of the Seller's knowledge" or any phrase of
similar import shall refer to the actual knowledge of John Ambrose, Domenic
Golato, Howard Kimball or Richard Mixon, after review of this Article III and
the Disclosure Schedules and, as to each such person, such records relating to
the Pet Business as he maintains or reviews in the normal course of his duties
as an employee of the Seller or any of its Subsidiaries.

SECTION 3.01. Organization, Standing and Power. The Seller and each of its
Subsidiaries conducting operations in the Pet Business is duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized (which jurisdiction is listed opposite the Seller's or
its Subsidiaries' name on Schedule 3.01 of the Disclosure Schedules) and has
full corporate power and authority to enable it to own, lease or otherwise hold
its properties and assets and to conduct its businesses as presently conducted.
Schedule 3.01 contains a complete list of all Subsidiaries conducting
operations in the Pet Business and the address of all principal executive
offices maintained by the Seller and its Subsidiaries during the last five (5)
years.

SECTION 3.02. Authority, Execution and Delivery; Enforceability. Except for
the approval by the Required Stockholder Vote of the Seller's stockholders of
the sale of assets contemplated by this Agreement, (a) the Seller and each of
its Subsidiaries has all requisite corporate power and authority to execute
this Agreement and each of the other Transaction Agreements to which the Seller
and/or its Subsidiaries is (or will be) a party, and to consummate the
transactions contemplated hereby and thereby, (b) the execution and delivery by
the Seller of this Agreement and the execution by the Seller and/or its
Subsidiaries of each of the other Transaction Agreements to which the Seller
and/or its Subsidiaries are (or will be) a party, and the consummation by the
Seller and each such Subsidiary of the transactions contemplated hereby and
thereby, has been duly authorized by all necessary corporate action on the part
of the Seller and each such Subsidiary, (c) the Seller has duly executed and
delivered this Agreement, and (d) this Agreement and the other Transaction
Agreements constitute or will constitute, as the case may be, valid and binding
obligations of the Seller and/or its Subsidiaries, enforceable against the
Seller and/or its Subsidiaries in accordance with their respective terms.

SECTION 3.03. No Conflicts; Consents. Except as set forth in Schedule 3.03
of the Disclosure Schedules, the execution and delivery by the Seller of this
Agreement, and by the Seller and each of its Subsidiaries of each of the other
Transaction Agreements to which the Seller or each such Subsidiary is (or will
be) a party, does not, and the consummation of any transaction and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a benefit under, or to increased, additional,
accelerated or guaranteed rights or entitlements of any Person under, or result
in the creation of any Lien or Encumbrance upon any of the Purchased Assets
under, any provision of (i) the Seller's or any of its Subsidiaries' Charter or
bylaws, (ii) any material Assumed Contract or material contract, lease,
license, indenture, mortgage, note, bond, agreement, permit, concession,
franchise or other instrument to which any of the Purchased Assets is bound or
(iii) except to the extent it would not individually or in the aggregate have a
Material Adverse Effect on the Pet Business as conducted by the Seller on the
date hereof, (A) any judgment, order, injunction, award, decree or writ
("Judgment"), (B) any federal, state, local or foreign statute, law (including,
common law), code, ordinance, rule or regulation enacted, adopted, issued or
promulgated by any

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Governmental Entity ("Applicable Law") applicable to the Seller or any of its
Subsidiaries, the Pet Business or any of the Purchased Assets or (C) any
written request of any Governmental Entity. Except to the extent it would not
individually or in the aggregate have a Material Adverse Effect on the Pet
Business as conducted by the Seller on the date hereof, no consent, approval,
license, permit, order or authorization ("Consent") of, or registration,
declaration or filing with, or notice to ("Filing"), any federal, state, local
or foreign government or any court of competent jurisdiction, administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign, including, without limitation, the FDA (a "Governmental
Entity") or any Person party to any Assumed Contract or other issuer of any
Permit, is required to be obtained or made by or with respect to the Seller or
any of its Subsidiaries in connection with the execution, delivery and
performance of any transaction contemplated by this Agreement or any other
Transaction Agreements.

SECTION 3.04. Financial Statements; Undisclosed Liabilities.

(a) Footnotes 17, 17 and 19 of the Financial Statements for the fiscal years
ended December 31, 1998, 1999 and 2000, respectively, fairly present in
accordance with U.S. GAAP consistently applied throughout the periods indicated
(and when reviewed as a part of, and with reference to, the Financial
Statements), the revenues, operating profit (loss), depreciation and
amortization, identifiable assets and capital expenditures of the Pet Business
for the periods then ended.

(b) Set forth on Schedule 3.04 of the Disclosure Schedules are the following
additional financial statements of the Seller (the "Unaudited Financial
Statements"): (i) unaudited statement of profit and loss of the Pet Business
for the fiscal years ended December 31, 1998, 1999 and 2000, (ii) unaudited
statement of profit and loss of the Pet Business for the 11 months ended
November 30, 2001, (iii) unaudited balance sheet of the Pet Business at
December 31, 2000 and (iv) unaudited balance sheet (the "Reference Balance
Sheet") of the Pet Business at November 30, 2001. The Unaudited Financial
Statements were prepared from the accounting books and records of Seller and
Seller's Subsidiaries used as a basis for the preparation of Seller's
consolidated financial statements and present fairly in all material respects
the net revenues, cost of goods sold, total cost of sales, gross profit,
selling and marketing expenses, operating profit (loss), and income (loss) from
continuous operations and, in the case of the Reference Balance Sheet, the
Current Assets and Current Liabilities, of the Pet Business at the respective
dates set forth therein, in each case in accordance with U.S. GAAP consistently
applied, except as set forth in Schedule 3.04, as disclosed therein and as may
be customary in the presentation of interim financial statements and segment
reporting (including, without limitation, the absence of footnotes and being
subject to year end adjustment). The reserve for accounts receivable set forth
in the Reference Balance Sheet includes a reserve for product returns at
November 30, 2001 and such reserve for product returns was prepared in
accordance with U.S. GAAP consistently applied.

(c) There are no liabilities, debts, obligations or claims relating to the
Pet Business absolute or contingent, except (i) as and to the extent reflected
or reserved against of any nature, on the Reference Balance Sheet; (ii) as to
and to the extent set forth in the Disclosure Schedule and which a reasonable
person would determine could apply to this paragraph; (iii) incurred since the
date of the Reference Balance Sheet in the ordinary course of business
consistent with prior practice; (iv) open purchase or sales orders or
agreements for delivery of goods and services in the ordinary course of
business consistent with prior practice, provided that, as of the Closing Date,
neither the Seller nor any Subsidiary shall be in default thereunder; (v)
liabilities, debts, obligations and claims (other than those relating to Taxes,
Indebtedness, violations of Applicable Laws, including Environmental Laws, the
Excluded Assets or the Retained Liabilities) which do not exceed $100,000 in
the aggregate; and (vi) under the Assumed Contracts.

SECTION 3.05. Absence of Certain Changes or Events. Since November 30, 2001
there has not been any:

(a) Material Adverse Effect;

(b) except as set forth in Schedule 3.05(b) of the Disclosure Schedules,
change in accounting methods, principles or practices by the Seller or any
of its Subsidiaries (other than pursuant to a change in U.S. GAAP

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or a statement of any appropriate accounting authority) materially affecting
the Purchased Assets, liabilities or results of operations of the Pet
Business;

(d) sale, lease, license or other disposition of, or subjecting to any
Lien or Encumbrance of any material Intellectual Property or, except in the
ordinary course of business consistent with past practice, any material
sale, lease, license or other disposition of, or subjecting to any Lien or
Encumbrance any other Purchased Assets;

(e) acquisition or agreement to acquire any assets for use in connection
with the Pet Business that are material, individually or in the aggregate,
to the Pet Business, except purchases of Inventory or other assets in the
ordinary course of business consistent with past practice;

(f) (i) waiver by the Seller or any of its Subsidiaries of any material
claims or rights related to the Pet Business and included in the Purchased
Assets or (ii) waiver of any material benefits of, or agreement to modify in
any material manner, any confidentiality, standstill or similar agreement to
which the Seller or any its Subsidiaries is a party and relating to any of
the Products, the Purchased Assets or the Pet Business;

(g) termination (other than by lapse of time) or failure to renew any
material Assumed Contract, or termination or failure to renew, or receipt of
any written threat (that was not subsequently withdrawn) to terminate or
fail to renew, any material Permit; or

(h) any damage, destruction or loss, whether or not covered by insurance,
adversely affecting, either in any case or in the aggregate, any Purchased
Asset or the Pet Business which had, individually or in the aggregate, a
Material Adverse Effect.

SECTION 3.06. Taxes. Except as set forth in Schedule 3.06 of the Disclosure
Schedules,

(a) For purposes of this Agreement, (i) "Tax" or "Taxes" shall mean all
federal, state, local, provincial and foreign taxes and similar assessments,
including all interest, penalties and additions imposed with respect to such
amounts; (ii) "Pre-Closing Tax Period" shall mean all taxable periods ending on
or before the Closing Date and the portion of any taxable period prior to the
Closing Date of any taxable period that includes (but does not end on) the
Closing Date and (iii) "Returns" shall mean returns, reports or forms,
including information returns filed or required to be filed with a taxing
authority.

(b) The Seller or its Subsidiaries has timely paid or accrued or has caused
to be timely paid or accrued all Taxes relating to the Pet Business and each of
the Purchased Assets shown to be due on any Tax Return. No Tax Liens have been
filed and remain outstanding with respect to the Pet Business or any of the
Purchased Assets, and no claims are being asserted in a writing received by the
Seller or any its Subsidiaries with respect to any such Taxes.

(c) Neither the Seller nor any of its Subsidiaries is bound by any agreement
with respect to Taxes relating to the Pet Business or any of the Purchased
Assets.

(d) During the immediately preceding three (3) full years, with respect to
the Pet Business and the Purchased Assets, there have not been (i) any Tax
audits of the Seller by any Tax authority and, to the knowledge of the Seller,
the Seller has not received any notice that any such audit will be commenced or
(ii) any rulings by any Tax authority requested by or issued to the Seller.

SECTION 3.07. Workers' Injuries. Except as set forth in Schedule 3.07 of
the Disclosure Schedules, there has not been during the past three (3) years,
any actual or, to the knowledge of the Seller, threatened claims in writing of
Transferred Employees for compensation for any material injury, disability or
illness arising out of or relating to their employment by the Seller or any its
Subsidiaries in connection with the Pet Business.

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SECTION 3.08. Litigation. There is (i) no material outstanding Judgment of
any Governmental Entity against the Seller or any of its Subsidiaries relating
to the Pet Business or any of the Purchased Assets, (ii) no suit, action,
claim, dispute or legal, governmental, administrative, arbitration or
regulatory proceeding ("Proceeding") pending or, to the knowledge of the
Seller, threatened in writing against the Seller or any of its Subsidiaries
relating to the Pet Business or any of the Purchased Assets, and (iii) no
investigation by any Governmental Entity pending or, to the knowledge of the
Seller, threatened in writing against the Seller or any of its Subsidiaries
relating to the Pet Business or any of the Purchased Assets. None of the items
set forth in Schedule 3.08 of the Disclosure Schedules, if adversely determined
against the Seller or any or its Subsidiaries, would be material to the Pet
Business or any of the Purchased Assets or adversely affect the ability of the
Seller or any its Subsidiaries to consummate the transactions contemplated by
this Agreement or any of the other Transaction Agreements.

SECTION 3.09. Compliance with Applicable Laws. Except as set forth in
Schedule 3.09 of the Disclosure Schedules, to the Seller's knowledge, the Pet
Business is (and during the past three (3) years has been) conducted in
material compliance with all Applicable Laws. Neither the Seller nor any of its
Subsidiaries has received any written communication during the past three (3)
years from a Governmental Entity that alleges that the Pet Business is not
conducted in material compliance with any Applicable Law. This Section 3.09
does not relate to matters with respect to Taxes or Environmental Laws.

SECTION 3.10. Environmental Matters.

(a) Except as set forth on Schedule 3.10:

(i) to the best of Seller's knowledge, neither the Seller nor any of its
Subsidiaries is in violation or alleged violation of any judgment, decree,
order, license, rule or regulation issued, entered, promulgated and/or
authorized by any Governmental Entity under, pursuant to and/or otherwise by
operation of any applicable Environmental Laws with respect exclusively to
the Plant and/or to its operations of the Pet Business at any time prior to
the date of this Agreement;

(ii) to the best of Seller's knowledge, neither the Seller nor any of its
Subsidiaries have received actual written notice from any third party
providing, (A) that the Seller or any of its Subsidiaries has been
identified and/or named by the United States Environmental Protection Agency
("EPA") as a potentially responsible party ("PRP") under CERCLA with respect
to a site listed on the National Priorities List, 40 C.F.R. Part 300
Appendix B (1986) as amended, or (B) that any Hazardous Substances
generated, transported and/or disposed of by the Seller or any of its
Subsidiaries on or at the Plant or otherwise exclusively in connection with
its operations of the Pet Business at any time prior to the date of this
Agreement have been specifically identified, located and/or found to exist
at any site which is and/or has been the subject of any remedial
investigation, removal or other response action pursuant to the requirements
and/or mandates of any Environmental Laws;

(iii) to the best of Seller's knowledge, neither the Seller nor any of
its Subsidiaries have actually been or overtly been threatened in writing to
be named as a party to any legal and/or administrative claim, lawsuit,
action, cause of action, complaint and/or proceeding instituted, commenced
and/or otherwise asserted by any third party seeking to recover from the
Seller or any of its Subsidiaries costs, expenses, losses or damages of any
kind whatsoever allegedly incurred and/or sustained by such third party as a
proximate result of Seller's or any of its Subsidiaries' release of
Hazardous Substances generated, handled, stored, treated, transported and/or
disposed of on or at the Plant and/or otherwise exclusively in connection
with its operations of the Pet Business at any time prior to the date of
this Agreement;

(iv) to the best of Seller's knowledge, neither Seller nor any of its
Subsidiaries has used any portion of the Plant for the handling,
manufacturing, processing, storage or disposal of Hazardous Substances,
except in accordance with and as permitted by applicable Environmental Laws;

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(v) to the best of Seller's knowledge, there are no underground storage
tanks or other underground storage receptacles formerly or presently used
for the storage of any Hazardous Substances located on or at the Plant;

(vi) to the best of Seller's knowledge, no actionable contamination
levels of any Hazardous Substances regulated under applicable Environmental
Laws are present on or at the Plant, including without limitation, the
groundwater, surface water, soil and subsurface thereof, except in each case
to the extent that the presence of any such Hazardous Substances thereon
does not violate any applicable Environmental Laws;

(vii) to the best of Seller's knowledge, there have been no actual
releases (i.e., spills, leaks, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, disposing or dumping) in actionable level
amounts of any Hazardous Substances on, upon, into, at or from the Plant,
except in accordance with and/or as otherwise permitted by applicable
Environmental Laws;

(viii) to the best of Seller's knowledge, any Hazardous Substances that
have been used, handled, generated and/or stored by the Seller or any of its
Subsidiaries on or at the Plant or otherwise exclusively in conjunction with
its operations of the Pet Business at any time prior to the date of this
Agreement have to the extent required by applicable Environmental Laws been
transported offsite by independent, third-party haulers and/or carriers
retained by Seller or its Subsidiaries, each of which such hauler and/or
carrier having represented to Seller or its Subsidiaries that it was fully
authorized and licensed by any and all necessary Governmental Entities in
compliance with all applicable Environmental Laws to transport any and all
such Hazardous Substances, to facilities for treatment and/or disposal, each
of which such treatment and/or disposal facility having been represented to
Seller or its Subsidiaries to be fully authorized and licensed by any and
all necessary Governmental Entities in compliance with all applicable
Environmental Laws to treat and/or dispose of any and all such Hazardous
Substances;

(ix) to the best of Seller's knowledge, except as set forth in Section
6.21 of this Agreement, the transactions set forth and to be made in
accordance with the terms of this Agreement do not subject the Plant to,
trigger and/or otherwise require compliance with any Environmental Laws
regulating the performance of remedial actions and imposing other
responsibilities in conjunction with the transfer of real property and/or
sale, transfer or closure of an industrial establishment or other commercial
enterprise.

(b) The Seller and its Subsidiaries have furnished to or made available for
inspection by the Buyer or its attorneys, accountants, consultants or other
representatives, complete and accurate copies of all known documents in the
Seller's or its Subsidiaries' custody, control or possession which contain any
material information with respect to environmental liabilities associated with
the environmental condition of and/or compliance with Environmental Laws
applicable to the Plant and/or its operations of the Pet Business at any time
prior to the date of this Agreement.

SECTION 3.11. Intellectual Property.

(a) Schedule 3.11(a) of the Disclosure Schedules sets forth a true and
complete list of all material registered Intellectual Property. Notwithstanding
anything to the contrary in this Agreement, the term "Intellectual Property"
shall not include the Novasome Technology. For purposes of this Agreement, the
term "Intellectual Property" means all patents, design patents, trademarks,
trade names, domain names, Internet web sites, service marks, common law marks,
trade dress and copyrights and applications therefor, royalty rights and other
intellectual property and proprietary rights, whether or not subject to
statutory registration or protection, owned, used, filed by or licensed to the
Seller and any of its Subsidiaries that relate solely to the Products or any
other Purchased Asset or the Pet Business. With respect to such material
registered Intellectual Property, Schedule 3.11(a) sets forth a true and
correct list of all jurisdictions in which such are registered or applied for,
classifications for all trademarks, service marks and trade names, registration
and application numbers, registration dates, expiration dates and the
registered owners thereof. The Seller or its Subsidiaries own, and have the
right to use, execute, reproduce, display, perform, modify, enhance,
distribute, prepare derivative works of

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and sublicense, free and clear of any pledges, liens, charges, encumbrances,
usufructs, defects in title, security interests and options, without payment of
any kind to any other Person, all Technology and all Intellectual Property and
the consummation of any transaction contemplated hereby or by any of the other
Transaction Agreements will not conflict with, alter or impair any such rights,
except to the extent such rights are transferred to the Buyer as provided in
the Transactions Agreements. All items of Intellectual Property set forth on
Schedule 3.11 are valid and in full force and effect, have not been abandoned
or terminated, all renewals due through the Closing Date have been filed and
are not subject to any pending cancellation or reexamination Proceeding or any
other Proceeding challenging their extent or validity. The Seller or its
Subsidiaries have all rights to the Intellectual Property as are necessary in
connection with the conduct of the Pet Business as presently conducted.

(b) Neither the Seller nor its Subsidiaries own or have rights in any
trademark, trade name, domain name, Internet web site or service mark that is
not part of the Purchased Assets that is confusingly similar to those set forth
on Schedule 3.11(a) of the Disclosure Schedules.

(c) Neither the Seller nor its Subsidiaries is bound by or a party to any
agreement, contract, lease, option, license, commitment, instrument or any
other binding obligation or arrangement (oral or written) relating to the
Intellectual Property or the Technology (the "Intellectual Property
Contracts"). The Seller and its Subsidiaries (i) own all Intellectual Property
and Technology free and clear of any claims of others and of all Liens (other
than the Intellectual Property and Technology that is used pursuant to any
Intellectual Property Contract set forth in Schedule 3.11(c) of the Disclosure
Schedules) and (ii) have the legal right to use all of the Intellectual
Property and Technology that is used pursuant to an Intellectual Property
Contract set forth in Schedule 3.11(c) of the Disclosure Schedules. The Seller
and its Subsidiaries have paid all material required filing and registration
fees in connection with the Intellectual Property and the Technology. To the
Seller's knowledge, none of the Intellectual Property or Technology violates,
conflicts with or infringes any patents, design patents, trademarks, trade
names, service marks, common law marks, domain names, trade dress, industrial
property and copyrights and any other Intellectual Property rights and
applications therefor of any other Person. Except as set forth in Schedule
3.11(c) of the Disclosure Schedules, (i) no claims are pending or, to the
knowledge of the Seller or any of its Subsidiaries, threatened, against the
Seller by any Person with respect to the ownership, validity, enforceability,
effectiveness or use of any Intellectual Property or Technology and (ii) during
the past three (3) years, neither the Seller nor any of its Subsidiaries has
received any written communications alleging that the Seller or any of its
Subsidiaries has violated any rights relating to any patents, design patents,
trademarks, trade names, service marks, common law marks, domain names, trade
dress, industrial property and copyrights and any other Intellectual Property
rights and applications therefor of any Person or asserting any infringement,
dilution, unfair competition or conflict with the asserted rights of any other
Person in connection with the use by any of the Seller or any of its
Subsidiaries of any of the Intellectual Property or Technology.

(d) Except with respect to the Novasome Technology, the Seller or any of its
Subsidiaries are the applicant of record in all pending patent applications and
applications for trademark, trade name, service mark or copyright registration
related to the Pet Business and no written action of opposition or interference
or final refusal has been received by the Seller or any of its Subsidiaries in
connection with any such application. Neither Seller nor any of its
Subsidiaries is a party to or bound by any Contract or Judgment which limits
the use by the Seller of any of the Intellectual Property or Technology (other
than the Intellectual Property and Technology used pursuant to any Intellectual
Property Contract set forth in Schedule 3.11(d)).

(e) The Intellectual Property and the Technology has been maintained in
confidence in accordance with protection procedures customarily used in the
industries of the Seller and each of its Subsidiaries to protect rights of like
importance. To the Seller's knowledge, no former or current officer or other
employee of the Seller or any of its Subsidiaries has any claim against the
Seller or any of its Subsidiaries in connection with such Person's involvement
in the conception and development of any Intellectual Property or Technology
and no such claim has been asserted or is threatened. None of the current
officers and employees of the Seller or any of its

A-15

Subsidiaries have any patents issued or applications pending for any device,
process, design or invention of any kind now used by the Pet Business, which
patents or applications have not been assigned to the Seller or its
Subsidiaries.

SECTION 3.12. Contracts.

(a) Complete and correct copies of each of the Assumed Contracts other than
purchase orders from suppliers and customers have been made available to the
Buyer. None of the Assumed Contracts constitutes an agreement, contract, lease,
option, license, commitment, instrument or any other binding obligation or
arrangement (oral or written) by or to which the Pet Business, any of the
Purchased Assets or the Products are bound or subject and which are material to
the conduct of the Pet Business (collectively, the "Contracts") which is a
contract with any Affiliate of the Seller or any of its Subsidiaries or any
director, officer, stockholder or employee of the Seller or any of its
Subsidiaries.

(b) Each of the Assumed Contracts is a valid and binding obligation of the
Seller or its Subsidiaries which is a party to such Assumed Contract and, to
the knowledge of the Seller, of the other party thereto, and is in full force
and effect and is enforceable by the Seller or any of its Subsidiaries which is
a party to such Assumed Contract in accordance with its terms. None of the
Assumed Contracts shall as a result of the transactions contemplated by this
Agreement be restricted in any manner having a Material Adverse Effect. The
Seller and each of its Subsidiaries are not in material breach or default
thereunder and, to the knowledge of the Seller, no other party to any of the
Assumed Contracts is in breach or default thereunder. There have been no
amendments of any material Assumed Contract. From June 30, 2001 through (and
including) the date hereof, no Person which is a party to any Contract has
informed the Seller in writing, nor to the Seller's knowledge, has any such
Person informed the Seller, that it intends to change its current relationship
with the Pet Business in any manner which would have a Material Adverse Effect.

SECTION 3.13. Bonds. The Seller has no material outstanding bonds and other
surety arrangements issued or entered into by the Seller or any of its
Subsidiaries in connection with the Pet Business and operations of the Pet
Business or any of the Purchased Assets.

SECTION 3.14. Accounts Receivable, Accounts Payable.

(a) All accounts receivable of the Pet Business as of the Closing Date,
whether reflected on the Unaudited Financial Statements or subsequently
created, have arisen from bona fide transactions in the ordinary course of
business. Schedule 3.14(a) of the Disclosure Schedules sets forth a true and
correct aged list of all accounts receivable of the Pet Business as of November
30, 2001.

(b) Except as set forth in Schedule 3.14(b), all accounts payable of the Pet
Business, whether reflected on the Unaudited Financial Statements or
subsequently created, have arisen from bona fide transactions in the ordinary
course of business. Schedule 3.14(b) of the Disclosure Schedules sets forth a
true and correct aged list of all accounts payable of the Pet Business and
includable in the Assumed Liabilities as of November 30, 2001.

SECTION 3.15. Licenses; Permits. Schedule 3.15 of the Disclosure Schedule
sets forth a true and complete list of all issued and pending product
registrations (other than those set forth on Schedule 3.11 of the Disclosure
Schedules), and any and all applications therefor, relating to the Products
(the "Product Registrations") and all Permits, in each case issued or granted
to the Seller or any of its Subsidiaries by any Governmental Entity and used by
the Seller or any of its Subsidiaries at any time during the past twelve (12)
months solely in connection with the conduct of the Pet Business, identifies
the Seller or its Subsidiary to which such Product Registration or Permit has
been issued or granted and sets forth the period of validity of each such
Product Registration and Permit. Each of such Product Registrations and each of
such Permits has been validly issued or granted and is in full force and
effect, and may be transferred to the Buyer to the extent such party meets the
requirements of

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Applicable Law. No other product registrations relating to the Product or
Permits are necessary in connection with the conduct of the Pet Business as
presently conducted other than as set forth in Schedule 1.01(a)(vi) and other
than product registrations and permits the absence of which would not have a
Material Adverse Effect. Neither the Seller nor any of its Subsidiaries has
received any unresolved written notice that it lacks any Product Registration
it is required to have or any Product Registrations are under review by any
Governmental Entity or subject to termination, suspension, modification,
revocation or non-renewal for any reason, or that they will be subject to
termination, suspension, modification, revocation or non-renewal as a result of
the execution, delivery and performance of this Agreement or any of the other
Transaction Agreements or for any other reason.

SECTION 3.16. Suppliers. Schedule 3.16 of the Disclosure Schedules is a
true and complete list of all material suppliers of raw materials, packaging
materials, or any other component of inventory of the Pet Business as of
December 31, 2001 and the dollar amount of such raw materials or other supplies
purchased by the Seller or its Subsidiaries from such supplier during the most
recent full fiscal year. From June 30, 2001 through (and including) the date
hereof, no such supplier has informed the Seller or any of its Subsidiaries in
writing, nor, to the Seller's knowledge, has any such supplier informed the
Seller or any of its Subsidiaries that it intends to change its current
relationship with the Pet Business in any manner which would have a Material
Adverse Effect.

SECTION 3.17. Customers. Schedule 3.17 of the Disclosure Schedules contains
a true and complete list of all material customers (including distributors) of
the Pet Business as of November 30, 2001 which purchase any of the Products
directly from the Seller or its Subsidiaries. Since November 30, 2001 neither
the Seller nor any of its Subsidiaries has received any written complaint from
any customer (not limited to those listed in Schedule 3.17 of the Disclosure
Schedules) regarding Products with a value in excess of $25,000, nor has it had
any Products returned by a customer or subsequent purchaser thereof with a
value in excess of $25,000. From June 30, 2001 through (and including) the date
hereof, no customer (including a distributor) has informed the Seller or any of
its Subsidiaries in writing, nor, to the Seller's knowledge, has any such
customer informed the Seller or any of its Subsidiaries that it intends to
change its current relationship with the Pet Business in any manner which would
have a Material Adverse Effect.

SECTION 3.18. Real Property.

(a) Neither Seller nor any of its Subsidiaries own, lease or sublease any
real property or interests therein in connection with, or necessary for, the
operation of the Pet Business as presently conducted, other than as set forth
on Schedule 3.18 of the Disclosure Schedules.

With respect to the Plant:

(i) Neither the Seller nor any of its Subsidiaries have granted to any
third party a right to use or occupy any portion of the Plant.

(ii) No condemnation of the Plant, or any portion thereof, has occurred
or to the knowledge of Seller is threatened.

(iii) The occupancy and use of the Plant, or any portion thereof, in a
manner consistent with the occupancy and use thereof by the Seller as
contemplated by Section 6.13 will not violate or conflict with any
covenants, conditions, restrictions or contractual obligations applicable
thereto.

(iv) Except as disclosed on Schedule 3.18, there are no restrictions of
any nature on the Seller's ability, and Seller has sufficient title or other
leasehold interest in the Plant, to permit the Seller to occupy and use the
Plant as contemplated under Section 6.13.

(v) All utilities necessary to operate the Plant in a manner consistent
with the use thereof by the Seller (including without limitation, water,
sewer, electricity and telephone facilities) are available to the Plant and
there exists, to the knowledge of Seller, no proposed limitation in or
reduction of the quality or quantity of the utility services to be furnished
to the Plant.

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The Seller has all material Permits with respect to the ownership, use and
occupancy of the Plant for the Pet Business. The current use and occupancy of
the Plant for the Pet Business does not materially violate any such Permit, and
no proceeding is pending or, to the knowledge of Seller or its Subsidiaries, is
threatened, to revoke, suspend, modify or limit any Permit in a manner that
would have a Material Adverse Effect. No Permit will be subject to revocation,
suspension, modification or limitation as a result of this Agreement or the
consummation of the transactions contemplated hereby.

SECTION 3.19. Transactions with Affiliates.

(a) There are no agreements, contracts, leases, options, licenses,
commitments, instruments or any other binding obligations (oral or written)
(the "Affiliate Contracts") between the Seller, on the one hand, and any of its
Subsidiaries or Affiliates, on the other hand, relating to the Products, the
Purchased Assets or the Pet Business. Except as set forth in Schedule 3.19,
after the Closing neither the Seller nor any of the Seller's Subsidiaries or
Affiliates will own or have any interest in any assets, property (personal,
tangible or intangible, but excluding real property) or contract or agreement
necessary for the conduct of the Pet Business (other than the Excluded Assets).

(b) After the Closing Date, no ingredient used to formulate the Products
other than the Novasome Technology will need to be procured from the Seller or
the Seller's Affiliates in order for the Buyer to be able to manufacture and
sell the Products in a manner consistent with the manner such Products were
manufactured and sold by the Seller.

SECTION 3.20. Products. There are no published statements, citations or
decisions by any Governmental Entity (including, without limitation, the United
States Food and Drug Administration ("FDA")) stating that any of the Products
is defective or unsafe for its intended uses or fails to meet any standards
promulgated by any such Governmental Entity. During the 3-year period
immediately preceding the Closing Date, there have been no recalls ordered by
any Governmental Entity with respect to any of the Products. Since January 1,
1998 neither the Seller nor any of its Subsidiaries has received any written
complaints of any injury or harm to any person or animal arising from use of a
Product and to the Seller's knowledge there is no (i) fact relating to any of
the Products that would impose upon the Seller or any of its Subsidiaries a
duty to recall any of the Products or a duty to warn customers of a defect in
any of the Products, (ii) latent or overt design, manufacturing or other defect
in any of the Products or (iii) material liability for warranty claims or
returns known to the Seller with respect to any of the Products not fully
reflected on the Unaudited Financial Statements with respect to the periods
covered by the Unaudited Financial Statements. Schedule 3.20 sets forth a
description of all material Product warranty claims in excess of $5,000 for
each of calendar years 2000 and 2001. The Product formulations being sold to
the Buyer pursuant to Section 1.01(a)(iii), and each of the ingredients
therein, conform in all material respects with all Applicable Laws and all
written requests of all Governmental Entities, and such formulations and
ingredients are in all material respects safe and, to the knowledge of the
Seller, do not pose any risk of material injury or harm to any end-user when
used in accordance with applicable instructions.

SECTION 3.21. Employees and Benefit Plans.

(a) Schedule 3.21(a) of the Disclosure Schedules sets forth the name, title,
current annual salary or wages, current bonus or commissions, and vacation
entitlements of, and the Benefit Plans offered by the Seller or any of its
Subsidiaries to, each employee of the Seller or any of its Subsidiaries who is
employed solely in the Pet Business (each a "Pet Business Employee"). Each Pet
Business Employee is an employee-at-will. The Company has not agreed to pay any
severance to any Pet Business Employee nor does it have a policy or standard
practice of paying severance to its employees.

(b) With respect to the Pet Business Employees, (i) there is no labor
strike, dispute, slowdown or stoppage actually pending or, to the Seller's
knowledge, threatened in writing against the Pet Business; (ii) the Pet

A-18

Business has not experienced any organized work stoppage in the last three (3)
years; (iii) to the Seller's knowledge, none of the Pet Business Employees is a
member of or represented by any labor union and there are no attempts of
whatever kind and nature being made to, organize any of such Employees; (iv) no
agreement (including any collective bargaining agreement), arbitration or court
decision, decree or order or governmental order which is binding on the Pet
Business (other than Applicable Law) in any material way limits or restricts
the Seller or any of its Subsidiaries from relocating or closing any of its
operations; and (v) there are no material charges, administrative proceedings
or formal complaint of discrimination (including but not limited to
discrimination based upon sex, age, marital status, race, national origin,
sexual preference, handicap or veteran status) pending or, to the Seller's
knowledge, threatened in writing against the Seller or any of its Subsidiaries.

SECTION 3.22. Inventory. Except as set forth in Schedule 3.22 of the
Disclosure Schedules, (i) all of the Inventory is in commercially acceptable
condition, conforms in all material respects with the applicable warranties of
the Pet Business and with all Permits, Applicable Laws and requests of all
Governmental Entities, and (ii) the value at which the Inventory is carried is
in accordance with U.S. GAAP consistently applied. The amount and mix of the
items included in the Inventory is, and at the Closing Date will be, consistent
with the past business practices of the Seller and its Subsidiaries relating to
the conduct of the Pet Business.

SECTION 3.23. Title. Except as set forth in Schedule 3.23 of the Disclosure
Schedules, Seller and the Subsidiaries have and will convey to the Buyer good
title to the Purchased Assets free and clear of all Liens and Encumbrances
other than Permitted Liens.

SECTION 3.24. Sufficiency of Assets. Except for the provision of various
transition services by the Seller to the Buyer and the use and occupancy of the
Plant by the Buyer, in each case as contemplated by Section 6.13, the Purchased
Assets, the Plant, the Technology Rights Agreement and the Supply Agreement, in
the aggregate, when utilized by a labor force substantially similar to that
employed by the Seller with respect to the Pet Business on the date hereof, are
sufficient for the conduct of the operations of the Pet Business as presently
conducted by the Seller in all material respects, exclusive of executive,
finance, accounting and other general and administrative functions.

SECTION 3.25. Micro-Pak License Agreement. The Seller delivered to the
Buyer a complete and correct copy of the License Agreement, dated as of
December 13, 1995, between Igen, Inc. ("Igen") and Micro-Pak, Inc.
("Micro-Pak") and all amendments thereto (the "Micro-Pak License Agreement").
The Micro-Pak License Agreement is a valid and binding obligation of Igen and,
to the Seller's knowledge, Micro-Pak and is in full force and effect and, to
the Seller's knowledge, is enforceable by Igen in accordance with its terms.
The Micro-Pak License Agreement shall not, as a result of the transactions
contemplated by this Agreement be restricted in any manner having a Material
Adverse Effect. Igen is not in material breach or default thereunder nor, to
the knowledge of the Seller, is Micro-Pak in breach or default thereunder.
There have been no oral or written modifications, amendments or waivers with
respect to any of the terms of the Micro-Pak License Agreement.

SECTION 3.26. Capitalization. As of the date hereof, the authorized capital
stock of the Seller consists of 51,000,000 shares of capital stock of which
50,000,000 shares are shares of Common Stock, par value $0.01 per share (the
"Seller Common Stock"), and 1,000,000 are shares of Preferred Stock, par value
$0.01 per share (the "Seller Preferred Stock"). As of the close of business on
the Business Day ending two Business Days prior to the date hereof, (i)
11,269,320 shares of Seller Common Stock and no shares of Seller Preferred
Stock were issued and outstanding and (ii) securities convertible into or
exchangeable for 4,391,984 shares of the Seller Common Stock prior to July 1,
2002 were issued and outstanding.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE BUYER

The Buyer represents and warrants to the Seller as follows:

SECTION 4.01. Organization, Standing and Power. Each of the Buyer and the
Parent is duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization and has full corporate power and authority
to conduct its businesses as presently conducted.

SECTION 4.02. Authority; Execution and Delivery; Enforceability. Each of
the Buyer and the Parent has all requisite corporate power and authority to
execute this Agreement and each of the Transaction Agreements to which it is
(or will be) a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery by the Buyer and the Parent of this
Agreement, and of each of the other Transaction Agreements to which it is (or
will be ) a party, and the consummation by them of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of the Buyer or the Parent, as the case may be.
Each of the Buyer and the Parent has duly executed and delivered this
Agreement, and this Agreement and the other Transaction Agreements to which it
is or will be a party constitute or will constitute, as the case may be, valid
and binding obligations of the Buyer or the Parent, as the case may be,
enforceable against it in accordance with their respective terms.

SECTION 4.03. No Conflicts; Consents. Except to the extent it would not
have a material adverse effect on the Buyer's or the Parent's ability to
consummate the transactions contemplated by this Agreement or the Transaction
Agreements to which it is a party, the execution and delivery by the Buyer and
the Parent of this Agreement and the Transaction Agreements to which it is a
party, does not, and the consummation of any transaction and compliance with
the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a benefit under, or to increased, additional,
accelerated or guaranteed rights or entitlements of any Person under, or result
in the creation of any Lien upon any of its properties or assets under, any
provision of (i) its organizational documents, (ii) any material contract,
lease, license, indenture, mortgage, note, bond, agreement, permit, concession,
franchise or other instrument to which it is a party or by which any of its
properties or assets is bound or (iii) any Judgment or Applicable Law
applicable to Buyer or the Parent or its properties or assets. Except to the
extent it would not have a material adverse effect on the ability of the Buyer
or the Parent, as the case may be, to consummate the transactions contemplated
hereby, no Consent of, or Filing with any Governmental Entity is required to be
obtained or made by or with respect to the Buyer or the Parent in connection
with the execution, delivery and performance the Agreement or any other
Transaction Agreement.

SECTION 4.04. Brokers. Except for Antares International Partners, Inc., no
broker, investment banker, financial advisor or other Person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby or by any of the other
Transaction Agreements based upon arrangements made by or on, behalf of the
Buyer or any of its Affiliates. The Buyer shall be responsible for, and will
indemnify the Buyer and all of its Affiliates for all Losses relating to, any
and all fees payable to Antares International Partners, Inc. in connection with
the transactions contemplated by this Agreement.

SECTION 4.05. Financing. The Buyer's existing financial resources are
sufficient to enable the Buyer to consummate the transactions contemplated by
this Agreement and the payment of all fees and expenses to be incurred by the
Buyer in connection herewith. The Notoriety Statement of Societe Generale, SA
dated November 28, 2001 provided by the Parent to the Seller is true and
correct in all material respects. Such statement shall be deemed to be
Confidential Material for purposes of the Confidentiality Agreement.

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ARTICLE V

COVENANTS RELATING TO CONDUCT OF BUSINESS

SECTION 5.01. Conduct of Business by the Seller. Except for matters
permitted or contemplated by this Agreement, from the date of this Agreement to
the Closing Date, the Seller agrees to use commercially reasonable efforts to
conduct the Pet Business in the usual, regular and ordinary course in
substantially the same manner as previously conducted and, to the extent
consistent therewith, to preserve intact the current business organization of
the Pet Business, keep available the services of the current officers and
employees employed in connection with the Pet Business and keep their
relationships with customers, suppliers, licensors, licensees, distributors and
others having business dealings with the Pet Business to the end that its
goodwill and ongoing business shall be in all material respects unimpaired at
the Closing Date. In addition, and without limiting the generality of the
foregoing, except for matters set forth in Schedule 5.01 or otherwise permitted
or contemplated by this Agreement, from the date of this Agreement to the
Closing Date, the Seller agrees that it shall not undertake any of the
following actions without the prior written consent of the Buyer (unless such
action is required by Applicable Law, in which case the Seller shall promptly
notify the Buyer of such action).

(a) acquire any assets for use in connection with the Pet Business that are
material, individually or in the aggregate, to the Pet Business, except
purchases of Inventory or other assets in the ordinary course of business
consistent with past practice;

(b) make any change in accounting methods, principles or practices (other
than pursuant to a change in U.S. GAAP or a statement of any appropriate
accounting authority) materially affecting the reported combined consolidated
assets, liabilities or results of operations of the Pet Business (including the
Purchased Assets);

(c) sell, lease, license, pledge or otherwise dispose of or subject to any
material Lien or Encumbrance any Purchased Assets, except sales of Inventory
and excess or obsolete assets in the ordinary course of business consistent
with past practice, or enter into a legally binding commitment to do any of the
foregoing;

(d) make any material change, revision, amendment or other modification to
any Product labeling;

(e) except as set forth in Schedule 5.01(e), make any material change,
revision or other modification to the formulation of any of the Products other
than in the ordinary course of business consistent with past practice;

(f) make any change (or announce any prospective change) in prices, sales
discounts or allowances or any other sales incentives in connection with the
sale of any of the Products to distributors or customers of the Pet Business
other than in the ordinary course of business consistent with past practice;

(g) (i) waive any material claims or rights related to the Pet Business and
included in the Purchased Assets or (ii) waive the material benefits of, or
agree to modify in any material manner, any confidentiality, standstill or
similar agreement to which the Seller or any of its Subsidiaries is a party and
relating to the Pet Business or any of the Products or the Purchased Assets; or

(h) authorize any of, or cause, commit or agree to take any of, the
foregoing actions.

SECTION 5.02. Other Actions. The parties hereto shall not, and shall not
permit any of their respective Subsidiaries to, take any action that would, or
that could reasonably be expected to, result in (i) any of the representations
and warranties of such party set forth in this Agreement becoming untrue or
inaccurate in any material respect or (ii) any condition set forth in Article
VII not being satisfied.

SECTION 5.03. Release of Liens. The Seller shall cause any and all Liens
and Encumbrances recorded against or applicable to the Purchased Assets to have
been released, and the Seller shall furnish the Buyer with reasonably
satisfactory evidence thereof.

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SECTION 5.04. Advise of Changes.

(a) The Seller shall promptly advise the Buyer in writing of any fact,
occurrence, change or event prior to the Closing which was required to have
been disclosed but was not disclosed or, if it occurred or existed on or prior
to the date hereof, would have been required to have been disclosed, on any of
the Schedules to be delivered by the Seller to the Buyer pursuant to Article
III including, without limitation, the Disclosure Schedules.

(b) The Buyer shall promptly advise the Seller in writing of any fact,
occurrence, change or event prior to the Closing which was required to have
been disclosed but was not disclosed or, if it occurred or existed on or prior
to the date hereof, would have been required to have been disclosed, on any of
the Schedules to be delivered by the Buyer to the Seller pursuant to Article IV.

SECTION 5.05. Supplements to Disclosure Schedules. From time to time prior
to the Closing, the Seller shall deliver to the Buyer information that arises
from an event that occurs on or after the date hereof, or with respect to a
representation or warranty qualified by the Seller's knowledge from an event
that occurred prior to the date hereof but which was not a matter of the
Seller's knowledge as of the date hereof, supplementing or amending the
representations, warranties and disclosures (including the Disclosure Schedules
hereto) in order to make such information therein timely, complete and
accurate. Such supplemental information furnished by the Seller shall identify
the specific event. Subject to Section 8.02, any covenant, representation or
warranty of the Seller affected by such supplemental information shall be
deemed to have been amended accordingly.

SECTION 5.06. Maintenance of Plant. The Seller agrees that between the date
of this Agreement and the Closing Date, the Seller shall (i) maintain the Plant
in substantially the same condition as exists on the date hereof, reasonable
wear and tear excepted, (ii) operate the Pet Business in compliance with all
Applicable Laws in all material respects, (iii) maintain in full force and
effect all (or substantially similar) property and liability insurance policies
on the Plant in effect as of the date hereof; and (iv) afford the Buyer and its
representatives, reasonable access during normal business hours upon reasonable
notice (and in a manner so as not to interfere with the normal business
operations of the Seller and its Subsidiaries) to the Plant.

ARTICLE VI

ADDITIONAL AGREEMENTS

SECTION 6.01. Access to Information; Confidentiality. The Seller shall
afford the Buyer and its officers, employees, accountants, counsel, financial
advisors and other representatives, reasonable access during normal business
hours (and in a manner so as not to interfere with the normal business
operations of the Seller and its Subsidiaries) during the period prior to the
Closing Date to all its properties, books, contracts, commitments, personnel
and records to the extent relating to the Pet Business, the Products or any of
the Purchased Assets and, during such period, the Seller shall furnish promptly
to the Buyer (i) a copy of each material report, schedule and other document to
the extent relating to any of the Products, the Pet Business or any of the
Purchased Assets filed by it during such period with any Governmental Entity,
(ii) a copy of any and all material correspondence to or from any Governmental
Entity to the extent relating to any of the Products, the Pet Business or any
of the Purchased Assets, (iii) detailed monthly financial data for the Pet
Business (in any event not later than twenty (20) days (or, in the case of the
month ended December 31, 2001, sixty (60) days) after the close of such month)
and (iv) all other information concerning the Pet Business, the Products or any
of the Purchased Assets as the Buyer may reasonably request. All information
reviewed by the Buyer or its officers, employees, accountants, counsel,
financial advisors or other representatives or furnished by the Seller to the
Buyer pursuant to this Section 6.01 shall be deemed to be Confidential Material
for purposes of the Confidentiality Agreement. No investigation by the Buyer
shall affect the representations and warranties of the Seller.

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SECTION 6.02. Commercially Reasonable Efforts. Upon the terms and subject
to the conditions set forth in this Agreement, the Seller and the Buyer shall
use their commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated hereby or by the other Transaction
Agreements, including (i) the obtaining of all necessary actions or
non-actions, waivers, consents and approvals from Governmental Entities and the
making of all necessary Filings including, without limitation, filings with
Governmental Entities, and the taking of all reasonable steps as may be
necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity, (ii) the obtaining of all necessary
consents, approvals or waivers from third parties (including, without
limitation, in connection with any of the Assumed Contracts), (iii) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or any other Transaction Agreement
or the consummation of the transactions contemplated hereby or thereby,
including seeking to have any stay or temporary restraining order entered by
any court or other Governmental Entity vacated or reversed and (iv) the
execution and delivery of any additional instruments necessary to consummate
the transactions contemplated hereby or by the other Transaction Agreements and
to fully carry out the purposes of each of the Transaction Agreements.

SECTION 6.03. Fees and Expenses. Except as otherwise provided in this
Agreement, all fees and expenses incurred in connection with the transactions
contemplated by this Agreement and the other Transaction Agreements shall be
paid by the party incurring such fees or expenses, whether or not the
transactions contemplated hereby or thereby are consummated.

SECTION 6.04. Public Announcements. The parties hereto agree that, from the
date of this Agreement through the Closing Date, except as contemplated by this
Agreement, no public release, announcement or any other disclosure concerning
any of the transactions contemplated hereby or by any of the other Transaction
Agreements shall be made or issued by any party hereto (without the consent of
the Buyer (in the case of a disclosure by the Seller) or without the consent of
the Seller (in the case of a disclosure by the Buyer)), except as the
disclosing party reasonably believes such release, announcement or disclosure
may be required by Applicable Law or stock market regulation, in which case, to
the extent practicable under Applicable Law or stock market regulation, the
party required to make the release, announcement or disclosure shall provide
the other parties hereto with a copy of such release, announcement or
disclosure in advance of such issuance or disclosure. Notwithstanding the
foregoing, any Party may announce or disclose any matter which the other Party
has previously publicly announced or disclosed in accordance with the terms of
this Section.

SECTION 6.05. Advertising and Promotional Materials. The Buyer shall be
permitted to use any and all product labels and advertising and promotional
materials included in the Purchased Assets bearing the Seller's corporate name,
logo's and product identification numbers until such materials are exhausted so
long as, and solely to the extent that, such materials are "stickered" or
otherwise identified as the Buyer's in accordance with the requirements of
Applicable Law or Governmental Entity. The Buyer agrees to maintain quality
standards equal to those maintained by the Seller at the time of Closing for so
long as the Buyer shall continue to use any product labels or any advertising
or promotional materials bearing the Seller's corporate name, logo's, or
product identification numbers. The Buyer will not order any new, or replenish
any, product labels or advertising or promotional materials bearing the
Seller's corporate name, logo's or product identification numbers.

SECTION 6.06. Proxy Statement, Stockholders' Meeting.

(a) The Seller shall use commercially reasonable efforts to prepare and file
with the U.S. Securities and Exchange Commission (the "SEC") as promptly as
practicable, a proxy statement relating to the solicitation of votes of the
Seller's stockholders authorizing the sale of assets contemplated by this
Agreement (the "Proxy Statement"). The Seller shall cause the Proxy Statement
to be mailed to the Seller's stockholders as soon as practicable. The Buyer
shall promptly provide the Seller with such information as it may reasonably
request for inclusion in the Proxy Statement. The information provided and to
be provided by the Seller and the Buyer, respectively, for use in the Proxy
Statement shall be, as of the date of the stockholders' meeting contemplated

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therein, true and correct in all material respects and shall not omit to state
any material fact required to be stated therein or necessary in order to make
such information not misleading, and the Seller and the Buyer each agree to
correct any information provided by it for use in the Proxy Statement to the
extent such information shall have become materially false or misleading.

(b) The Seller will promptly notify the Buyer of (i) the receipt of any
comments from the SEC and (ii) any request by the SEC for any amendments to the
Proxy Statement or for additional information relating to the Proxy Statement.
The Proxy Statement and any amendment thereto, and all mailings to the Seller's
stockholders, in each case in connection with this Agreement and the
transactions contemplated hereby shall be provided to the Buyer and its
representatives prior to the filing or mailing thereof, as the case may be, in
substantially the same form as proposed to be filed or mailed, as the case may
be.

(c) The Seller shall, as promptly as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders for the purpose of authorizing the sale of assets contemplated by
this Agreement. Subject to Section 6.07 and its fiduciary duties, the Seller's
Board of Directors shall recommend to its stockholders authorization of such
matters.

SECTION 6.07. Nonsolicitation.

(a) Except as set forth in this Section 6.07 and for any public release,
announcement or any other disclosure in accordance with the provisions of
Section 6.04, from the date of this Agreement through the Closing Date, the
Seller shall not, nor shall it authorize or permit any of its Subsidiaries or
any of its directors or executive officers or any agent or representative to
(i) solicit, initiate or affirmatively encourage the submission of a Competing
Proposal or (ii) participate in any discussions or negotiations regarding, or
furnish to any Person any information with respect to, or take any other action
designed to facilitate any inquiries or the making of any proposal that
constitutes, or could reasonably be expected to lead to, any Competing Proposal.

(b) To the extent a bona fide Competing Proposal is made to or received by
the Seller after the date of this Agreement and prior to the Final Proposal
Date, which Competing Proposal did not result from a breach of Section 6.07(a),
and which the Board of Directors of the Seller determines in good faith is
likely to lead to a Superior Proposal, the Seller may (i) furnish information
with respect to the Seller to the Person making such Competing Proposal
pursuant to a customary confidentiality agreement and (ii) participate in
discussions or negotiations (including solicitation of a revised Competing
Proposal) with such Person regarding any Superior Proposal made by such Person;
provided, that, the Seller may not take any of the actions described in clauses
(i) and (ii) of this Section 6.07(b) unless and until the Seller provides to
the Buyer (x) contemporaneous written notice of the Seller's intent to furnish
information or enter into negotiations or discussions with such Person, (y) a
copy of the confidentiality agreement entered into between the Seller and such
Person, and (z) a copy of the material terms and conditions of the initial
Competing Proposal that the Seller receives from any third party.

(c) To the extent a Superior Proposal is made to or received by the Seller
after the date of this Agreement and prior to the date twenty-five (25) days
subsequent to the date hereof (the "Final Proposal Date"), which Superior
Proposal did not result from a breach of this Section 6.07 and with respect to
which Superior Proposal the Seller intends to pursue negotiations or
discussions with a third party, the Seller shall provide the Buyer with a
written notice indicating such intent and indicating the material terms of the
Superior Proposal (a "Superior Proposal Notice"). To the extent the Seller
terminates such negotiations or discussions, the Seller shall provide the Buyer
with written notice of such termination (the "Termination Notice"). The Seller
shall be required to provide to the Buyer with only one Superior Proposal
Notice with respect to any Superior Proposal (including any amendments, changes
or revisions thereto). The Seller's obligations under Section 6.06 shall be
tolled during any time which the Seller is involved in negotiations with a
third party with respect to any Superior Proposal in accordance with the
provisions of this Section 6.07. Beginning on the date twenty-five (25) days
subsequent to the date the Buyer receives a Superior Proposal Notice and ending
on the date the Buyer receives a Termination Notice, the Buyer shall be
entitled to terminate this Agreement. Upon any termination of this Agreement by
the

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Buyer pursuant to this Section 6.07(c), (i) the Voting Agreement shall become
void, will have no effect and terminate in its entirety and (ii) if such
termination by the Buyer occurs after the date fourteen (14) days subsequent to
the date the Buyer becomes entitled to terminate this Agreement pursuant to
this Section 6.07(c), the Seller shall promptly pay to the Buyer the amount of
any and all reasonable costs and expenses incurred by the Buyer in connection
with this Agreement and the transactions contemplated hereby.

(d) The Board of Directors of the Seller, in response to a Superior Proposal
that Seller receives on or before the Final Proposal Date, and which Superior
Proposal did not result from a breach of Section 6.07(a), may (i) withdraw or
modify its recommendation to the Seller's stockholders to authorize the sale of
assets contemplated by this Agreement or (ii) authorize the Seller to terminate
this Agreement; provided, that, the Board of Directors of the Seller may not
take any of the actions described in clauses (i) and (ii) of this Section
6.07(d) unless (x) the Buyer receives from the Seller, on or prior to the Final
Proposal Date, a Superior Proposal Notice; (y) the Buyer does not make, prior
to five (5) Business Days after its receipt of the Superior Proposal Notice, a
counteroffer to the Seller that the Board of Directors of the Seller determines
in good faith is at least as favorable as the Superior Proposal (including any
amendments, changes or revisions thereto) (a "Matching Offer"); and (z) the
Board of Directors of the Seller determines in good faith after consultation
with outside counsel, that with respect to the action described in clause (i),
such action is necessary for such Board of Directors to act in a manner
consistent with its fiduciary obligations and, with respect to the action
described in clause (ii), such action is in the best interests of the Seller's
stockholders; provided further, that, prior to any termination of the Agreement
pursuant to this Section 6.07(d), notwithstanding whether or not the Buyer
makes any Matching Offer, the Seller shall pay to the Buyer a termination fee
in the amount of $750,000 (Seven Hundred Fifty Thousand Dollars) in addition to
any and all costs and expenses incurred by the Buyer in connection with this
Agreement and the transactions contemplated herein. In the event that this
Agreement is terminated pursuant to this Section 6.07(d) the Voting Agreement
shall become void, will have no effect and will terminate in its entirety.

(e) Nothing in this Agreement shall be deemed to prohibit the Seller from
taking and disclosing to its stockholders a position with respect to a tender
offer contemplated by Rule 14e-2(a) promulgated under the Securities Exchange
Act of 1934, as amended, or from making any required disclosure to the Seller's
stockholders if, in the good faith judgment of the Seller's Board of Directors,
after consultation with outside counsel, failure to so disclose would be
inconsistent with its obligations under Applicable Law; provided, that, except
as set forth in Section 6.07(d), in no event shall the Seller's Board of
Directors withdraw or modify, or publicly propose to withdraw or modify, its
position with respect to the authorization of the sale of assets contemplated
by this Agreement.

(f) For purposes of this Agreement:

(i) "Competing Proposal" means any proposal made by a third party for a
merger, consolidation, dissolution, sale of assets, tender offer,
recapitalization, share exchange or other acquisition of, or business
combination involving, the Pet Business, other than the sale of assets to
the Buyer as contemplated by this Agreement; provided, that, no proposal
made by a third party for a merger, consolidation, dissolution, sale of
assets, tender offer, recapitalization, share exchange or other acquisition
of, or business combination involving, the Pet Business shall be deemed to
be a Competing Proposal if the Board of Directors reasonably believes that
such proposal (an "Acquisition Proposal") contemplates of the Seller the
assumption by such third party or an Affiliate thereof of all of the
Seller's obligations under this Agreement (in which case, notwithstanding
the provisions of Section 10.08, the Seller may assign either this Agreement
or any of its rights, interests or obligations hereunder without the prior
approval (written or otherwise) of any other party hereto upon the
consummation of such Acquisition Proposal and the written assumption thereof
by such third party or Affiliate); and

(ii) "Superior Proposal" means any bona fide written Competing Proposal
made by a third party (i) on terms which the Board of Directors of the
Seller determines in its good faith judgment to be more favorable to the
Seller's stockholders than the sale of assets contemplated by this
Agreement, taking into account all the terms and conditions of such proposal
and this Agreement and (ii) that in the good faith

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judgment of the Seller's board of directors is reasonably capable of being
completed on the material terms proposed, taking into account all financial,
regulatory, legal and other aspects of such proposal.

SECTION 6.08. Transferred Employees, Employee Matters. The Buyer shall
offer employment, commencing on the Closing Date, to all of the Pet Business
Employees, and to certain other employees of the Seller listed on Schedule 6.08
(such Pet Business and other employees being the "Transferred Employees"). Any
such offer of employment made by the Buyer shall be at the same salary and
commission rate paid as of the date hereof to such Transferred Employee (or, if
the Transferred Employee is hired after the date hereof, at such Employee's
salary and commission rate at his date of hire) and with substantially
comparable medical, dental, life and long-term disability insurance, vacation,
sick leave and 401(k) benefits offered by the Seller or any of its Subsidiaries
to such employees, as set forth on Schedule 3.21. The Seller shall be solely
responsible at the Closing for any and all accrued benefit costs or any other
liability under Seller's Benefit Plans with respect to any Transferred
Employees, regardless of whether or not such Transferred Employees accept the
Buyer's offer of employment, except to the extent that any such accrued benefit
costs or any other liability is accrued on the Final Statement of Working
Capital (in which case, such accrued benefit costs and such other liabilities
so accrued shall be the sole responsibility of the Buyer). The Seller and its
Subsidiaries shall not for two (2) years after the Closing attempt to solicit
or induce any Transferred Employee to terminate his or her employment with the
Pet Business; provided, that this sentence shall not apply to any such
individual whose employment with the Buyer has been terminated or to any such
individual who did not accept the Buyer's offer of employment set forth in the
first sentence of this Section 6.08.

SECTION 6.09. Transfer Taxes and Fees. All transfer, stamp, documentary,
sales, use, registration, withholding and other similar Taxes and related fees
(including penalties, interest and additions to Tax) required to be paid in
connection with this Agreement or the transactions contemplated hereby shall be
borne fifty percent (50%) by the Seller and fifty percent (50%) by the Buyer.
The Buyer shall bear all registration, filing and similar fees and expenses
associated with the assignment, transfer or sale of the Intellectual Property
and the Permits.

SECTION 6.10. Intellectual Property Matters.

(a) The parties hereto agree that the Buyer, in its sole discretion, shall
be entitled to control the filing and recording of the assignments of the
Intellectual Property contemplated by this Agreement.

(b) Seller hereby grants and shall cause each of its Subsidiaries to grant,
to the Buyer, as of the Closing Date, a royalty free, perpetual, non-exclusive
license to use in the Pet Business any patents, trade secrets, know-how,
processes and other technology other than the Novasome Technology which is not
included in the Purchased Assets but is used as of the Closing Date both (i) in
the Pet Business and (ii) in a business of Sellers and their Subsidiaries other
than the Pet Business, which license may be assigned in whole or in part,
without Seller's consent in connection with a sale or transfer of all or any
portion of the Pet Business.

SECTION 6.11. Accounts Receivable Collection. On the Closing Date or as soon
thereafter as practicable, the Buyer shall send a letter from the Buyer, and to
the extent commercially reasonable and reasonably acceptable to the Seller, to
each of the obligors on the accounts receivable and other receivables included
in the Purchased Assets (the "Purchased Receivables") informing each such
obligor of the transfer of the Pet Business contemplated hereby and instructing
them to remit all payments and other items in respect of the Purchased
Receivables and all future accounts receivable of the Pet Business as directed
in such letter. If the Buyer receives any payment with respect to any accounts
receivable not included in the Purchased Assets (or, to the extent included in
the Purchased Assets, if the Buyer receives any payment with respect to any
accounts receivable in excess of the amount of accounts receivable (net of
reserves therefor) set forth on the Final Statement of Working Capital), the
Buyer shall reasonably promptly deliver such payment to the Seller; provided,
that the Buyer shall not be required to deliver any such payment to the Seller
more frequently than once per week. If the Seller or any of its Subsidiaries
receives any payment with respect to any of the Purchased Receivables or any
accounts receivable or other receivable for Products sold or services rendered
after the Closing Date and included in the

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Purchased Assets, the Seller shall reasonably promptly deliver such payment to
the Buyer; provided, that the Seller shall not be required to deliver any such
payment to the Buyer more frequently than once per week. For each of the
Purchased Receivables, any amounts received by Seller from the account customer
shall be applied first to reduce the Purchased Receivables and then to the
other amounts owed by such customer, except for amounts of any receivables as
to which the account customer is disputing.

SECTION 6.12. Confidentiality. From and after the date of this Agreement,
the Seller shall not, and shall cause its Affiliates not to, disclose, divulge,
furnish or make accessible to any Person, any information of a confidential
nature or not generally known to the public relating to the Pet Business
(collectively, the "Confidential Information"). The obligations of the Seller
under this Section 6.12 are in addition to, and not in limitation or preemption
of, all other obligations of confidentiality which the Seller may have to the
Buyer pursuant to the Confidentiality Agreement or under any legal or equitable
principles.

SECTION 6.13. Transition Services Agreement.

(a) Following the execution of this Agreement and prior to the Closing Date,
the Seller and the Buyer shall negotiate in good faith a mutually acceptable
transition services agreement (the "Transition Services Agreement") detailing
the terms and conditions of the services to be provided by the Seller to the
Buyer and the terms and conditions (including, price and term) related to the
provision of such services. The parties acknowledge that the transition
services to be the subject of the Transition Services Agreement shall include
computer and information technology support, telephone services and such other
services as the Buyer and the Seller may mutually determine (collectively, the
"Technical Services"). At the Buyer's election exercised no later than thirty
(30) days prior to the date scheduled for the meeting of the Seller's
stockholders contemplated by Section 6.06(c), the Transition Services Agreement
shall include the exclusive use and occupancy by the Buyer of the Plant;
provided, that, such use and occupancy shall be under the Terms of Occupancy.

(b) For purposes of this Agreement, the term "Terms of Occupancy" shall mean
the exclusive use and occupancy of all of the Plant (except for storage and
filing space consistent with the current use by the Seller and the room in
which the Seller's autoclave is presently situated), which use and occupancy
shall be consistent with the present use and occupancy thereof by the Seller,
for the three-month period immediately following the Closing (with the option
to continue such use and occupancy for up to two successive additional 6-month
periods, upon the written notice of the Buyer to the Seller given no later than
sixty (60) days prior to the end of the then current occupancy period), (i) at
a price equal to $1.00 for each such occupancy period, (ii) where the Buyer
reimburses the Seller on a monthly basis (within 10 days of the invoice
therefor) for all costs incurred by the Seller with respect to the Plant during
the Buyer's use and occupancy of the Plant that would customarily be paid by a
tenant under a "triple net lease", other than those with respect to which the
Buyer is entitled to indemnification pursuant to Sections 9.01(a)(iii), (iv) or
(v), and (iii) under such other terms and conditions as are commercially
reasonable for a commercial lease of an industrial facility in Buena, New
Jersey.

(c) In the event that the Seller and the Buyer do not execute a Transition
Services Agreement, the Seller agrees (i) to provide the Buyer with the
Technical Services for a reasonable period following the Closing Date (not to
exceed sixty (60) days) at reasonable prices and (ii) at the Buyer's election,
exercised no later than thirty (30) days prior to the date scheduled for the
meeting of the Seller's stockholders contemplated by Section 6(c), to permit
the Seller to use and occupy the Plant under the Terms of Occupancy.

(d) The execution of a Transition Services Agreement shall not be a
condition to Closing hereunder.

SECTION 6.14. Supply Agreement. The Buyer and the Seller shall enter into
the Manufacturing and Supply Agreement, in the form attached hereto as Exhibit
1 (the "Supply Agreement") on or prior to the Closing.

SECTION 6.15. Instrument of Assignment and Assumption. At the Closing, the
Buyer shall execute and deliver the Instrument of Assignment and Assumption in
the form attached hereto as Exhibit 2 (the "Instrument of Assignment and
Assumption").

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SECTION 6.16. [Intentionally Omitted]

SECTION 6.17. Technology Rights Agreement. On or prior to the Closing, the
Buyer and the Seller shall enter into the Technology Rights Agreement.

SECTION 6.18. Accessible Financial Records. For a period of six (6) years
following the Closing Date, the Seller shall afford the Buyer and its officers,
employees, accountants, counsel, financial advisors and other representatives
reasonable access during normal business hours (and in a manner so as not to
interfere with the normal business operations of the Seller and its
Subsidiaries) to all books, records, files and other data of the Seller or any
of its Subsidiaries (including those stored electronically) of a financial
nature relating to any of the Products, the Purchased Assets or the Pet
Business (the "Accessible Financial Records") that have not been transferred to
the Buyer pursuant to this Agreement because they do not relate solely to the
Pet Business. Notwithstanding the foregoing, if the Seller's standard document
retention policy would require or permit the Seller to destroy or dispose of
any Accessible Financial Record prior to the 6th anniversary of the Closing
Date, the Seller shall offer to deliver such Accessible Financial Record to the
Buyer at the Buyer's sole cost and expense prior to such destruction or
disposal. All information and data contained within Accessible Financial
Records reviewed by the Buyer or its officers, employees, accountants, counsel,
financial advisors or other representative and not relating to the Products,
the Purchased Assets or the Pet Business shall be deemed to be confidential and
shall be held in confidence by the Buyer and its officers, employees,
accountants, counsel, financial advisors and other representatives.

SECTION 6.19. Bulk Sales Laws. The Buyer and the Seller each hereby waives
compliance with the provisions of the bulk transfer statute in each of the
jurisdictions, if any, where such compliance would be required in connection
with the transactions contemplated by this Agreement.

SECTION 6.20. Noncompetition.

(a) The Seller agrees that from the Closing Date through sixty (60) months
after the date thereof, neither it nor any of its Subsidiaries shall,
independently or through any other Person:

(i) engage anywhere in the United States and Canada in any enterprise
engaged in the business of manufacturing, packaging, marketing, selling or
otherwise distributing animal health products (the "Restricted Business")
(and, for the purpose of clarity, with respect to marketing, telemarketing,
on-line services and other forms of marketing, this activity shall be deemed
to be conducted in any place where the mail, telephone communication,
computer signal or other marketing medium is received); or

(ii) acquire or own any interest in any entity engaged in a Restricted
Business and which derives sales from the Restricted Business in an amount
greater than 20% of its total sales from all of its businesses (provided
that the Seller or any of its Subsidiaries may hereafter acquire an interest
in any enterprise engaged in a Restricted Business so long as the Seller
causes, to the extent it can so cause, such enterprise to use reasonable
commercial efforts to divest, as soon as reasonably practicable, a portion
of its interest in such Restricted Business such that the 20% sales test set
forth above would not be exceeded after such divestiture or, if the Seller
cannot so cause, the Seller divests its interest in such entity as soon as
reasonably practicable).

(b) Anything to the contrary herein notwithstanding, in no event shall this
Section 6.20 prevent, or be deemed to prevent, the Seller or any Subsidiary of
the Seller from:

(i) engaging in any business anywhere in the world outside the United
States and Canada;

(ii) acquiring up to 10% (in the aggregate) of the outstanding common
stock of any publicly traded company engaged in a Restricted Business;

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(iii) manufacturing, packaging, marketing, selling, distributing or
otherwise using or licensing Novasome Technology and improvements thereto or
other technology developed or acquired by the Seller or any of its
Subsidiaries for use in products other than animal health products;

(iv) exercising any of its rights or performing any of its obligations
under the Supply Agreement; or

(v) supplying (including the manufacture and packaging for) or licensing
third parties with Novasome Technology (or products manufactured, formulated
or otherwise made with or incorporating or containing Novasome Technology)
for marketing, sale, distribution or other use by such third parties in
products that are not Technology Products in the Field.

(c) With respect to the restrictive covenants set forth in this Section
6.20, the Seller acknowledges and agrees that the restrictive covenants
contained herein are reasonable as to time, scope and area and are not unduly
burdensome on the Seller or its Subsidiaries.

(d) The restrictive covenants contained herein are in addition to any rights
the Buyer may have in law or at equity.

SECTION 6.21. ISRA Compliance.

(a) The Seller shall at its sole cost and expense obtain and provide to
Buyer, as promptly as practicable but in no event later than the Closing Date,
as to the transactions set forth in and to be made in accordance with the terms
of this Agreement for the sale of the assets of the Pet Business, (i) a written
determination from the New Jersey Department of Environmental Protection
("NJDEP") of the nonapplicability of the provisions of the New Jersey
Industrial Site Recovery Act, N.J.S.A. 13:1K, et seq., and the regulations
promulgated thereunder (collectively "ISRA"), to the transactions set forth in
this Agreement, issued by NJDEP in response to an Applicability Determination
submitted to NJDEP by the Seller pursuant to N.J.A.C. 7:26B-2.2 (hereinafter
referred to as a "Letter of Nonapplicability" or "LNA"), (ii) a Remediation In
Progress Waiver pursuant to N.J.S.A. 13:1K-11.5 and N.J.A.C. 7:26B-5.4 issued
by the NJDEP in response to a Remediation in Progress Application submitted by
the Seller to NJDEP for the transactions set forth in this Agreement, (iii)
NJDEP's written approval of a Negative Declaration Certificate submitted by the
Seller to NJDEP for the transactions set forth in this Agreement, (iv) NJDEP's
written approval of a Remedial Action Workplan (as defined by ISRA) submitted
by the Seller to NJDEP, or (v) an executed Remediation Agreement (as defined by
ISRA) between the Seller and NJDEP.

(b) Under any Remediation Agreement or Remedial Action Workplan submitted by
Seller and approved by NJDEP in compliance with its obligations under ISRA to
the extent such is applicable to the transactions set forth this Agreement for
the sale of the assets of the Pet Business, the Seller shall be solely
responsible for obtaining NJDEP approval of a Remediation Funding Source (as
defined by ISRA), to the extent such may be required. In addition, in any such
Remediation Agreement or Remedial Action Workplan, Seller shall be identified
as the sole party responsible for (and Seller shall pay for): (i) compliance
with the Remediation Agreement or Remedial Action Workplan and (ii) obtaining
from NJDEP a No Further Action Letter under ISRA with respect thereto.

SECTION 6.22. Products Liability Insurance. During each Products Liability
Period, Seller shall maintain one or more insurance policies providing coverage
for up to an aggregate amount of One Million Dollars per occurrence/Two Million
Dollars aggregate with a $25,000 deductible per claim with respect to any
Products Liability Claims that may be made against the Seller or any of its
Subsidiaries during such Products Liability Period. Notwithstanding the
foregoing, if the Seller is not able to obtain a policy on the terms specified
in the preceding sentence, the Seller may obtain one or more insurance policies
upon substantially similar terms for per occurrence/aggregate and deductible
amounts, which terms shall be commercially reasonable.

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ARTICLE VII

CONDITIONS PRECEDENT

SECTION 7.01. Conditions to Each Party's Obligation to Effect the
Closing. The respective obligation of each party to effect and complete the
Closing is subject to the satisfaction or waiver (by each party) on or prior to
the Closing Date of the following conditions:

(a) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any
Governmental Entity or other legal restraint or prohibition preventing the
consummation of the transactions contemplated by this Agreement or by the
other Transaction Agreements shall be in effect.

(b) Transaction Agreements. All the Transaction Agreements shall have
been executed and delivered by and to the respective parties to such
agreements.

(c) Stockholders' Approval. The sale of assets contemplated by this
Agreement shall have been authorized by the affirmative vote of holders of a
majority (or such higher number as may be required by Seller's Charter or
bylaws or Applicable Law) of the outstanding shares of the Seller's capital
stock outstanding as of the record date for the meeting of stockholders of
the Seller contemplated by Section 6.06 (the "Required Stockholder Vote").

SECTION 7.02. Conditions to Obligations of the Buyer. The obligations of
the Buyer to effect and complete the Closing are further subject to the
satisfaction or waiver of the following conditions:

(a) Representations and Warranties. The representations and warranties
of the Seller set forth in this Agreement shall be true and correct (i) as
of the date of this Agreement and (ii) as of the Closing Date as though made
on and as of the Closing Date, except in the case of each of the foregoing
clauses (i) and (ii), (x) to the extent such representations and warranties
are specifically made as of a particular date, in which case such
representations and warranties shall be true and correct as of such date,
(y) for changes contemplated by this Agreement and (z) where the failure to
be true and correct (without regard to any materiality qualifications
contained therein) individually or in the aggregate, has not had, and is not
reasonably likely to have, a Material Adverse Effect. The Buyer shall have
received a certificate of the Seller signed on behalf of such Seller by a
duly authorized officer of such Seller to such effect.

(b) Performance of Obligations of the Obligations of Other Parties. The
Seller shall have performed in all material respects all of its covenants
and obligations required to be performed by it under this Agreement on or
prior to the Closing Date, specifically including all such covenants and
obligations as set forth in Articles V and VI hereof. The Buyer shall have
received a certificate of the Seller signed on behalf of the Seller by a
duly authorized officer of the Seller to such effect.

(c) Consents and Approvals. All Consents set forth in Schedule 7.02
shall have been obtained and be in full force and effect and all Filings set
forth in Schedule 7.02 shall have been made with the appropriate Person, and
the Buyer shall have been furnished with evidence reasonably satisfactory to
it of the granting of such Consents or the submission of such Filings, as
the case may be.

(d) No Litigation. There shall not be pending any suit, action or
proceeding by any Governmental Entity or any other Person (other than a
Person asserting a claim based on a business or stockholder relationship
with the Buyer), in each case that has a reasonable likelihood of success,
(i) challenging the purchase by the Buyer of any of the Purchased Assets or
seeking to restrain or prohibit the consummation of the transaction
contemplated hereby or by any of the other Transaction Agreements or seeking
to obtain from any of the parties hereto any damages with respect to the
transactions contemplated by this Agreement, (ii) seeking to prohibit or
limit the ownership or operation by the Buyer of the Pet Business or any
portion of the Purchased Assets, or to compel the Buyer to dispose of or
hold separate any portion of the Purchased Assets, as a result of the
transaction contemplated hereby, or by any of the other Transaction
Agreements, or (iii) seeking to prohibit the Buyer from effectively
controlling any of the Purchased Assets.

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(e) Opinion of Counsel. The Buyer shall have received the opinion of
Hale and Dorr LLP, counsel to the Seller, dated the Closing Date, addressed
to the Buyer, substantially in the form attached hereto as Exhibit 3.

SECTION 7.03. Conditions to Obligation of the Seller. The obligation of the
Seller to effect and complete the Closing is further subject to the
satisfaction waiver of the following conditions:

(a) Representations and Warranties. The representations and warranties
of the Buyer set forth in this Agreement qualified as to materiality shall
be true and correct, and those not so qualified shall be true and correct in
all material respects, in each case as of the date hereof and as of the
Closing Date as though made as of the Closing Date, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties qualified as to materiality
shall be true and correct, and those not so qualified shall be true and
correct in all material respects, as of such earlier date). The Seller shall
have received a certificate signed on behalf of the Buyer by a duly
authorized officer of the Buyer to such effect.

(b) Performance of Obligations of the Buyer. The Buyer shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and the Seller
shall have received a certificate signed on behalf of the Buyer by a duly
authorized officer of the Buyer to such effect.

(c) Consents and Approvals. All Consents set forth in Schedule 7.02
shall have been obtained and be in full force and effect and all Filings set
forth in Schedule 7.02 shall have been made with the appropriate Person, and
the Seller shall have been furnished with evidence reasonably satisfactory
to it of the granting of such Consents or the submission of such Filings, as
the case may be.

(d) No Litigation. There shall not be pending any suit, action or
proceeding by any Governmental Entity or any other Person (other than a
Person asserting a claim based on a business or stockholder relationship
with the Seller), in each case that has a reasonable likelihood of success,
(i) challenging the sale by the Seller of any of the Purchased Assets, (ii)
seeking to prohibit or limit the ownership or operation by the Buyer of the
Pet Business or any portion of the Purchased Assets, or to compel the Buyer
to dispose of or hold separate any portion of the Purchased Assets, as a
result of the transaction contemplated hereby, or by any of the other
Transaction Agreements or (iii) seeking to prohibit the Buyer from
effectively controlling any of the Purchased Assets.

(e) Opinion of Counsel. The Seller shall have received the opinion of
Bingham Dana LLP, counsel to the Buyer, dated the Closing Date, addressed to
the Seller, substantially in the form attached hereto as Exhibit 4.

ARTICLE VIII

TERMINATION, AMENDMENT AND WAIVER

SECTION 8.01. Termination. This Agreement may be terminated at any time
prior to the Closing:

(a) by mutual written consent of the Buyer and the Seller;

(b) by either the Buyer or the Seller upon written notice to the other

(i) if the transactions contemplated hereby or by the other
Transaction Agreements are not consummated on or before June 30, 2002
(the "Outside Date"), unless the failure to consummate the transactions
contemplated hereby is the result of a material breach of this Agreement
by the party seeking to terminate this Agreement; provided, however,
that the passage of such period shall be tolled for any part thereof
(but not exceeding sixty (60) days in the aggregate) during which time
the Seller's proxy solicitation materials described in Section 6.06
hereof are subject to review by, and comments from, the SEC until the
date the SEC grants the Seller permission to distribute such materials
to its stockholders;

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(ii) if any Governmental Entity issues an order, decree or ruling or
takes any other action permanently enjoining, restraining or otherwise
prohibiting the transactions contemplated hereby or by the other
Transaction Agreements and such order, decree, ruling or other action
shall have become final and nonappealable; or

(iii) if the stockholders of the Seller do not by the Required
Stockholder Vote authorize the sale of assets contemplated hereby in
which event the Seller shall promptly pay all the reasonable costs and
expenses of the Buyer incurred in connection with this Agreement and the
transactions contemplated herein, but in no event more than $300,000;

(d) by the Buyer pursuant to Section 6.07(c) upon written notice to the
Seller and

(e) as provided in Section 8.02.

SECTION 8.02. Additional Termination Rights. In the event the Buyer
receives notice under Section 5.05 of a supplement or amendment to any
Disclosure Schedule which discloses, or which together with any prior
supplements or amendments pursuant to such section discloses, any change or
effect which constitutes a Material Adverse Effect measured against the
Disclosure Schedules with respect to such representations and warranties as of
the date hereof, the Buyer may, prior to the 10/th Business Day after its
receipt of the applicable supplement pursuant to Section 5.05, terminate this
Agreement. /

SECTION 8.03. Effect of Termination. In the event of termination of this
Agreement by either the Buyer or the Seller as provided in Section 8.01, this
Agreement shall forthwith become void ab initio and have no effect, without any
liability or obligation on the part of any party hereto, other than the
confidentiality provisions of Section 6.01, Section 6.03, Section 6.04, the
fees and expenses provisions of Sections 6.07 and 8.01(b)(iii), this Section
8.03 and Article X, and except to the extent that such termination results from
the willful breach by a party of any covenant set forth in this Agreement.

SECTION 8.04. Extension; Waiver. At any time prior to the Closing Date, the
parties may agree to (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement
or in any document delivered pursuant to this Agreement, (c) waive compliance
with any of the agreements of the other party contained in this Agreement or
(d) waive any condition to such party's obligation to effect and complete the
Closing. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.

ARTICLE IX

INDEMNIFICATION

SECTION 9.01. Indemnification.

(a) The Seller shall indemnify the Buyer and its Affiliates and their
respective officers, directors, employees, stockholders, agents and
representatives against and hold them harmless from any loss, liability, claim,
damage or actual out-of-pocket expense (including reasonable legal fees and
expenses) (collectively, a "Loss") suffered or incurred by any such indemnified
party to the extent arising from

(i) any breach of any representation or warranty of the Seller which
survives the Closing contained in this Agreement;

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(ii) any breach of any covenant or agreement of the Seller contained in
this Agreement requiring performance after the Closing Date;

(iii) any remediation, assessment or monitoring obligations or death or
injury to persons or property relating to the presence of Hazardous
Substances, other than those Hazardous Substances brought to or otherwise
introduced at or introduced on the Plant by the Buyer or its agents,
employees, representatives or independent contractors at any time during the
period of Buyer's occupancy and use of the Plant, if any, (A) in, on, under
or migrating from any property currently or formerly owned, operated or
leased by the Seller or its Subsidiaries in connection with the Pet Business
(including, without limitation, the Plant), whether known or unknown at
Closing, or (B) at any other location if such Hazardous Substances were
manufactured, generated, produced, used, stored, treated, recycled,
transported, discharged, emitted or released by or on behalf of the Seller
or any of its Subsidiaries at or from such location;

(iv) any actual or alleged violation of any Environmental Law by the
Seller or any of its Subsidiaries (A) with respect to the Plant other than a
violation caused by an act or omission of Buyer or its agents, employees,
representatives or independent contractors at the Plant during the period of
Buyer's occupancy and use thereof, if any (other than violations which are a
continuation of or arise as a result of conditions or violations which
existed at the Plant at Closing) or (B) with respect to the Pet Business
occurring prior to the Closing Date;

(v) any breach by Seller of its obligations pursuant to Section 6.21
regarding ISRA compliance, and any liability or obligation of Buyer arising
in connection with any ISRA filing required to be made by the Buyer upon the
termination of the use and occupancy, if any, of the Plant by the Buyer
unless such liability or obligation of the Buyer arises due to the handling,
manufacturing, use, treatment, recycling, transporting, discharge, emission,
generation, processing, storage, release or disposal of Hazardous Substances
at or on the Plant by the Buyer or its agents, employees, representatives or
independent contractors;

(vi) any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of the Seller or any of its
Subsidiaries; and

(vii) the failure of the Buyer to obtain protections afforded by
compliance with the notification and other requirements of the bulks
transfer statutes in force in the jurisdictions, if any, in which such
compliance would be required in connection with the transactions
contemplated by this Agreement;

provided that, except in the case of fraud, (A) except for Losses attributable
to a breach of a representation or warranty in Section 3.19, the Seller shall
not be liable under Section 9.01(a)(i) unless and until the aggregate amount of
Losses with respect to matters referred to in Section 9.01(a)(i) exceeds U.S.
$200,000 (the "Deductible Amount") and thereafter shall be liable for any and
all Losses under Section 9.01(a)(i) only to the extent they exceed the
Deductible Amount and (B) the Seller's maximum liability under Section
9.01(a)(i) shall not exceed $8,350,000.

(b) The Buyer shall indemnify the Seller and its Affiliates and their
respective officers, directors, employees, stockholders, agents and
representatives against and hold them harmless from any Loss suffered or
incurred by any such indemnified party to the extent arising from

(i) any breach of any representation or warranty of the Buyer which
survives the Closing contained in this Agreement;

(ii) any breach of any covenant or agreement of the Buyer contained in
this Agreement requiring performance after the Closing Date;

(iii) the Assumed Liabilities; and

(iv) the operation of the Pet Business on and after the Closing Date;

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provided that, except in the case of fraud, (A) except for Losses attributable
to a breach of a representation or warranty in Section 4.04, the Buyer shall
not be liable under Section 9.01(b)(i) unless and until the aggregate amount of
Losses with respect to matters referred to in Section 9.01(b)(i) exceeds the
Deductible Amount and thereafter shall be liable for any and all Losses under
Section 9.01(b)(i) only to the extent they exceed the Deductible Amount and (B)
the Buyer's maximum liability under Section 9.01(b)(i) shall not exceed
$8,350,000.

SECTION 9.02. Termination of Indemnification. The obligations to indemnify
and hold harmless a party hereto (i) pursuant to Sections 9.01(a)(i) and
9.01(b)(i) shall terminate when the applicable representation or warranty
terminates pursuant to Section 10.01 and (ii) pursuant to the other clauses of
Sections 9.01(a) and 9.01(b) shall continue indefinitely; provided, however,
that as to clause (i) above such obligations to indemnify and hold harmless
shall not terminate with respect to any item as to which the Person to be
indemnified or the related party thereto shall have, before the expiration of
the applicable period, previously made a claim by delivering a notice of such
claim (stating in reasonable detail the basis of such claim) to the
Indemnifying Party.

SECTION 9.03. Procedures Relating to Indemnification for Third Party
Claims. In order for an indemnified party or any of its Affiliates or any of
their respective officers, directors, employees, stockholders, agents or
representatives (an "Indemnified Party") to be entitled to any indemnification
provided for under this Agreement in respect of, arising out of or involving a
claim or demand made by any Person (other than a party hereto) against such
party (a "Third Party Claim"), such party must notify the indemnifying party
(the "Indemnifying Party") in writing, and in reasonable detail, of the Third
Party Claim promptly after receipt by the Indemnified Party of written notice
of the Third Party Claim; provided, however, that failure to give such
notification shall not affect the indemnification obligations set forth in this
Article IX except to the extent the Indemnifying Party shall have been
prejudiced as a result of such failure (except that the Indemnifying Party
shall not be liable for any expenses incurred during the period in which the
Indemnified Party failed to give such notice). Thereafter, the Indemnified
Party shall deliver to the Indemnifying Party, reasonably promptly after the
Indemnified Party's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnified Party relating to the
Third Party Claim.

If a Third Party Claim is made against the Indemnified Party, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
if the Indemnifying Party so chooses and acknowledges its obligation to
indemnify the Indemnified Party therefor, to assume the defense thereof with
counsel selected by the Indemnifying Party; provided that such counsel is not
reasonably objected to by the Indemnified Party within 15 days after the
Indemnified Party is advised in writing as to the selection of such counsel by
the Indemnifying Party. Should the Indemnifying Party so assume the defense of
a Third Party Claim, the Indemnifying Party shall not be liable to the
Indemnified Party for any legal fees, costs and/or expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof. If
the Indemnifying Party assumes such defense, the Indemnified Party shall have
the right to participate in the defense thereof and to employ counsel (not
reasonably objected to by the Indemnifying Party), at its own expense, separate
from the counsel employed by the Indemnifying Party, it being understood that
the Indemnifying Party shall control such defense.

If the Indemnifying Party so elects to assume the defense of any Third Party
Claim, the Indemnified Party shall cooperate with the Indemnifying Party in the
defense thereof. Such cooperation shall include, without limitation, the
retention and (upon the Indemnifying Party's request) the provision to the
Indemnifying Party of records and information which are reasonably relevant to
such Third Party Claim, and making employees available on a mutually convenient
basis to provide additional information and explanation of any material
provided hereunder. Whether or not the Indemnifying Party shall have assumed
the defense of a Third Party Claim, neither the Indemnifying Party nor the
Indemnified Party shall admit any liability with respect to, or settle,
compromise or discharge, such Third Party Claim without the other party's prior
written consent (which consent shall not be unreasonably withheld); provided,
that the consent of the other party will not be required if such admission of
liability, settlement, compromise or discharge includes a complete release of
such other party from further liability.

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SECTION 9.04. Procedures Related to Indemnification for Other Claims. In
the event the Indemnified Party should have a claim against any Indemnifying
Party under Section 9.01 that does not involve a Third Party Claim being
asserted against or sought to be collected from such Indemnified Party, the
Indemnified Party shall deliver notice of such claim with reasonable promptness
to the Indemnifying Party. The failure by such Indemnified Party so to notify
the Indemnifying Party shall not relieve the Indemnifying Party from any
liability which it may have to such Indemnified Party under Section 9.01,
except to the extent that the Indemnifying Party demonstrates that it has been
prejudiced by such failure.

SECTION 9.05. Exclusivity; Limitation; Reduction.

(a) After the Closing, except in the case of fraud by the breaching party,
Section 9.01 shall provide the exclusive remedy for any misrepresentation,
breach of warranty, covenant or other agreement, or other claims arising out of
this Agreement or the transactions contemplated hereby or the subject matter
hereof.

(b) In no event shall any party hereto be responsible for any Losses or
other amounts that are damages to reputation or the like, or special,
incidental, exemplary, consequential or punitive damages, except to the extent
such Losses are components of awards or judgments in third party claims and
except that the foregoing shall not restrict or limit any claim by the Seller
for any diminution in the value of the Pet Business (including on a "multiple"
basis) resulting from any misrepresentation, breach of warranty, covenant or
other agreement by the Seller under this Agreement.

(c) The amount of any Losses for which indemnification is provided under
this Article IX shall be reduced by any related recoveries which the
Indemnified Person has received under insurance policies or other related
payments received from third parties (including defense, indemnity,
contribution and setoff rights under the Assumed Contracts or by virtue of any
of the other Purchased Assets).

ARTICLE X

GENERAL PROVISIONS

SECTION 10.01. Survival of Representations and Warranties. The
representations and warranties in this Agreement or in any other document
delivered in connection herewith shall survive the Closing and shall terminate
as of the date which is fifteen (15) months after the Closing Date except for
(i) Section 3.06 which shall survive the Closing until thirty (30) days after
the expiration of the applicable statute of limitations (giving effect to any
extension thereof); (ii) the representations and warranties set forth in
Sections 3.01, 3.02, 3.23, 4.01 and 4.02 which shall not terminate. This
Section 10.01 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Closing Date.

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SECTION 10.02. Notices. All notices, requests, claims, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be delivered by hand or sent by confirmed facsimile or
email (with the original to follow by first class mail, postage prepaid) or
sent, postage prepaid, by registered or certified mail or internationally
recognized express courier service and shall be deemed given when so delivered
by hand, email or facsimile or if mailed, five (5) days after mailing (two (2)
business day in the case of overnight courier service) at the following
addresses (or at such other address for a party as shall be specified by like
notice):

(a) if to the Buyer, to

VETOQUINOL U.S.A., Inc.
2000 Chemin Georges
Lavaltrie, Quebec
Canada J0K 1H0
Attention: Normand Robichaud
Telephone: 450-586-2252
Facsimile: 450-586-2511
Email: nrobichaud@vetoquinol.ca

with a copy to:

Bingham Dana LLP
399 Park Avenue
New York, NY 10022-4689
Attention: Craigh Leonard, Esq.
Telephone: 212-318-7700
Facsimile: 212-752-5378
Email: cleonard@bingham.com

and to the Parent at the address set forth below.

(e) if to the Seller, to

IGI, Inc.
Wheat Road & Lincoln Avenue
P.O. Box 687
Buena, NJ 08310-0687
Attention: John Ambrose
Telephone: 856-697-1441
Facsimile: 856-697-2259
Email: johnambrose@askigi.com

With a copy to:

Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Jeffrey N. Carp, Esq.
Telephone: 617-526-6468
Facsimile: 617-526-5000
Email: jeffrey.carp@haledorr.com

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(f) If to the Parent, to:

VETOQUINOL S.A.
Laboratoire Vetoquinol
34, rue du Chene Sainte-Anne
70200, Magny-Vernois, France
Attention: Etienne Frechin
Telephone: 011-333-8462-5555
Facsimile: 011-333-8462-5509
Email: etienne.frechin@vetoquinol.com

with a copy to:

Bingham Dana LLP
399 Park Avenue
New York, NY 10022-4689
Attention: Craigh Leonard, Esq.
Telephone: 212-318-7700
Facsimile: 212-752-5378
Email: cleonard@bingham.com

SECTION 10.03. Definitions.

(a) For purposes of this Agreement:

"Affiliate" of any Person means another Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first Person.

"Assignment of Trademarks" means the Assignment of Trademarks and Domain
Names, to be dated as of the Closing Date, in substantially the same form
attached hereto as Exhibit 5.

"Benefit Plan" means any employment bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, workers'
compensation, death benefit, hospitalization, medical or other plan,
arrangement or understanding (whether or not legally binding) providing
benefits to any of the Seller's or any of its Subsidiaries' current or former
employees, officers or directors.

"Bill of Sale" means the bill of sale to be delivered by the Seller to the
Buyer on the Closing Date in substantially the same form attached hereto as
Exhibit 6.

"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized to close.

"Charter" means the Certificate of Incorporation of a corporation (for a
Delaware corporation) or other similar document of any corporation or entity
(for corporations or entities organized under the laws of other jurisdictions),
as such document has been amended and restated to date.

"Encumbrances" means all Liens, claims, rights of first refusal,
assignments, preemptive rights, rights-of-way, easements, encroachments,
restrictions, covenants, title retention agreements, indentures, security
agreements or any other encumbrances of any kind, other than any Permitted Lien
and other than any mechanic's, materialmen's, and similar liens, liens arising
under worker's compensation, unemployment insurance, social security,
retirement and similar legislation and liens on goods in transit incurred
pursuant to documentary letters of credit.

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"Environmental Laws" means the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 as amended ("CERCLA"), the Superfund Amendments and Reauthorization
Act of 1986 ("SARA"), the Federal Water Pollution Control Act, the Solid Waste
Disposal Act, as amended, the Federal Clean Water Act, the Federal Clean Air
Act, the Toxic Substances Control Act, as each may be amended from time to
time, or any federal, state or local law, statute, regulation, ordinance or
order relating to (i) pollution or the protection, preservation or restoration
of the environment, or (ii) exposure to or the use, storage, recycling,
treatment, generation, manufacture, processing, distribution, transportation,
handling, labeling, production, emission, discharge, release or disposal or
threatened release of Hazardous Substances (as such term in defined herein
below in this Section 10.03).

"Field" means the manufacture, packaging, marketing, selling or other
distribution of products for use in the animal health business.

"Financial Statements" means the audited consolidated balance sheets of the
Seller for each of the fiscal years ended December 31, 1998, 1999 and 2000,
respectively, and the related statements of operations, cash flow and
stockholders' equity for the years then ended, and the related notes thereto
accompanied by the report of an independent auditor included therein.

"Hazardous Substances" means any hazardous waste as defined by 42 U.S.C.
(S)6903(5), any hazardous substance as defined by 42 U.S.C. (S)9601(14), any
pollutant or contaminant as defined by 42 U.S.C. (S)9601(33) or any toxic
substance, oil or other hazardous materials or chemical (including, without
limitation, asbestos in any form, urea formaldehyde or polychlorinated
biphenyls) regulated by any Environmental Laws.

"Indebtedness" means, with respect to any Person, without duplication, (i)
all obligations of such Person for borrowed money, or with respect to deposits
or advances of any kind, (ii) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (iii) all obligations of such
Person upon which interest charges are customarily paid (other than trade
payables incurred in the ordinary course of business consistent with past
practice), (iv) all obligations of such Person under conditional sale or other
title retention agreements relating to property purchased by such Person, (v)
all obligations of such Person issued or assumed as the deferred purchase price
of property or services (excluding obligations of such Person to creditors for
raw materials, Inventory, services and supplies incurred in the ordinary course
of such Person's business), (vi) all lease obligations of such Person
capitalized on the books and records of such Person, (vii) all obligations of
others secured by a Lien on property or assets owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed,
(viii) all obligations of such Person under interest rate or currency hedging
transactions (valued at the termination value thereof) (other than forward or
spot foreign currency exchange contracts entered into in the ordinary course of
business consistent with past practice), (ix) all letters of credit issued for
the account of such Person (excluding letters of credit issued for the benefit
of suppliers to support accounts payable to suppliers incurred in thordinary
course of business) and (x) all guarantees and arrangements having the economic
effect of a guarantee of such Person of any Indebtedness of any other Person.

"Lien" means, with respect to any property or asset (or any income or
profits therefrom) of any Person (in each case whether the same is consensual
or nonconsensual or arises by Contract, operation of law, legal process or
otherwise), (a) any mortgage, lien, encumbrance, pledge, attachment, levy or
other security interest of any kind thereupon or in respect thereof, or (b) any
other arrangement, express or implied, under which the same is subordinated,
transferred, sequestered or otherwise identified so as to subject the same to,
or make the same available for, the payment or performance of any Indebtedness,
liability or obligation in priority to the payment of the ordinary, unsecured
liabilities of such Person. For the purposes of this Agreement, a Person shall
be deemed to own subject to a Lien any asset that it has acquired or holds
subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement relating to such
asset. For purposes of this Agreement, the term "Lien" shall not include any
Permitted Liens nor any mechanic's, materialmen's nor similar liens, liens
arising under worker's compensation, unemployment insurance, social security,
retirement and similar legislation nor liens on goods in transit incurred
pursuant to documentary letters of credit.

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"Material Adverse Effect" means (i) a material adverse effect on the Pet
Business, or Purchased Assets, operations, condition (financial or otherwise),
or results of operations of the Pet Business, taken as a whole, (ii) a material
adverse effect on the operation or use of any of the material Purchased Assets
or the ability of the Seller to perform its material obligations under any of
the Transaction Agreements, (iii) a material breach or cancellation of the
Supply Agreement dated as of March 6, 2001 by and between Corwood Laboratory,
Inc. and the Seller, or (iv) in the case of the Plant, the impairment of, or
interference with, the present or continued use of the property subject thereto
or affected thereby in any material respect, taken as a whole; provided, that
in no event shall any of the following constitute a Material Adverse Effect:
(a) a change in the market price or the trading volume of the Seller's Common
Stock, (b) failure of any one or more employees of the Seller or any of its
Subsidiaries to accept employment with the Buyer, (c) conditions affecting the
animal health industry generally or the United States or global economies, (d)
conditions resulting from the announcement and the pendency of the transactions
contemplated by this Agreement and the Transaction Agreements, or (e) the mere
fact of the Seller's failure to meet internal projections or forecasts,
analysts' expectations or published revenue or earnings predictions, for the
Pet Business or otherwise.

"Novasome Technology" means any technology, intellectual property, trade
secrets, processes and other property licensed, provided or used or permitted
to be licensed, provided or used under the Micro-Pak License Agreement,
including any enhancements, advances, modifications and improvements to such
technology, intellectual property, trade secrets, processes or other property
made or developed by Micro-Pak or the Seller or any of its Subsidiaries to
which (and to the extent) the Seller or any of its Subsidiaries has rights.

"Parent" means Vetoquinol S.A., a societe anonyme organized under the laws
of France.

"Permitted Liens" means Liens for taxes, assessments or governmental charges
which are not yet due and payable or that, subject to adequate security for
payment, are being properly contested in good faith by the Seller.

"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, joint venture, association, Governmental Entity or
other entity.

"Subsidiary" (including "Subsidiaries") means any corporation, joint
venture, partnership, limited liability company or other entity of which the
Seller, directly or indirectly, owns or controls a majority of the capital
stock or other equity interests and that is engaged solely in any aspect of the
Pet Business.

"Technology Rights Agreement" means the Technology Rights Agreement, to be
dated as of the Closing Date, by and between the Buyer and the Seller in the
form attached hereto as Exhibit 7.

"Technology Products" means all product lines or product categories in the
field known as: (i) shampoos, if such products contain any of the active
ingredients contained in any products of the Pet Business that are shampoos
that exist on the date hereof or existed at any time prior hereto;

(ii) creme rinses, if such products contain any of the active ingredients
contained in any products of the Pet Business that are creme rinses that exist
on the date hereof or existed at any time prior hereto;

(iii) moisturizing sprays or ear cleansers, to the extent such sprays or ear
cleansers, as the case may be, are formulated with 100% Novasome Technology; and

(iv) hand cremes.

A product which is a Technology Product shall cease to be a Technology
Product if the Novasome Technology in its formulation is reduced to a de
minimis amount compared to the amount of Novasome Technology in its formulation
in effect on the date hereof (or, if the product has been discontinued prior to
the date hereof, its formulation on the date that its use was discontinued).

A-39

"Transaction Agreements" means, collectively, this Agreement, the Instrument
of Assignment and Assumption, the Bill of Sale, the Assignment of Trademarks,
the Technology Rights Agreement, the Transition Services Agreement (if entered
into as contemplated by Section 6.13), the Supply Agreement and the
Confidentiality Agreement.

"Voting Agreement" means the Stockholder Voting Agreement by and among the
Buyer and certain shareholders of the Seller as listed therein, in the form
attached hereto as Exhibit 8.

(b) The following terms have the meanings set forth in the Sections set
forth below:

Term Section
---- -----------

Accessible Financial Records 6.18
Affiliate 10.03(a)
Affiliate Contracts 3.19
Agreement Preamble
Applicable Law 3.03
Arbiter 1.06(c)
Assignment of Trademarks 10.03(a)
Assumed Contracts 1.01(a)(v)
Assumed Liabilities 1.02(a)
Benefit Plan 10.03(a)
Bill of Sale 10.03(a)
Business Day 10.03(a)
Buyer Preamble
Buyer's Accountants 1.06(b)
Charter 10.03(a)
Claims 1.01(a)(xv)
Closing 2.01
Closing Date 2.01
Closing Payment 1.03
Code 2.02(a)(v)
Competing Proposal 6.07(f)(i)
Confidential Information 6.12
Confidentiality Agreement 6.01
Consent 3.03
Contracts 3.12
Current Assets 1.06(a)
Current Liabilities 1.06(a)
Deductible Amount 9.01(a)
Disclosure Schedules Article III
Encumbrances 10.03(a)
Environmental Laws 10.03(a)
Excluded Assets 1.01(b)
FDA 3.20
Field 10.03(a)
Filing 3.03
Final Proposal Date 6.07(c)
Final Statement of Working Capital 1.06(d)
Financial Statements 10.03(a)
Governmental Entity 3.03
Hazardous Substances 10.03(a)

A-40

Term Section
---- -----------

Indebtedness 10.03(a)
Indemnified Party and Indemnifying Party 9.03
Igen 3.25
Instrument of Assignment and Assumption 6.15
Intellectual Property 3.11(a)
Intellectual Property Contracts 3.11(c)
Inventory 1.01(a)(i)
ISRA 6.21
ISRA Clearance 6.21
Judgment 3.03
Lien 10.03(a)
Loss 9.01(a)
Manufacturing Equipment 1.01(b)(ii)
Matching Offer 6.07(d)
Material Adverse Effect 10.03(a)
Micro-Pak 3.25
Micro-Pak License Agreement 3.25
Net Working Capital 1.06(a)
NJDEP 6.21
Novasome Technology 10.03(a)
Objection Notice 1.06(b)
Outside Date 8.01(b)(i)
Parent 10.03(a)
Permits 1.01(a)(vi)
Permitted Liens 10.03(a)
Person 10.03(a)
Pet Business Preamble
Pet Business Employee 3.21(a)
Plant 1.01(b)(ii)
Pre-Closing Tax Period 3.06(a)
Preliminary Statement of Working Capital 1.06(a)
Proceeding 3.08
Product Registrations 3.15
Products Preamble
Products Liability Claims 1.02(a)(v)
Products Liability Period 1.02(a)(v)
Proxy Statement 6.06(a)
Purchase Price 1.02(a)
Purchase Price Adjustment 1.06(f)
Purchased Assets 1.01(a)
Purchased Receivables 6.11
Reference Balance Sheet 3.04(b)
Retained Liabilities 1.02(c)
Restricted Business 6.20(a)(i)
Returns 3.06(a)
Required Stockholder Vote 7.01(c)
SEC 6.06(a)
Seller Preamble
Seller Common Stock 3.26
Seller Preferred Stock 3.26

A-41

Term Section
---- ------------

Subsidiary and Subsidiaries 10.03(a)
Superior Proposal 6.07(f)(ii)
Superior Proposal Notice 6.07(c)
Supply Agreement 6.14
Tax and Taxes 3.06(a)
Technical Services 6.13(a)
Technology 1.01(a)(iii)
Technology Products 10.03(a)
Technology Rights Agreement 10.03(a)
Termination Notice 6.07(c)
Terms of Occupancy 6.13(b)
Third Party Claim 9.03
Transaction Agreements 10.03(a)
Transferred Employees 6.08
Transition Services Agreement 6.13(a)
Unaudited Financial Statements 3.04(b)
USDA 3.20
U.S. GAAP 1.06(a)
Voting Agreement 10.03(a)

SECTION 10.04. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any Applicable
Law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, such term or other provision will be interpreted so as to best
accomplish the intent of the parties within the limits of Applicable Law.

SECTION 10.05. Counterparts. This Agreement and each of the Transaction
Agreements may be executed in one or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties. This Agreement and each of the Transaction Agreements may be
executed via facsimile.

SECTION 10.06. Entire Agreement; No Third-Party Beneficiaries.

(a) Each of the representations, warranties, covenants and agreements of any
party hereto contained in any Schedule or Exhibit (including, without
limitation, the Disclosure Schedules) hereto or any certificate delivered by or
on behalf of such party pursuant to Sections 7.02 or 7.03 of this Agreement
will be deemed incorporated and contained in this Agreement and will constitute
representations, warranties, covenants and agreements or qualifications thereto
of such party. This Agreement together with the Confidentiality Agreement,
supersedes any other agreement, whether written or oral, that may have been
made or entered into by any party with respect to the subject matter hereof;
provided that, in the event that any provision of the Confidentiality Agreement
conflicts with any provisions of this Agreement, the provisions of this
Agreement shall prevail. This Agreement (including the Schedules and Exhibits
hereto), together with the other Transaction Agreements, constitutes the entire
agreement by and among the parties hereto with respect to the subject matter
hereof and there are no agreements or commitments by or among such parties or
the Affiliates with respect to the subject matter hereof except as expressly
set forth herein. No investigation or receipt of information by or on behalf of
the Buyer will diminish or obviate any of the representations, warranties,
covenants or agreements of the Seller under this Agreement or the conditions to
obligations of the Buyer under this Agreement.

(b) Nothing in this Agreement, express or implied, is intended to confer on
any Person other than the parties hereto and their respective permitted
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.

A-42

SECTION 10.07. Amendments. No modification or amendment of this Agreement
and no waiver of any of the terms or conditions hereof shall be valid or
binding unless made in writing and executed by all of the parties hereto (in
the case of modification or amendment) or by the party giving such waiver (in
the case of waiver).

SECTION 10.08. Assignment, Successors in Interest. This Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and permitted assigns. Prior to the Closing, no
party may assign either this Agreement or any of its rights, interests or
obligation hereunder without the prior written approval of the other party. No
assignment of this Agreement by any party without the consent of the other
party shall release such party of its obligations hereunder. In no event under
this Agreement shall the Seller ever be required to secure the consent of more
than one (1) of the Buyer or the Parent.

SECTION 10.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the internal laws (and not the law of conflicts)
of the State of New York.

SECTION 10.10. Interpretation.

(a) Unless the context otherwise requires, (i) all references made in this
Agreement to a Section, Schedule or an Exhibit are to a Section, Schedule or an
Exhibit of or to this Agreement, (ii) each term defined in this Agreement has
the meaning ascribed to it, (iii) "or" is disjunctive but not necessarily
exclusive, (iv) words in the singular include the plural and vice versa. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation."

(b) In the event of an ambiguity or question of intent or interpretation,
this Agreement shall be construed as if drafted jointly by the parties and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the extent to which any such party or its counsel participated in the
drafting of any provision hereof or by virtue of the extent to which any such
provision is inconsistent with any prior draft hereof.

(d) All documents and correspondence relating to this Agreement and the
other Transaction Agreements shall be in the English language.

SECTION 10.11. Waiver. The failure of any of the parties to enforce at any
time any of the provisions of this Agreement or the other Transaction
Agreements shall in no way be construed to be a waiver of any such provision,
nor in any way to affect the validity of this Agreement or any other
Transaction Agreement or any part hereof or thereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
or noncompliance with this Agreement or any other Transaction Agreement shall
be held to be a waiver of any other subsequent breach or noncompliance.

SECTION 10.12. Payments. Unless otherwise provided, all payments required
to be made pursuant to this Agreement or the other Transaction Agreements shall
be made in U.S. Dollars in the form of cash or by wire transfer or immediately
available funds to an account designated by the party receiving such payment.

SECTION 10.13. The Parent Guaranty. The Parent hereby unconditionally
guarantees the due and punctual performance of all of the Buyer's obligations
under this Agreement and under all of the Transaction Agreements. This guaranty
is an irrevocable guaranty of payment (and not just of collection) and shall
continue in effect notwithstanding any extension or modification of the terms
of this Agreement or any other act or event which might otherwise operate as a
legal or equitable discharge of such guarantor under this Section 10.13. The
Parent hereby waives all special suretyship defenses and notice requirements.

A-43

SECTION 10.14. Submission to Jurisdiction; Waiver of Jury Trial. Except as
provided in Section 1.06, each party hereto (i) submits to the non-exclusive
jurisdiction of any state or federal court sitting in the State of New York in
any action or proceeding arising out of or relating to this Agreement or the
Transaction Agreements, (ii) agrees that all claims in respect of such action
or proceeding may be heard and determined in any such court, (iii) agrees not
to bring any action or proceeding arising out of or relating to this Agreement
or the Transaction Agreements in any other court and (iv) WAIVES ANY RIGHT IT
MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTION AGREEMENTS. Each party
hereto hereby waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety or other
security that might be required to any other party hereto with respect thereto.
Any party hereto may make service on another party hereto by sending or
delivering a copy of the process to the party to be served at the address and
in the manner provided for the giving of notices in Section 10.02. Nothing in
this Section 10.14, however, shall affect the right of any party hereto to
serve legal process in any other manner permitted by law.

SECTION 10.15. Specific Performance. The parties hereto acknowledge that
the Buyer may be irreparably harmed and that there will be no adequate remedy
at law for a violation of any of the covenants or agreements of the Seller and
its Subsidiaries set forth in Sections 6.01, 6.06, 6.07, 6.12, 6.13 and 6.20.
Accordingly, it is agreed that, in addition to any other remedies that may be
available to the Buyer upon any such violation, the Buyer shall have the right
to enforce such covenants and agreements by specific performance, injunctive
relief or by any other means available to the Buyer at law or in equity.
Nothing contained in this Section 10.15 shall release the Seller or any of its
Subsidiaries from any liability arising from any breach by it of its
representations, warranties, covenants or agreements in this Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
all as of the date first written above.

THE SELLER:

IGI, INC.

By /s/ JOHN F. AMBROSE
-----------------------------
Name: John F. Ambrose
Title: President and Chief
Executive Officer

THE BUYER:

VETOQUINOL U.S.A., INC.

By /s/ NORMAND ROBICHAUD
-----------------------------
Name: Normand Robichaud
Title: President

THE PARENT:

By its signature below, the Parent
becomes a party to this Agreement
with respect to Article X only.

VETOQUINOL S.A.

By /s/ NORMAND ROBICHAUD
-----------------------------
Name: Normand Robichaud
Title:

A-44

Annex B

TECHNOLOGY RIGHTS AGREEMENT

Technology Rights Agreement made as of this day of , 2002 (the
"Agreement"), by and among IGI, Inc., a Delaware corporation ("IGI"), Igen,
Inc., a Delaware corporation ("Igen") (IGI and Igen being each a "Seller" and,
collectively, the "Sellers") on the one hand, and Vetoquinol U.S.A., Inc., a
Delaware corporation (the "Purchaser"), on the other hand.

W I T N E S S E T H:

WHEREAS, pursuant to and as further set forth in an Asset Purchase
Agreement, dated as of February 6, 2002 between IGI and the Purchaser (the
"Purchase Agreement"), the Purchaser agreed to purchase from the Sellers the
Purchased Assets; and

WHEREAS, the Sellers will realize good and valuable consideration as a
result of the consummation of the transactions contemplated by the Purchase
Agreement; and

WHEREAS, Section 2.02 of the Purchase Agreement provides that IGI and the
Purchaser will each execute and deliver to the other this Agreement at the
Closing; and

WHEREAS, included in the sale of the Purchased Assets is a sale and transfer
of all of the Sellers' goodwill in the Pet Business; and

WHEREAS, the Purchaser would suffer irreparable harm in the event the
Sellers, or any of them, license or permit others to use Novasome Technology in
Technology Products, except as provided herein.

NOW, THEREFORE, in consideration of the conditions and covenants set forth
herein and in the Purchase Agreement, it is agreed as follows:

1. Definitions. Capitalized terms not otherwise defined herein or in the
Purchase Agreement shall have the meanings set forth in Section 5 of this
Agreement.

2. Exclusive Rights in Field.

(a) The Purchased Assets include the exclusive right (to the extent such
right is held by the Sellers) to use Novasome Technology in Technology Products
to the extent such Technology Products are sold or marketed in the business of
animal health. Accordingly, subject to Section 2(c), each Seller hereby sells,
assigns and grants to the Purchaser the exclusive (even as to such Seller),
perpetual, world-wide, royalty-free, transferable, assignable, irrevocable
right and license to use solely in the business of animal health (the "Field")
any rights of such Seller in the Novasome Technology solely in connection with
the business of marketing or selling products that are Technology Products.
Except as provided in the Supply Agreement, each Seller agrees that it shall
not, nor permit any of its Subsidiaries to, (i) use the Novasome Technology, or
license others to use Novasome Technology, in products that are Technology
Products in the Field or (ii) manufacture, package, market, sell or otherwise
distribute or license others to manufacture, package, market, sell or otherwise
distribute, IGI-Novasome Products for use in products that are Technology
Products in the Field.

(b) Nothing in this Agreement shall prohibit any Seller from (i) using or
licensing others to use Novasome Technology in any products other than products
that are Technology Products in the Field or (ii) from manufacturing,
packaging, marketing, selling or otherwise distributing or licensing others to
manufacture, package, market, sell or otherwise distribute IGI-Novasome
Products for use in products that are not Technology Products in the Field.

B-1

(c) The exclusive right and license granted to the Purchaser in Section 2(a)
(the "Novasome Technology License") constitutes a sublicense of Igen's rights
under the License Agreement to the extent of the rights granted to the
Purchaser in Section 2(a). The Novasome Technology License and the other rights
sold, assigned, granted, licensed or sublicensed by each Seller pursuant to
this Agreement are so sold, assigned, granted, licensed or sublicensed solely
to the extent each such Seller has the right to so sell, assign, grant, license
or sublicense such rights for such purposes. Notwithstanding anything to the
contrary in this Agreement, in no event does the Novasome Technology License or
any other right sold, assigned, granted, licensed or sublicensed by either the
Seller to the Purchaser under this Agreement permit the Purchaser to
manufacture, formulate or otherwise produce any Novasome Technology including,
without limitation, the IGI-Novasome Products, or any product (other than
products that are Technology Products in the Field) containing any Novasome
Technology. Moreover, nothing in this Agreement shall prevent, prohibit or
inhibit in any respect any Seller or any Subsidiary (as defined in the Purchase
Agreement) of such Seller from performing its obligations or exercising any of
its rights under the Supply Agreement. The Purchaser agrees that, during any
period during which the Supply Agreement is in effect, the Purchaser shall only
use the Novasome Technology pursuant to its rights under this Agreement and the
Purchase Agreement by purchasing IGI-Novasome Products from one or more of the
Sellers pursuant to the Supply Agreement.

3. Trademark License. Igen hereby grants to the Purchaser a worldwide,
exclusive, royalty-free sublicense under the License Agreement with the right
to grant sublicenses and the right of its sublicensees to grant further
sublicenses to use any of the trademarks listed in Appendix B to the License
Agreement (the "MP Marks") solely in connection with the sale or marketing of
any product that is a Technology Product in the Field, subject to the
restrictions set forth in Section 4.5 of the License Agreement and only to the
extent Igen has the right to use the MP Marks for such purpose (the "MP Mark
Sublicense"). The MP Mark Sublicense is hereby granted solely to the extent
permitted by the License Agreement and with specific reference to the rights of
Micro-Pak, Inc. under Section 4.5 of the License Agreement. The Purchaser
acknowledges that it has read Section 4.5 of the License Agreement and
understands its applicability to the Purchaser with respect to the MP Mark
Sublicense. The Purchaser agrees that its use (and the use of its sublicensees
and all further sublicensees of its sublicensees) of the MP Marks pursuant to
the MP Mark Sublicense is subject to the oversight, control and inspection of
Micro-Pak, Inc., as specified in Section 4.5 of the License Agreement. The
Purchaser also agrees that its use (and the use of its sublicensees and all
further sublicensees of its sublicensees) of the MP Marks pursuant to the MP
Mark Sublicense is subject to the oversight, control and inspection of the
Sellers to the same extent as it is subject to the oversight, control and
inspection of Micro-Pak, Inc. under Section 4.5 of the License Agreement and
that such oversight, control and inspection right of the Sellers shall continue
notwithstanding any termination of such right of Micro-Pak, Inc.

4. License Agreement.

(a) Sellers agree to exercise the option in Section 2.2 of the License
Agreement to cause the term of the License Agreement to be extended for an
additional term of ten (10) years and to cause the payment required to be made
to Micro-Pak, Inc. pursuant to Section 3.1 of the License Agreement (the
"Option Fee") to be made on or prior to November 30, 2005 (the "Renewal Date").
The Sellers shall furnish the Purchaser with written evidence of such exercise
and payment within five (5) days of the Renewal Date. At the Purchaser's
reasonable request from time to time after June 2005, the Sellers shall discuss
with the Purchaser their plans and ability to pay the Option Fee; provided that
the Purchaser shall keep all information resulting from such discussions
confidential and will, at Sellers' request, enter into a confidentiality
agreement in a form reasonably agreeable to both parties relating to such
discussions. In the event that the Sellers do not renew the License Agreement
on or prior to the Renewal Date, Purchaser shall have the right, on behalf of
the Sellers, to exercise Sellers' option under Section 2.2 of the License
Agreement to extend the License Agreement for an additional term of ten (10)
years and to pay the Option Fee required by Section 3.2 of the License
Agreement, and Sellers hereby irrevocably designate and appoint Purchaser as
their agent and attorney-in-fact to cause Sellers' said option to be exercised
in accordance with the terms and provisions of this sentence. The Renewal Date
shall be extended on a day-for-day basis for each day that any Seller's right
to exercise the option set forth in Section 2.2 of the License

B-2

Agreement is extended. If Purchaser exercises such right to extend the term of
the License Agreement, the Sellers shall either (i) repay to Purchaser the
Option Fee on or prior to December 31, 2005 (which date shall be extended on a
day-for-day basis for each day that the Renewal Date is extended hereunder)
together with interest thereon at a rate equal to the lesser of (x) the prime
lending rate of the Bank of Montreal plus 3% or (y) 10%, compounded annually,
from the date of payment by Purchaser of the Option Fee to the date of
repayment by Sellers or (ii) solely at the Sellers' written election, transfer
to Purchaser all of Sellers' rights and obligations under the License Agreement
free and clear of any liens or encumbrances (other than under this Section 4)
on or prior to December 31, 2005 (which date shall be extended on a day-for-day
basis for each day that the Renewal Date is extended hereunder); provided,
that, in the case of the foregoing clause (ii), in connection with and upon the
Seller's transfer to the Purchaser of its rights and obligations under the
License Agreement, the Purchaser shall sublicense to the Seller all rights and
obligations of the Purchaser (after the transfer contemplated by the foregoing
clause (ii)) under the License Agreement other than Purchaser's rights in
Sections 2 and 3 of this Agreement; provided, further, that if the Seller
repays the Option Fee to the Purchaser (with interest thereon at a rate equal
to the lesser of (x) the prime lending rate of the Bank of Montreal plus 3% or
(y) 10%, compounded annually) within two years after the date the Seller
transfers its rights and obligations under the License Agreement to the
Purchaser pursuant to the foregoing clause (ii), the Purchaser shall, upon such
repayment, transfer to the Seller all of the Purchaser's rights and obligations
under the License Agreement free and clear of any liens or encumbrances other
than Purchaser's rights under Sections 2 and 3 of this Agreement.

(b) Sellers shall not amend, modify or terminate any provision of the
License Agreement in any manner so as to adversely affect the Purchaser's
rights to use the Novasome Technology as provided herein or which would
interfere with Sellers' obligations under the Supply Agreement.

(c) Sellers shall not transfer, assign or otherwise convey the License
Agreement except in connection with a Change of Control, and then only on
condition that the assignee expressly agree in writing delivered to the
Purchaser to be bound by the provisions of this Agreement. Notwithstanding the
foregoing, nothing in this Agreement shall prevent or inhibit the Seller from
sublicensing any of its rights and obligations under the License Agreement
other than those rights granted to Purchaser in Sections 2 and 3 hereof and no
consent of or notice to the Purchasers shall be required with respect to any
such sublicense.

5. Definitions. For purposes of this Agreement,

(a) "Change of Control" means, with respect to any person (the "Target"),
the sale, transfer or other disposition of all or substantially all of such
Target's assets to one or more other persons (the "Acquiror") in a single
transaction or series of related transactions, unless securities possessing
more than 50% of the total combined voting power of the Acquiror's outstanding
securities (or the securities of any parent thereof) are held by a person or
persons who held securities possessing more than 50% of the total combined
voting power of the Target immediately prior to that transaction.

(b) "IGI-Novasome Products" means those products by which Novasome
Technology is included in the products that are Technology Products as of the
date hereof (or in the case of Technology Products whose distribution was
discontinued prior to the date hereof, on such date of discontinuance)
including, but not limited to, those set forth on Exhibit A hereto.

(c) "License Agreement" means that certain License Agreement, dated December
13, 1995, by and between Micro Pak, Inc., a Delaware corporation ("Micro-Pak")
and Igen, attached hereto as Exhibit B.

(d) "Novasome Technology" means any technology, intellectual property, trade
secrets, processes and other property licensed, provided or used or permitted
to be licensed, provided or used under the License Agreement that was used in
any products of the Pet Business on or prior to the Closing Date of the
Purchase Agreement.

B-3

(e) "Technology Products" means all product lines or product categories in
the Field known as: (i) shampoos, if such products contain any of the active
ingredients contained in products of the Pet Business that are shampoos that
exist on the date hereof or existed at any time prior hereto; (ii) creme
rinses, if such products contain any of the active ingredients contained in
products of the Pet Business that are creme rinses that exist on the date
hereof or existed at any time prior hereof; (iii) moisturizing sprays or ear
cleansers, to the extent such sprays or ear cleansers, as the case may be, are
formulated with 100% Novasome Technology; and (iv) hand cremes. A product which
is a Technology Product shall cease to be a Technology Product if the Novasome
Technology in its formulation is reduced to a de minimis amount compared to the
amount of Novasome Technology in its formulation in effect on the date hereof
(or, if the Product has been discontinued prior to the date hereof, its
formulation on the date that its use was discontinued).

5.2. Notices. All notices, requests, claims, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be delivered by hand or sent by confirmed facsimile or
email (with the original to follow by first class mail, postage prepaid) or
sent, postage prepaid, by registered or certified mail or internationally
recognized express courier service and shall be deemed given when so delivered
by hand, email or facsimile or if mailed, five (5) days after mailing (two (2)
business day in the case of overnight courier service) at the following
addresses (or at such other address for a party as shall be specified by like
notice):

(a) if to the Buyer, to

VETOQUINOL U.S.A., Inc.
2000 Chemin Georges
Lavaltrie, Quebec
Canada J0K 1H0
Attention: Normand Robichaud
Telephone: 450-586-2252
Facsimile: 450-586-2511
Email: nrobichaud@vetoquinol.ca

With a copy to:

VETOQUINOL S.A.
Laboratoire Vetoquinol
34, rue du Chene Sainte-Anne
70200, Magny-Vernois, France
Attention: Directeur General
Telephone: 011-333-8462-5555
Facsimile: 011-333-8462-5509
Email: dg@vetoquinol.com

(b) if to a Seller, to

IGI, Inc.
Wheat Road & Lincoln Avenue
P.O. Box 687
Buena, NJ 08310-0687
Attention: John Ambrose
Telephone: 856-697-1441
Facsimile: 856-697-2259
Email: johnambrose@askigi.com

B-4

With a copy to:

Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Jeffrey N. Carp, Esq.
Telephone: 617-526-6468
Facsimile: 617-526-5000
Email: jeffrey.carp@haledorr.com

6. No Waiver. The failure to enforce at any time any of the provisions of
this Agreement or to require at any time performance by the other party of any
of the provisions hereof shall in no way be construed to be a waiver of such
provisions or to affect the validity of this Agreement, of any part hereof, or
the right of either party thereafter to enforce each and every such provision
in accordance with the terms of this Agreement.

7. Amendment; Interpretation. This Agreement may not be amended or extended
in any respect except by a writing signed by all parties hereto. The subject
matter and language of this Agreement has been the subject of negotiations
between the parties hereto and their respective counsel, and this Agreement has
been jointly prepared by them; accordingly, this Agreement shall not be
construed against any party hereto on the basis that it was drafted by such
party or its counsel.

8. Governing Law; Jurisdiction; Specific Performance.

(a) This Agreement shall be governed by, and construed in accordance with,
the internal laws (and not the law of conflicts) of the State of New York.

(b) Each party hereto (i) submits to the non-exclusive jurisdiction of any
state or federal court sitting in the State of New York in any action or
proceeding arising out of or relating to this Agreement, (ii) agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court, (iii) agrees not to bring any action or proceeding arising out
of or relating to this Agreement in any other court and (iv) WAIVES ANY RIGHT
IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTION AGREEMENTS. Each party
hereto hereby waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety or other
security that might be required to any other party hereto with respect thereto.
Any party hereto may make service on another party hereto by sending or
delivering a copy of the process to the party to be served at the address and
in the manner provided for the giving of notices in Section 5.2. Nothing in
this Section 8(b), however, shall affect the right of any party hereto to serve
legal process in any other manner permitted by law.

(c) Each of the parties hereto acknowledges that the other may be
irreparably harmed and that there will be no adequate remedy at law for a
violation of any of the covenants or agreements of the other parties set forth
in this Agreement. Accordingly, it is agreed that, in addition to any other
remedies that may be available to a party upon any such violation, such party
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to such party at
law or in equity. Nothing contained in this Section 8(c) shall release such
party from any liability arising from any breach by it of its representations,
warranties, covenants or agreements in this Agreement.

(d) Each of the Sellers and the Purchaser hereby agrees to seek confidential
treatment of all confidential matters relating to any suit, claim, action or
proceeding brought in any court.

B-5

9. Assignment. The Sellers shall not, without the Purchaser's prior written
consent, in any way transfer, assign or otherwise convey either (i) this
Agreement or any of the Sellers duties or obligations hereunder or (ii) the
License Agreement except in either case in connection with a Change of Control
and then only on condition that the assignee expressly agree in writing
delivered to the Purchaser prior to the consummation of the Change of Control
to assume all of the Seller's obligations hereunder. This Agreement shall be
binding upon the parties and their respective successors and permitted assigns.

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their duly authorized representatives as of the day and year first above
written.

THE SELLERS:

IGI, INC.

By: -----------------------------
Name:
Title:

IGEN, INC.

By: -----------------------------
Name:
Title:

THE PURCHASER:

VETOQUINOL U.S.A, INC.

By: -----------------------------
Name:
Title:

B-6

Annex C

MANUFACTURING AND SUPPLY AGREEMENT

This Manufacturing and Supply Agreement (the "Agreement"), dated as of
, 2002, is entered into by and among IGI, Inc., a Delaware corporation
("IGI"), Igen, Inc., a Delaware corporation ("Igen") (IGI and Igen,
collectively, the "Suppliers" and each a "Supplier"), and Vetoquinol, U.S.A.,
Inc., a Delaware corporation (the "Purchaser").

RECITALS

WHEREAS, the Suppliers are in the business of the production and marketing
of products in the animal health business, such as pharmaceuticals, nutritional
supplements and grooming aids and formulations under the names EVSCO
Pharmaceuticals, Tomlyn and Luv'Em, among others (collectively, the "Pet
Business");

WHEREAS, the Purchaser and IGI have entered into that certain Asset Purchase
Agreement (the "Purchase Agreement"), dated as of February 6, 2002, pursuant to
which the Purchaser has agreed to purchase, and IGI has agreed to sell the
Purchased Assets (as defined in the Purchase Agreement) as further set forth in
the Purchase Agreement;

WHEREAS, certain products manufactured, marketed or sold by the Pet Business
incorporate Novasome Technology in a form manufactured by the Suppliers;

WHEREAS, Section 2.02 of the Purchase Agreement provides that IGI, Igen and
the Purchaser will each execute and deliver to each other this Agreement at the
Closing (as defined in the Purchase Agreement);

WHEREAS, the Suppliers desire to supply the Purchaser with certain products
incorporating Novasome Technology on the terms and conditions set forth in this
Agreement;

WHEREAS, the Purchaser desires to have the Suppliers supply to it such
products on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the above premises and the mutual
agreement set forth herein, the parties agree as follows:

1. Definitions. Capitalized terms used in this Agreement and not otherwise
defined herein shall have the meaning set forth below.

"Change of Control" means, with respect to any person (the "Target"), the
sale, transfer or other disposition of all or substantially all of such
Target's assets to one or more other persons (the "Acquiror") in a single
transaction or series of related transactions, unless securities possessing
more than 50% of the total combined voting power of the Acquiror's outstanding
securities (or the securities of any parent thereof) are held by a person or
persons who held securities possessing more than 50% of the total combined
voting power of the Target immediately prior to that transaction.

"Field" means the manufacture, packaging, marketing, selling or other
distribution of products for use in the animal health business.

"Force Majeure" means any event beyond the control of the parties,
including, without limitation, fire, flood, riots, strikes, epidemics, war
(declared or undeclared and including the continuance, expansion or new

C-1

outbreak of any war or conflict now in existence), acts of terrorism and
responses thereto, shortages, scarcities, embargoes and governmental actions or
decrees.

"IGI-Novasome Products" means those products by which Novasome Technology is
included by the Suppliers in the Technology Products as of the date hereof (or
in the case of Technology Products whose distribution was discontinued prior to
the date hereof, on such date of discontinuance), including, but not limited
to, those set forth on Exhibit A attached hereto.

"License Agreement" means that certain License Agreement, dated December 13,
1995 by and between Micro-Pak, Inc., a Delaware corporation ("Micro-Pak"), and
Igen.

"Novasome Technology" means any technology, intellectual property, trade
secrets, processes and other property licensed, provided or used or permitted
to be licensed, provided or used under the License Agreement that was used in
any products of the Pet Business on or prior to the Closing Date of the
Purchase Agreement.

"person" (regardless of whether capitalized) means any natural person,
entity, or association, including any corporation, partnership, limited
liability company, government (or agency or subdivision thereof), trust, joint
venture, or proprietorship.

"Related Technology" means any new technology or product incorporating
Novasome Technology developed solely by or for IGI or any of its wholly-owned
subsidiaries (and no other person other than IGI or any of its wholly-owned
subsidiaries), which technology IGI desires to use in the Field.

"Technology Products" means all product lines or product categories in the
field known as:

(i) shampoos, if such products contain any of the active ingredients
contained in any products of the Pet Business that are shampoos that exist
on the date hereof or existed at any time prior hereto;

(ii) creme rinses, if such products contain any of the active ingredients
contained in any products of the Pet Business that are creme rinses that
exist on the date hereof or existed at any time prior hereto;

(iii) moisturizing sprays or ear cleansers, to the extent such sprays or
ear cleansers, as the case may be, are formulated with 100% Novasome
Technology; and

(iv) hand cremes.

A product which is a Technology Product shall cease to be a Technology Product
if the Novasome Technology in its formulation is reduced to a de minimis amount
compared to the amount of Novasome Technology in its formulation in effect on
the date hereof (or, if the product has been discontinued prior to the date
hereof, its formulation on the date that its use was discontinued).

2. Supply of Products; Forecasts and Orders.

2.1. General. Subject to the terms and conditions of this Agreement, the
Suppliers shall sell to the Purchaser, and the Purchaser shall purchase from
the Suppliers, the IGI-Novasome Products, in such quantities and at such times
as ordered by the Purchaser in accordance with Section 2 hereof. The Suppliers
shall use commercially reasonable efforts to maintain manufacturing capacity
sufficient to meet the Purchaser's needs on a timely basis. In the event of any
shortage of any raw materials or supplies required by the Suppliers to
manufacture the IGI-Novasome Products forecast under Section 2.2, the Suppliers
shall assure that the Purchaser's Orders for the IGI-Novasome Products are
fulfilled on a pro rata basis, based upon the available raw materials and
supplies and the other needs, requirements and commitments of the Suppliers
(including, without limitation, the manufacture, production and supply of
products for the Suppliers' use in the Suppliers' businesses) for such raw
materials and supplies.

C-2

2.2. Forecasts. Promptly after the Effective Date, the Purchaser shall
provide the Suppliers with a written forecast of its estimated purchases of
each IGI-Novasome Product for the next three (3) months. Suppliers shall use
reasonable commercial efforts to fill Orders that are consistent with such
forecast. On the 15th day of every month commencing with the second month after
the Effective Date, the Purchaser shall provide the Suppliers with a written
forecast of the Purchaser's estimated purchases of IGI-Novasome Products during
each month of the 3-month period beginning with the second month following the
month in which the forecast is given. For example, on January 15th the
Purchaser would give a forecast of the months of March, April and May. On
February 15th the Purchaser would give a forecast for the months of April, May
and June. The last forecast in which a month is included shall constitute a
binding commitment to purchase in such month, at the minimum, 75% of the
estimated purchases of each IGI-Novasome Product set forth in such forecast
with respect to such month. For example, the month of May would be included in
forecasts given on January 15th , February 15th and March 15th. The forecast
for May included in the March 15th forecast would be binding on the Purchaser
to the extent provided above. In no event will the Suppliers be required to
supply, otherwise provide or sell to the Purchaser with respect to any month
any IGI-Novasome Products in excess of the amount for such IGI-Novasome
Products set forth in the binding forecast provided by the Purchaser to the
Suppliers under this Section 2.2 for such month.

2.3. Orders. Orders to purchase the IGI-Novasome Products under this
Agreement ("Orders") shall be made in writing and submitted by mail, facsimile,
electronic mail or other means agreed upon by the parties. Each order must
specify the quantity of each IGI-Novasome Product being ordered and the
delivery dates therefor. All orders shall reference and incorporate the terms
and conditions set forth in this Agreement. The quantity for each IGI-Novasome
Product ordered in any Order shall be set in whole number units of 2,000
kilogram batch sizes, with a minimum order of one 2,000 kilogram batch size. No
Order shall set a delivery date for less than forty-five (45) days after the
date that such Order is delivered to the Suppliers.

2.4. Specifications. During the Term, the Suppliers shall assure that the
IGI-Novasome Products shall conform in all material respects to those
formulations and specifications for IGI-Novasome Products utilized by the
Suppliers in their conduct of the Pet Business on the date of the Purchase
Agreement and on the date hereof (collectively, the "Specifications"). The
Specifications are described in Exhibit B attached hereto. Except as may be
required by Sections 2.5 and 5, no change shall be made to the Specifications
without the Purchaser's prior written consent.

2.5. Compliance. The Suppliers shall comply with all applicable laws and
regulations, and all approvals and permits maintained by it, if any, with
respect to the manufacture, sale and delivery of IGI-Novasome Products under
this Agreement.

3. Delivery; Acceptance and Rejection; Payment.

3.1. Deliveries. The Suppliers shall deliver all IGI-Novasome Products
specified under each Order, f.o.b. the Suppliers' plant in Buena, New Jersey
(or such other location in the United States as the Suppliers may designate to
the Purchaser in writing). In the event that the Suppliers are, or may become,
unable to timely fill any Order for any reason, the Suppliers shall promptly
notify the Purchaser of such inability.

3.2. Right to Reject Delivery. Upon receipt of any delivery of IGI-Novasome
Products hereunder, the Purchaser shall make or cause to be made such
inspection and tests of the IGI-Novasome Products as the Purchaser shall deem
reasonably necessary to determine whether or not such IGI-Novasome Products
conform to the Specifications and the Purchaser's Order. In the event any
IGI-Novasome Product fails to so conform, before using the IGI-Novasome
Product, the Purchaser shall give the Suppliers written notice of such failure
(which notice shall describe the specific failure to conform) within sixty (60)
days after the date of delivery of the IGI-Novasome Product to the Purchaser,
and at the Purchaser's election, the Suppliers shall promptly either (i)
replace the nonconforming IGI-Novasome Product(s) within thirty (30) days after
receipt of such notice from the Purchaser, or (ii) issue to the Purchaser a
credit in the amount of the Manufacturing Fee applicable to the of the

C-3

nonconforming IGI-Novasome Product(s) plus applicable taxes and costs, to the
extent such Manufacturing Fee, taxes and costs have been paid by the Purchaser.
In the case of either replacement or credit pursuant to the preceding clauses
(i) and (ii), the Purchaser shall promptly return to the Suppliers the
nonconforming IGI-Novasome Product at the Supplier's cost.

3.3. Payment. During the Term, the Purchaser shall pay to IGI, within
thirty (30) days of delivery of a shipment of IGI-Novasome Products under an
Order, on an order-by-order basis, a manufacturing fee (the "Manufacturing
Fee") for each IGI-Novasome Product as specified in Exhibit A attached hereto;
provided, however, that the Purchaser shall not pay any Manufacturing Fee for
any IGI-Novasome Product(s) that are rejected by the Purchaser pursuant to
Section 3.2 unless such IGI-Novasome Product(s) are replaced or credited by the
Suppliers pursuant to Section 3.2. All payments made by the Purchaser under
this Section 3.3 shall be made in U.S. Dollars. The Manufacturing Fee for each
IGI-Novasome Product set forth in Exhibit A shall govern through the date three
(3) years subsequent to the date of this Agreement, subject to increase on an
annual basis by a percentage equal to twenty percent of the percentage by which
the Producer Price Index published by the United States Department of Labor as
may be applicable to the State of New Jersey (the "PPI") has increased during
such annual period. Thereafter such Manufacturing Fee shall be subject to
increase on an annual basis by a percentage equal to the percentage by which
the PPI has increased during such annual period. For any new products or
reformulation of old products, the parties will negotiate in good faith a fee
to be paid to IGI. In the event the parties are not able to come to terms on
such a fee, the Suppliers shall have no obligation to supply, otherwise provide
or sell to the Purchaser any such new products or reformulations of old
products and shall have no liability to the Purchaser with respect thereto.
Notwithstanding anything in this Agreement to the contrary, the Suppliers shall
not be under any obligation to supply IGI-Novasome Products to the Purchaser
during any period when any material portion of the Manufacturing Fee has not
been paid when due, provided that any portion of the Manufacturing Fee as to
which there exists a bona fide dispute between the Purchaser and the Suppliers
shall not be deemed unpaid for the purposes of this sentence.

4. Use of IGI-Novasome Products; Access to Related Technology.

4.1. Use of IGI-Novasome Products. The Purchaser shall use the IGI-Novasome
Products purchased from the Suppliers pursuant to this Agreement only in
connection with the manufacture, packaging, marketing, sale or other
distribution by the Purchaser, its successors, assigns or licensees of
Technology Products in the Field. The Purchaser and the Suppliers shall
negotiate in good faith the terms and conditions upon which Supplier will
supply IGI-Novasome Products to the Purchaser for any other purpose. In the
event the parties are not able to agree as to the supply of IGI-Novasome
Products for another purpose, the Suppliers shall have no obligation to supply,
otherwise provide or sell to the Purchaser IGI-Novasome Products for such
purpose.

4.2 Technology. Subject to the provisions of this Section 4.2, the
Purchaser shall have the first right of negotiation to become the exclusive
purchaser from the Suppliers of any Related Technology. Upon the determination
by IGI or any of its wholly-owned subsidiaries to market for commercial use of
any Related Technology, the Suppliers shall promptly notify the Purchaser in
writing of the existence thereof (the "Related Technology Notice"), and the
parties hereby agree to negotiate in good faith with respect to mutually
acceptable terms, including distribution and pricing terms, relating to the
potential marketing and/or use of such Related Technology. Any Related
Technology Notice and the contents thereof shall be held by the Purchaser in
the strictest confidence, and the negotiations described in the previous
sentence shall be conducted only to the extent covered by a confidentiality
agreement in a form reasonably agreeable to both parties. In the event that the
Suppliers and the Purchaser are unable to reach a mutually satisfactory
agreement regarding any Related Technology within 90 days of the Related
Technology Notice, the Suppliers shall be free to offer such Related Technology
to others and will have no liability to the Purchaser with respect thereto
under this Agreement. Notwithstanding the foregoing, the Suppliers are not
required to disclose to the Purchaser, or provide to the Purchaser any
opportunity to negotiate to purchase or market, any technology developed by the
Suppliers pursuant to a contract or venture or other understanding, arrangement
or agreement with a third party (such technology, the "Unrelated Technology").
Any use or licensing of the Unrelated Technology, or the

C-4

manufacture or supply of any products that contain or are based on the
Unrelated Technology by the Suppliers shall not violate this Section 4.2.

5. Regulatory, Trademark, Licensing and Patent Matters. The Suppliers
hereby represent and warrant that they have obtained and will maintain all
material regulatory approvals that are necessary for manufacturing the
IGI-Novasome Products.

6. Term and Termination.

6.1. Term. The term of the Suppliers obligations to supply IGI-Novasome
Products to the Purchaser hereunder will commence on the date hereof (the
"Effective Date"), and, unless sooner terminated as provided in Section 6.2
hereof, will remain in force until December 13, 2015.

6.2. Termination. This agreement may be terminated as follows:

(a) Either Supplier shall have the right to terminate this Agreement
(including any pending orders placed by the Purchaser) immediately upon
written notice to the Purchaser in the event the Purchaser files or has
filed against it, any petition in a bankruptcy or similar proceeding.

(b) The Purchaser shall have the right to terminate this Agreement
(including any pending orders placed by the Purchaser) immediately upon
written notice to either Supplier in the event that either Supplier files or
has filed against it any petition in a bankruptcy or similar proceeding.

(c) The Suppliers may only terminate this Agreement immediately if
Purchaser fails to perform any of its material obligations under this
Agreement and such nonperformance continues for more than sixty (60) days
after written notice is received by Purchaser.

(d) The Purchaser may terminate this Agreement immediately if any
representation or warranty of any Supplier is materially inaccurate or if
the Suppliers fail to perform any of their material obligations under this
Agreement and such nonperformance continues for a period of sixty (60) days
after written notice is received by the Suppliers.

(e) If the manufacture, sale or distribution of any of the IGI-Novasome
Products is prohibited by applicable laws, rules or regulations in effect
from time to time, then either of the Suppliers, or the Purchaser, as the
case may be, may immediately terminate this Agreement at any time; provided
that if such prohibition relates to less than all of the Technology
Products, any such termination shall relate only to the Technology Products
with respect to which the manufacture, sale or distribution of IGI-Novasome
Products is prohibited, and this Agreement shall remain in effect with
respect to the Technology Products with respect to which the manufacture,
sale or distribution of IGI-Novasome Products is not prohibited.

(f) The Purchaser may terminate this Agreement for any other reason with
a minimum of six (6) months notice of intent to terminate except as
otherwise provided herein.

6.3. Effects of Termination. On the date that this Agreement is terminated
pursuant to any of the provisions of Section 6.2 (the "Termination Date"), the
following shall occur: (i) the Purchaser shall be required to pay to the
Suppliers, within a reasonable time following the Termination Date, any
Manufacturing Fees incurred as a result of Orders placed prior to, but not
after, the Termination Date, and (ii) any and all IGI-Novasome Products
manufactured by the Suppliers in response to an Order made by the Purchaser
prior to the Termination Date shall be delivered by the Suppliers to the
Purchaser pursuant to the terms of such Order.

7. Warranties. All products formulated by the Suppliers, and all labeling
provided by the Suppliers shall be subject to IGI's standard warranty that the
IGI-Novasome Products meet the Specifications, and are manufactured in
accordance with approved processes and comply with all applicable bulk
manufacturing, federal, state and local regulatory requirements. The warranty
provisions in this Section 7 provide the exclusive

C-5

warranties for any product supplied, otherwise provided or sold by the
Suppliers to the Purchaser under this Agreement. No other warranty, express or
implied, shall apply to any such products. The Suppliers specifically disclaim
all implied warranties of merchantability, fitness for a particular purpose and
noninfringement.

8. Insurance. The Suppliers shall maintain general liability insurance,
with products liability coverage, in such amounts and upon such terms as the
Suppliers deem advisable, but in any event not less than two million dollars
($2,000,000) in coverage. Upon reasonable request from time to time, the
Suppliers shall provide the Purchaser with evidence of such insurance.

9. Notices. All notices, requests, claims, demands and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be delivered by hand or sent by confirmed facsimile or email (with the
original to follow by first class mail, postage prepaid) or sent, postage
prepaid, by registered or certified mail or internationally recognized express
courier service and shall be deemed given when so delivered by hand, email or
facsimile or if mailed, five (5) days after mailing (two (2) business day in
the case of overnight courier service) at the following addresses (or at such
other address for a party as shall be specified by like notice):

(a) if to the Buyer, to

VETOQUINOL U.S.A., Inc.
2000 Chemin Georges
Lavaltrie, Quebec
Canada J0K 1H0
Attention: Normand Robichaud
Telephone: 450-586-2252
Facsimile: 450-586-2511
Email: nrobichaud@vetoquinol.ca

With a copy to:

(b) if to a Seller, to

IGI, Inc.
Wheat Road & Lincoln Avenue
P.O. Box 687
Buena, NJ 08310-0687
Attention: John Ambrose
Telephone: 856-697-1441
Facsimile: 856-697-2259
Email: johnambrose@askigi.com

C-6

With a copy to:

Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Jeffrey N. Carp, Esq.
Telephone: 617-526-6468
Facsimile: 617-526-5000
Email: jeffrey.carp@haledorr.com

10. Governing Law. This Agreement shall be governed, construed and enforced
in accordance with the internal laws (and not the law of conflicts) of the
State of New Jersey.

11. Entirety of Agreement; Amendment and Waiver. This Agreement sets forth
the entire agreement between the parties as to the subject matter hereof and
merges all prior discussions and negotiations between them, and none of the
parties shall be bound by any conditions, definitions, warranties,
understandings or representations with respect to such subject matter other
than as expressly provided herein. Neither this Agreement, nor any of the terms
or provisions hereof or appendices hereto, may be amended, modified,
supplemented or waived, except by a written instrument signed by the parties
hereto (or, in the case of a waiver, by the party granting such waiver). No
waiver of any of the provisions of this Agreement shall be deemed to be or
shall constitute a waiver of any other provisions hereof (whether or not
similar), nor shall such waiver constitute a continuing waiver. No failure of a
party hereto to insist upon strict compliance by the other party hereto with
any obligation, covenant, agreement or condition contained in this Agreement
shall operate as a waiver of any subsequent or other failure.

12. Assignment. The Suppliers shall not without the Purchaser's prior
written consent in any way transfer, assign or otherwise convey either this
Agreement or any of the Suppliers' rights, interests, duties or obligations
hereunder, except in connection with a Change of Control and then only on
condition that the assignee expressly agree in writing delivered to the
Purchaser prior to the consummation of the Change of Control to assume all of
the Suppliers' obligations hereunder. Notwithstanding anything to the contrary
herein, the Suppliers may subcontract out any or all of their obligations under
this Agreement. The Purchaser shall not, without the Suppliers' prior written
consent, in any way transfer, assign or otherwise convey its rights under
Section 4.2 except in connection with a Change of Control and then only on
condition that the assignee expressly agree in writing to assume all of the
Purchaser's obligations hereunder.

13. Actions by the Suppliers. Any action required to be taken by or that
may be taken by, or any obligation of, the Suppliers under this Agreement shall
be deemed taken or performed if taken or performed by any one or more of the
Suppliers.

14. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.

15. Independent Contractor. This Agreement shall not create an agency,
partnership, joint venture or employer/employee relationship between the
parties hereto. Each of the Purchaser and the Suppliers hereby agrees not to
represent itself in any of such capacities in any manner whatsoever in reliance
on the terms of this Agreement. The sole relationship established by this
Agreement is that of independent contractors, and nothing hereunder shall be
construed to give either party the power or authority to act for, represent,
bind or commit the other party.

C-7

16. Remedies. The parties acknowledge and agree that, in the event of a
breach or a threatened breach by either party of this Agreement, the other
party may suffer irreparable damage for which it will have no adequate remedy
at law and, accordingly, shall be entitled to injunctive and other equitable
remedies to prevent or restrain such breach or threatened breach, without the
necessity of posting any bond or surety, in addition to any other remedy it
might have at law or at equity. Unless otherwise provided in this Agreement,
each right and remedy set forth in this Agreement is in addition to any other
right and remedy, at law or in equity, and the exercise of one right or remedy
shall not be deemed a waiver of any other right or remedy.

17. Singular and Plural Forms. The use herein of the singular form shall
also denote the plural form, and the use herein of the plural form shall denote
the singular form, as in each case the context may require.

18. Headings. The headings contained in this Agreement are for convenience
of reference only and shall not constitute a part hereof or define, limit or
otherwise affect the meaning of any of the terms or provisions hereof.

19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.

20. Limitation on Damages. No party shall be liable to the other under
strict liability or for any indirect special, exemplary or punitive damages or
except as provided in the Uniform Commercial Code, for any incidental or
consequential damages in connection with the subject matter of this Agreement
or any Order.

21. Force Majeure. Neither Party shall be liable for any failure or delay
of performance under this Agreement due to any Force Majeure. Each party shall
use all reasonable efforts to minimize the impact of a Force Majeure upon such
party and its ability to perform any of its respective obligations under this
Agreement.

IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Agreement as of the date first written above.

IGI, INC.

By -----------------------------
Name:
Title:

IGEN, INC.

By -----------------------------
Name:
Title:

VETOQUINOL U.S.A., INC.

By -----------------------------
Name:
Title:

C-8

Preliminary Copy
Filed on April 24, 2002

Appendix A
----------

IGI, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

Special Meeting of Stockholders

May 31, 2002

The undersigned, having received notice of the special meeting and the board of
directors' proxy statement therefor and revoking all prior proxies, hereby
appoints Earl R. Lewis, John Ambrose and Domenic N. Golato, and each of them,
with full power of substitution, as proxies for the undersigned to act and to
vote, in respect of all shares of capital stock of IGI, Inc. ("IGI") which the
undersigned may be entitled to act or vote, at the special meeting of
stockholders of IGI to be held on May 31, 2002 and at any adjournment of the
meeting as designated in this proxy upon all matters referred to on the reverse
side of this proxy and as described in the proxy statement for the meeting and,
in their discretion, upon any matters that may properly come before the meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE, THE PROXIES WILL BE VOTED
AS RECOMMENDED BY THE BOARD OF DIRECTORS.

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

CONTINUED AND TO BE SIGNED ON REVERSE SIDE.

SEE REVERSE SIDE

Please Detach and Mail in the Envelope Provided

[X] Please mark votes as in this example.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
ALL OF THE FOLLOWING PROPOSALS. To vote in accordance with this recommendation,
just sign this proxy; no boxes need to be checked. Unless marked otherwise, this
proxy will be voted in accordance with the recommendation of the board of
directors.

1. To authorize the sale of assets contemplated by the asset purchase
agreement dated as of February 6, 2002 by and between Vetoquinol U.S.A.,
Inc. and IGI, Inc., a copy of which is set forth in Annex A to the board
of directors' proxy statement for the special meeting.

[_] FOR [_] AGAINST [_] ABSTAIN

2. To adjourn the meeting upon motion by the presiding officer or his
designee to allow additional time for solicitation of proxies.

[_] FOR [_] AGAINST [_] ABSTAIN

MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]

Signature:_______________ Date:_______ Signature:_________________ Date:_______

NOTE: Please sign exactly as name(s) appear(s) on this proxy. Joint owners
should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation or
partnership, please sign by authorized person.