<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q
                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                        
            For Quarter Ended                     Commission File No.
              June 30, 1998                            001-08568
           -------------------                  ----------------------


                                   IGI, Inc.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)


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


  WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ                08310
  ----------------------------------------             -----------
  (Address of principal executive offices)              (Zip Code)

                                (609)-697-1441
                     ------------------------------------
              Registrant's telephone number, including area code



   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                      Yes        No  X
                         -----     ------

   The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:


                  Common Shares Outstanding at August 7, 1998
                                   9,466,667



 
<PAGE>
 
                         PART 1 - FINANCIAL INFOMATION

                         Item 1 - Financial Statements

                           IGI, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)


<TABLE>
<CAPTION>
(THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)      Three months ended June 30,           Six months ended June 30,
                                                      ----------------------------------  -----------------------------------
                                                           1998              1997                1998              1997
                                                      ---------------  -----------------  ------------------  ---------------
                                                                          (RESTATED)                            (RESTATED)
<S>                                                   <C>              <C>                <C>                 <C>
Revenues:
     Sales, net                                           $    7,604         $    9,175          $   15,738       $   17,883
     Licensing and royalty income                                121                 36                 203              151
                                                          ----------         ----------          ----------       ----------
         Total revenues                                        7,725              9,211              15,941           18,034
 
Cost and expenses:
     Cost of sales                                             4,411              4,627               8,450            8,748
     Selling, general and administrative expenses              4,170              3,374               7,728            7,037
     Research and development expenses                           378                397                 703              887
                                                          ----------         ----------          ----------       ----------
Operating profit (loss)                                       (1,234)               813                (940)           1,362
Interest expense, net                                            933                464               1,551              939
Other (income) expense                                            (4)                54                 (11)              54
                                                          ----------         ----------          ----------       ----------
 
Income (loss) before provision for income taxes               (2,163)               295              (2,480)             369
Provision (benefit) for income taxes                            (779)                77                (893)              96
                                                          ----------         ----------          ----------       ----------
 
Net income (loss)                                         $   (1,384)        $      218          $   (1,587)      $      273
                                                          ==========         ==========          ==========       ==========
 
Net income (loss) per common and common
     equivalent share
          Basic                                                $(.15)              $.02               $(.17)            $.03
          Diluted                                              $(.15)              $.02               $(.17)            $.03
 
Average number of common and common
     equivalent shares
          Basic                                            9,466,667          9,453,461           9,466,667        9,442,419
          Diluted                                          9,466,667          9,463,070           9,466,667        9,534,231
</TABLE>



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

                                                                               2
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                              JUNE 30, 1998           December 31, 1997
                                                                          ----------------------  -------------------------
                                                                                       (AMOUNTS IN THOUSANDS)
ASSETS
 
Current assets:
<S>                                                                 <C>                     <C>
     Cash and equivalents                                                        $  1,168                   $  1,196
     Accounts receivable, less allowance for doubtful
          accounts of $1,107 and $903, respectively                                 7,122                      6,851
     Inventories                                                                    8,646                      9,816
     Current deferred taxes, net                                                      728                        728
     Prepaid expenses and other current assets                                        357                        819
                                                                                 --------                   --------
 
          Total current assets                                                     18,021                     19,410
                                                                                 --------                   --------
 
Investments                                                                           987                      1,011
                                                                                 --------                   --------
 
Property, plant and equipment - at cost:
     Land                                                                             625                        625
     Buildings                                                                      9,707                      9,600
     Machinery and equipment                                                        9,814                      9,659
                                                                                 --------                   --------
                                                                                   20,146                     19,884
Less accumulated depreciation                                                     (10,457)                   (10,048)
                                                                                 --------                   --------
                                                                                    9,689                      9,836
                                                                                 --------                   --------
 
Deferred income taxes                                                               4,140                      3,247
Other assets                                                                          691                        540
                                                                                 --------                   --------
 
                                                                                 $ 33,528                   $ 34,044
                                                                                 ========                   ========
</TABLE>




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

                                                                               3
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                  CONSOLIDATED BALANCE SHEETS     (CONTINUED)
                                  (Unaudited)
                                        
<TABLE>
<CAPTION>
                                                                              June 30, 1998           DECEMBER 31, 1997
                                                                          ----------------------  -------------------------
                                                                          (AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
                                                                          -------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
<S>                                                                 <C>                     <C>
     Note payable to bank                                                        $ 12,000                    $12,000
     Current maturities of long-term debt                                           6,657                      6,857
     Accounts payable                                                               4,358                      3,841
     Accrued payroll                                                                  339                        183
     Other accrued expenses                                                         1,229                        909
     Income taxes payable                                                              89                         89
                                                                                 --------                    -------
 
          Total current liabilities                                                24,672                     23,879
 
Long-term debt, less current maturities                                                 -                         36
                                                                                 --------                    -------
 
Deferred income from royalty contract                                               1,778                      1,801
                                                                                 --------                    -------
 
Commitments and contingencies                                                           -                          -
 
Stockholders' equity:
     Common stock $.01 par value, 30,000,000 shares
          authorized; 9,602,681 shares issued in 1998 and 1997                         96                         96
     Additional paid-in capital                                                    19,411                     19,074
     Accumulated Deficit                                                          (10,236)                    (8,649)
                                                                                 --------                    -------
                                                                                    9,271                     10,521
Less treasury stock; 136,014 shares at cost,
     in 1998 and 1997                                                              (2,163)                    (2,163)
Stockholders' notes receivable                                                        (30)                       (30)
                                                                                 --------                    -------
     Total stockholders' equity                                                     7,078                      8,328
                                                                                 --------                    -------
 
                                                                                 $ 33,528                    $34,044
                                                                                 ========                    =======
</TABLE>


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

                                                                               4
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (Unaudited)
                                        
<TABLE>
<CAPTION>
                                                                                      Six months ended June 30,
                                                                          -------------------------------------------------
                                                                                 1998                           1997
                                                                          -------------------------------------------------
                                                                                             (RESTATED)
                                                                                       (amounts in thousands)
Cash flows from operating activities:
<S>                                                                       <C>                     <C>
     Net (loss) income                                                            $(1,587)                   $   273
     Reconciliation of net income to net cash provided
          by operating activities:
          Depreciation and amortization                                               440                        565
          Issuance of warrants as consideration for Extension
               Agreement                                                              318                          -
          Provision for losses on accounts receivable and
               inventories                                                            667                        637
          Issuance of stock to 401(k) plan                                                                        40
          Stock option compensation expense                                            19                         47
          Change in deferred income taxes                                            (893)                       383
     Changes in operating assets and liabilities:
          Accounts receivable                                                        (475)                       159
          Receivable due under royalty agreement                                        -                      1,000
          Inventories                                                                 707                     (1,275)
          Prepaid and other assets                                                    462                        282
          Accounts payable and accrued expenses                                       993                        416
          Income taxes payable                                                          -                        (38)
          Deferred royalty income                                                     (23)                         -
                                                                                  -------                    -------
Net cash provided from operating activities                                           628                      2,489
                                                                                  -------                    -------
 
Cash flows from investing activities:
     Capital expenditures                                                            (262)                      (321)
     Decrease in investment                                                            24                          -
     Increase (decrease) in other assets                                             (182)                        23
                                                                                  -------                    -------
 
Net cash used by investing activities                                                (452)                      (298)
                                                                                  -------                    -------
 
Cash flows from financing activities:
     Net repayment under line of credit agreement                                    (200)                      (568)
     Payments of long-term debt                                                       (36)                    (1,721)
     Proceeds from exercise of common stock options                                     -                         59
                                                                                  -------                    -------
 
Net cash used by financing activities                                                (236)                    (2,230)
                                                                                  -------                    -------
 
Net decrease in cash and equivalents                                                  (28)                       (39)
Cash and equivalents at beginning of year                                           1,196                        317
                                                                                  -------                    -------
Cash and equivalents at June 30, 1998 and 1997                                    $ 1,168                    $   278
                                                                                  =======                    =======
</TABLE>

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

                                                                               5
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                                        

1.  BASIS OF PRESENTATION

   The accompanying consolidated financial statements have been prepared by IGI,
Inc. without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results for the interim
periods presented.  All such adjustments, except those described in Note 5, are
of a normal recurring nature.

   Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to such rules and regulations, although
the Company believes the disclosures are adequate to make the information
presented not misleading.  These financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

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

2.  NET INCOME PER COMMON SHARE

   Basic net income per share of common stock is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
three and six month periods ended June 30, 1998 and 1997.  Diluted net income
per share of common stock is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents, if
dilutive, outstanding during the three and six month periods ended June 30, 1998
and 1997.  Common stock equivalents include shares issuable upon the exercise of
dilutive common stock options.

3.  INVENTORIES

   Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method and consist of the following:

<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)                                                   June 30, 1998              DECEMBER 31, 1997
                                                                 ----------------------------  --------------------------
<S>                                                               <C>                           <C>
Finished goods                                                                   $2,481                      $3,365
Work-in-process                                                                   3,478                       3,192
Raw materials                                                                     2,687                       3,259
                                                                                 ------                      ------
 
Total                                                                            $8,646                      $9,816
                                                                                 ======                      ======
</TABLE>

     If the first-in, first-out (FIFO) method of accounting for inventories had
been used, inventories would have been $394,000 and $461,000 lower than reported
at June 30, 1998 and December 31, 1997, respectively.

                                                                               6
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     (CONTINUED)
                                  (Unaudited)
                                        
4.  BUSINESS SEGMENTS

   Summary operating results for the Company's Animal Health and Consumer
Products segments for the three-month and six-month periods ended June 30, 1998
and 1997 appear below:

<TABLE>
<CAPTION>
                                                 ANIMAL          CONSUMER
                                                 Health          Products         Corporate       Consolidated
                                             ---------------  ---------------  ---------------  ----------------
                                                                   (amounts in thousands)
Three months ended June 30,
1998
<S>                                          <C>              <C>              <C>              <C>
Total revenues                                       $ 6,604           $1,121  $         -              $ 7,725
Operating profit (loss)                                  387              196          (1,819)           (1,234)
 
1997
Total revenues                                       $ 8,039           $1,172  $         -              $ 9,211
Operating profit (loss)                                1,662              167          (1,016)              813
 
SIX MONTHS ENDED JUNE 30,
1998
Total revenues                                       $13,905           $2,036  $         -              $15,941
Operating profit (loss)                                1,854              580          (3,374)             (940)
 
1997
Total revenues                                       $15,599           $2,435  $        -               $18,034
Operating profit (loss)                                2,963              352          (1,953)            1,362
</TABLE>

5.    RESTATEMENT OF PRIOR PERIODS

     As a result of the findings of a special investigation initiated by the
Board of Directors in March 1998, the Company has restated its consolidated
financial statements for 1995 and 1996 and the first three quarters of 1997.  In
the opinion of management, all material adjustments necessary to correct the
financial statements have been recorded.

     The restatements reflect inventory write-offs and inventory adjustments
which should have been recorded in different periods. Also reflected are changes
in the time periods in which certain product shipments were recognized as sales.

     In addition, in the fourth quarter of 1997, the Company made adjustments to
write off certain inventory, increase valuation reserves for inventories and
accounts receivable, record legal and related expenses incurred in connection
with the United States Department of Agriculture Office of the Inspector General
investigation, and to adjust the recognition of licensing revenues.  Certain of
these adjustments were the result of actions or events which occurred in earlier
quarters of 1997.  The adjustments which relate to the three and six months
ended June 30, 1997 have been reflected in the accompanying financial
statements.

                                                                               7
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     (CONTINUED)
                                  (Unaudited)
                                        
5.   RESTATEMENT OF PRIOR PERIODS     (CONTINUED)

   A summary of the impact of such restatements on the financial statements for
the three and six months ended June 30, 1997 is as follows:

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED                       Six months ended
                                                    JUNE 30, 1997                           June 30, 1997
                                        -------------------------------------  ---------------------------------------
                                           AS REPORTED          Restated           AS REPORTED           RESTATED
                                        -----------------  ------------------  -------------------  ------------------
<S>                                     <C>                <C>                 <C>                  <C>
                                                         (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
 
Revenues                                           $8,841              $9,211              $18,320             $18,034
Net Income                                            356                 218                  718                 273
Income per common and
     common equivalent share
          Basic                                    $  .04              $  .02              $   .08             $   .03
          Diluted                                     .04                 .02              $   .08             $   .03
</TABLE>



               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITIONS AND RESULTS OF OPERATIONS
                                        
Results of Operations
---------------------

   From June 4, 1997 through March 27, 1998, the Company was subject to an order
by the Center for Veterinary Biologics ("CVB") of the United States Department
of Agriculture ("USDA") to stop distribution and sale of certain serials and
subserials of designated poultry vaccines produced by the Company's Vineland
Laboratories Division ("Stop Shipment Order").  The Stop Shipment Order was
based on CVB's findings that the Company shipped serials before the Animal Plant
Health Inspection Service division of the USDA ("APHIS") had the opportunity to
confirm the Company's testing results, failed to destroy serials reported to
APHIS as destroyed, and in general failed to keep complete and accurate records
and to submit accurate reports to APHIS.  The Stop Shipment Order affected 36 of
the Company's USDA-licensed vaccines.  In July 1997, the Office of Inspector
General of the USDA ("OIG") advised the Company of its commencement of an
investigation into alleged violations of the Virus Serum Toxin Act and alleged
false statements made to APHIS.

     Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December of
1997, lifted the Stop Shipment Order with respect to all but three of the 36
affected products.  As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.

     In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from its internal investigation of alleged violations by certain
former officers and employees of USDA rules and regulations and of the Virus
Serum Toxin Act and other statues including U.S. Customs laws and regulations.
In connection with its investigation, the OIG has subpoenaed Company documents
and the Company has provided, and will continue to provide, subpoenaed documents
to Governmental authorities.  The U.S. Government's investigation is

                                                                               8
<PAGE>
 
                           IGI. INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (Continued)
                                        

ongoing and could be expanded to other areas of the Company's business in which
violations of laws and regulations may be found to have occurred.  In addition,
the Government's ongoing investigation could result in action against the
Company and certain of its former employees, including fines and the possibility
of criminal charges.  Also, on April 30, 1998, the Securities and Exchange
Commission advised the Company that it is conducting an informal inquiry and
requested that the Company provide it with certain documents.

Three months ended June 30, 1998 compared to June 30, 1997
----------------------------------------------------------

The Company had a net loss of $1,384,000, or $.15 per share, for the quarter
ended June 30, 1998 as compared to net income (as restated) of $218,000, or $.02
per share, for the quarter ended June 30, 1997.  The major factors contributing
to the loss for the three months ended June 30, 1998 were increased costs
associated with the Company's internal investigation as well as the USDA and OIG
investigations and interim management, reduced sales of poultry vaccines, and
increased interest expense.

     Total revenues for the quarter ended June 30, 1998 were $7,725,000, which
represents a decrease of $1,486,000, or 16%, from revenues of $9,211,000 in the
quarter ended June 30, 1997.  Animal Health Products revenues in the quarter
ended June 30, 1998 declined $1,435,000 from the second quarter of 1997,
reflecting a $1,009,000 decrease in sales of poultry vaccines and a $426,000
decrease in sales of companion pet products.  The decrease in poultry vaccine
sales was due to the direct and indirect effects of the USDA Stop Shipment Order
and lower production volumes as the Company made changes to the Vineland
Laboratories' operations.  The decrease in sales of companion pet products was
attributable to strong customer response to promotions in the first quarter
resulting in a slowdown of orders in the second quarter as customers worked off
inventory, and a decrease in international sales of companion pet products.
Consumer Product revenues decreased by $51,000, or 4%, from the quarter ended
June 30, 1997.

     Cost of sales decreased by $216,000, or 5%, from the quarter ended June 30,
1997.  However, as a percentage of sales, cost of sales increased from 50% in
the quarter ended June 30, 1997 to 58% in the quarter ended June 30, 1998.  The
increase in percentage was primarily due to increased manufacturing variances at
the Company's Vineland Laboratories division.  The Company is making changes to
the Vineland Laboratories operation to improve efficiency and increase capacity.

     Selling, general and administrative expenses increased by $796,000, or 24%,
from $3,374,000 in the quarter ended June 30, 1997 to $4,170,000 in the quarter
ended June 30, 1998.  As a percentage of revenues, these expenses were 54% in
the quarter ended June 30, 1998 compared with 37% in the quarter ended June 30,
1997.  The increase was attributable to increased spending for professional fees
in the three months ended June 30, 1998, including legal, audit and consulting
services, related to the various investigations resulting from the USDA Stop
Shipment Order.  The Company also incurred significant professional fees for
interim management following the terminations during 1997 and 1998 of a number
of employees including most of the Company's senior management.  The total
amount of professional fees incurred during the three months ended June 30, 1998
was approximately $ 1,100,000 above the historical level of professional fees.

                                                                               9
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (CONTINUED)
                                        

     Net interest expense doubled from $464,000 in the quarter ended June 30,
1997 to $933,000 in the quarter ended June 30, 1998.  This reflected higher
borrowings at increased interest rates in 1998, fees paid to the Company's bank
lenders in connection with the Extension Agreement and a charge of $318,000 for
270,000 warrants issued to the bank lenders on the April 29, 1998 closing date
of the Extension Agreement which were vested during the quarter ended June 30,
1998.

Six months ended June 30, 1998 compared to June 30, 1997
--------------------------------------------------------

The Company had a net loss of $1,587,000, or $.17 per share, for the six months
ended June 30, 1998 as compared to net income (as restated) of $273,000, or $.03
per share for the six months ended June 30, 1997.  The major factors
contributing to the loss in the first six months of 1998 were $1.5 million in
unusual professional fees, including legal, audit and consulting services,
related to the various ongoing investigations and interim management, a
$1,519,000 decrease in sales of poultry vaccines due to the direct and indirect
effects of the Stop Shipment Order and increased interest expense of $612,000.

     Total revenues for the six months ended June 30, 1998, were $15,941,000
which represents a decrease of $2,093,000, or 12%, from revenues of $18,034,000
in the six months ended June 30, 1997. Animal Health Products revenues in the
first six months of 1998 decreased by $1,693,000, or 11%,due primarily to a
$1,519,000 decrease in sales of poultry vaccines.  Sales of poultry vaccines
were adversely affected by the Stop Shipment Order which remained in effect
until March 27, 1998 for three products and lower production volumes as the
Company made changes to improve the Vineland Laboratories operations. Consumer
Products revenues for the first six months of 1998 were $400,000, or 16%, below
1997 revenues which included initial stocking orders for the dermatology
business.

     Cost of sales decreased by $298,000, or 3%, due to the lower sales volume.
However, as a percentage of sales, cost of sales increased from 49% for the six
months ended June 30, 1997, to 54% for the comparable period in 1998.  The
increase in percentage was due to increased manufacturing variances at the
Company's Vineland Laboratories division.  The Company is making changes to the
Vineland Laboratories operation to improve efficiency and increase capacity.

     Selling, general and administrative expenses increased by $691,000, or 10%,
from $7,037,000 in the first half of 1997 to $7,728,000 in the first half of
1998.  These expenses totaled 39% of revenues in the six months ended June 30,
1997 compared with 48% of revenues in the six months ended June 30, 1998.  The
increase is attributable to increased spending for professional fees in the
first six months of 1998, including legal, audit and consulting services,
related to the various investigations resulting from the USDA Stop Shipment
Order.  The Company also incurred significant professional fees for interim
management following the terminations during 1997 and 1998  of a number of
employees including most of the Company's senior management.  The total amount
of professional fees paid in the six months ended June 30, 1998, was
approximately $1.5 million above the historical levels of professional fees.

     Research and development expenses decreased by $184,000, or 21% in the
first six months of 1998 compared to the first six months of 1997 as the Company
curtailed certain development projects. The Company expects to gradually
increase its research and development expenditures and focus its development
efforts to meet customer needs in all of its businesses and to maximize the
potential for new licensing and manufacturing relationships.

                                                                              10
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (Continued)
                                        

     Interest expense increased $612,000, or 65% from $939,000 in the six months
ending June 30, 1997 to $1,551,000 in the six months ending June 30, 1998. The
increase was due to a charge of $318,000 for warrants issued to the Company's
bank lenders at April 29, 1998 in connection with the Extension Agreement,
higher borrowings at increased interest rates in 1998 and fees paid to the bank
lenders related to the Extension Agreement. Since the Company was in default
under certain covenants in its loan agreement during the period from January 1,
1998 through April 29, 1998, the Company paid interest at a default interest
rate of prime plus 4% on outstanding borrowings under its working capital line
and prime plus 4 1/2% on outstanding borrowings under its revolving credit
facility. As a result of the default interest rate, the Company incurred
interest expense on borrowings outstanding during the six months ending June 30,
1998 of approximately $187,000 above the interest that would have been paid
based upon the non-default rate.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

   During the first quarter of 1998, the Company was engaged in negotiating
amendments to its credit agreement with its bank lenders, including waivers of
its covenant defaults and an extension of the credit agreement since the Company
was in default under certain covenants contained in its bank credit agreement
during 1997 and at December 31, 1997.  During the period from January 1, 1998
through April 29, 1998, the Company paid interest at a rate of prime plus 4% on
outstanding borrowings under its working capital line and prime plus 4 1/2% on
outstanding borrowings under its revolving credit facility.  The Company entered
into an Extension Agreement with its bank lenders as of April 29, 1998, (the
"Closing Date") which provided for the waiver of the then existing covenant
defaults, extension of the bank credit agreement through March 31, 1999, a
maximum credit line facility of $12,000,000 ("Credit Line") and extended terms
for repayment of the outstanding $6,857,142 balance (at April 29, 1998) of
revolving credit notes ("Revolving Facility").

   The Company was in default under certain covenants contained in the Extension
Agreement at July 31, 1998.  On August 19, 1998, the Company and its bank
lenders entered into a Forbearance Agreement whereby the banks agreed to forbear
from exercising their rights and remedies arising from these covenant defaults
through January 31, 1999.

   The Extension Agreement and the Forbearance Agreement ("The Agreements")
provide for the following:

*  The maximum availability under the Credit Line is subject to the
   determination of the amount of eligible accounts receivable and eligible
   inventories. The Credit Line is due and payable in full on January 31, 1999.

*  The outstanding balance of $6,857,142 under the Revolving Facility is due and
   payable on January 31, 1999.

*  All of the Company's indebtedness to the banks is subject to a security
   interest in all of the assets of the Company and its significant
   subsidiaries.

*  Interest on outstanding borrowings under both the Credit Line and the
   Revolving Facility will be:

     From August 1, 1998 through September 30, 1998      Prime plus 3  1/2 %
     From October 1, 1998 through November 30, 1998      Prime plus 4  1/2 %

                                                                              11
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (Continued)
                                        

     From December 1, 1998 through January 31, 1999      Prime plus 5  1/2 %

*  At the Closing Date the Company issued to the lenders warrants to purchase an
   aggregate of 540,000 shares of the Company's common stock at an exercise
   price of $3.50 per share. Warrants ("Unconditional Warrants") to purchase
   270,000 shares are exercisable at any time during the period commencing 60
   days after issuance and ending on the fifth anniversary of issuance, unless
   the Company is able to refinance its bank debt by October 31, 1998 in which
   case these warrants expire. Warrants ("Conditional Warrants") to purchase the
   remaining 270,000 shares are exercisable at any time during the period
   commencing September 1, 1998 and ending on the fifth anniversary of issuance,
   unless the Company is able to refinance its bank debt by December 24, 1998 in
   which case these warrants expire. The Company has a call option on the
   warrants, which can only be exercised as to all of the shares issuable at
   that time, with a repurchase price of $900,000 for each of the Conditional
   Warrants and Unconditional Warrants. The Company will recognize a non-cash
   expense for these warrants when earned in accordance with Statement of
   Financial Accounting Standards No. 123. The Company estimates the total
   expense for warrants is approximately $400,000, or $.04 per share, net of
   taxes.

*  The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a
   monthly agent's fee of $5,000 and an extension fee of $250,000, of which
   $60,000 was paid at the time of the Extension, and the balance is payable in
   three installments through March 24, 1999.

*  The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a
   forbearance fee of $140,000, of which $20,000 was paid at the time of the
   forbearance, and the balance is payable in three installments through January
   15, 1999. However, if the Company is able to replace its existing bank debt
   within the 30 days following a forbearance fee due date, the installment then
   due plus all future installments shall be waived.

   The Agreements require the Company to maintain certain financial ratios and
comply with other non-financial covenants, and also prohibits the payment of
cash dividends without the prior written consent of the lenders. The Company is
actively seeking, and believes it will be able to secure, alternative financing
arrangements to replace its existing debt and lending terms through a number of
potential options including, but not limited to, the issuance of debt or equity
securities or a combination of both. The Company plans to engage an investment
banker for the purpose of formulating alternative business strategies and to
coordinate the orderly satisfaction of its obligations. No assurance can be
given that the Company will be able to obtain alternative financing
arrangements, and if it is unsuccessful in doing so, the Company may be required
to restrict its business operations or otherwise modify its business strategy.
The Company believes it will be able to remain in compliance with its debt
covenants through January 30, 1999.

   The Company's operating activities provided $628,000 of cash during the six
months of 1998.  Cash was provided from non-cash charges to operations for
depreciation, amortization, interest and loss reserves, decreased inventories,
and increased accounts payable and accrued expenses, partially offset by an
increase in accounts receivable.

   At July 31, 1998, the Company had no available borrowing capacity under the
Credit Line and no borrowings available under the Revolving Facility.  Funds
generated from operations and existing bank credit facilities are expected to be
sufficient to meet the Company's short-term cash requirements. However, the
funds available under its existing bank credit facilities are only sufficient to
finance the

                                                                              12
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (CONTINUED)
                                        

Company's operations at its current levels including the costs associated with
the USDA and other regulatory and litigation matters.  The Company will be
required to raise additional funds to finance its capital expenditures as well
as the expansion of its business.  Additionally, the bank facility expires in
January 1999.  The Company, therefore, intends to seek additional funds through
the issuance of debt or equity securities or a combination of both.  No
assurance can be given that the Company will be able to obtain the additional
required funds, and if it is unsuccessful in doing so the Company may be
required to restrict its business operations or otherwise modify its business
strategy.

Factors That May Affect Future Results
--------------------------------------

   The industry segments in which the Company competes are constantly changing
and are subject to significant competitive pressures.  The following sets forth
some of the risks which the Company faces.  In addition, certain other factors
may affect the Company's business, financial condition and results of operations
including the "Factors That May Affect Future Results" contained in the
Company's annual report on Form 10-K for the year ended December 31, 1997 which
factors are incorporated herein by reference.

Adverse Effects of USDA Actions and OIG and U.S. Attorney Investigations
------------------------------------------------------------------------

   The Company believes that the Stop Shipment Order and other actions by the
USDA in 1997 and the ongoing government investigations described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A"), and the costs incurred in connection with those
investigations will have a materially adverse effect on its business and results
of operations in 1998.  First, the Company needs to attract, train and retain
key employees for its management team to replace key employees terminated in
1997 and 1998, including corporate officers to head up its manufacturing
operations, marketing and sales and business development.  Second, the Company
needs to satisfy the USDA and the government agencies and its customers that it
has established and implemented compliance programs that will prevent future
violations of government regulations applicable to its poultry vaccine business.
Third, it must assure its customers that its future business operations will
comply with all applicable government rules and regulations and that its
financial condition is adequate to meet its business commitments and to maintain
a viable and stable business environment.  Fourth, it must comply with all of
the covenants in its bank credit agreement to assure continued bank financing of
its operations and replace its current bank agreement.  Fifth, it must raise
additional funds, either through additional borrowing or the sale of equity, to
meet its growth objective and to maintain its competitive position.  Sixth, it
must overcome the adverse effects of the AMEX's trading suspension of the
Company's Common Stock to provide the opportunity for the Company to raise
additional funds for its business.  No assurance can be given that the Company
will be able to accomplish all or any of the foregoing requirements, and if it
is unsuccessful in doing so, or if the OIG, U.S. Attorney or the SEC decides to
commence enforcement proceedings against the Company, those proceedings, as well
as the cost and expenses related to them, could have a materially adverse effect
on the Company's business, financial conditions and results of operations.  In
addition, the costs and expenses, including legal, accounting and consulting
fees and expenses, associated with the ongoing investigations and existing and
potential litigation have been, and are expected to continue to be, substantial
and will have a materially adverse effect on the Company's 1998 operating
results.

                                                                              13
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
       OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS     (CONTINUED)
                                        

   The Company is cooperating fully with the U.S. Attorney and each of the
regulatory agencies and has produced a substantial amount of documents and
information requested by the U.S. Attorney.  The U.S. Attorney has not indicated
what course of action, if any, it may pursue with respect to IGI in light of the
Company's extensive cooperation.  The Company has not been advised that it or
any of its present employees are targets of any Justice Department or regulatory
investigation.  Although there can be no assurance as to the outcome of any
proceeding, the Company expects that it will be able to achieve a satisfactory
resolution of its existing regulatory and litigation matters.  However, if
criminal charges were to be brought against IGI, the Company could incur
substantial costs in fines and attorney's fees to defend the action. The Company
could also face additional substantial costs in administrative civil penalties.
Since the Company expects a satisfactory resolution of these matters, no
reserves were provided at June 30, 1998.

Highly Leveraged; Inability to Obtain Additional Funding
--------------------------------------------------------

   The Company has historically applied the operating profits from its animal
health products business to fund the development of its consumer products
business and its former biotechnology business, Novavax, which was distributed
to the Company's stockholders in December 1995.  The Company is currently very
highly leveraged and has negative working capital, and therefore will need
additional capital to finance the expansion of its animal health products and
consumer products businesses.  No assurance can be given that such funds will be
obtained when required or, if obtainable, on terms that are favorable to the
Company.  

   The Company was in violation of certain covenants in its bank credit
agreements during 1997 and at December 31, 1997. In April 1998, the banks agreed
to a waiver of the covenant defaults and to extend the credit agreement on
revised terms and conditions through March 31, 1999. The Company was in default
under certain covenants contained in the Extension Agreement at July 31, 1998.
On August 19, 1998, the Company and its bank lenders entered into a Forbearance
Agreement whereby the banks agreed to forbear from exercising their rights and
remedies arising from the covenant defaults through January 31, 1999. The
Company is actively seeking alternative financing arrangements to replace its
existing debt and lending terms through a number of potential options including,
but not limited to, the issuance of debt or equity securities or a combination
of both. No assurance can be given that the Company will be able to obtain
alternative financing arrangements, and if it is unsuccessful in doing so, the
Company may be required to restrict its business operations or otherwise modify
its business strategy. The Company believes it will be able to remain in
compliance with its covenants through January 30, 1999. No assurance can be
given that the banks will waive future covenant defaults or modify the terms of
the credit agreement to accommodate the Company.

Suspension of Trading
---------------------

   The Company was unable to file its 1997 Annual Report on Form 10-K by the
March 31, 1998 due date.  As a result, the AMEX halted trading of the Company's
common stock.  No assurance can be given that AMEX trading privileges will be
resumed in the future.  The failure of the Company to maintain its trading on
the AMEX could adversely affect its ability to raise additional funds required
for its business through the sale of debt or equity securities and would limit
and adversely affect the trading market for its outstanding common stock and the
ability of stockholders to liquify their holdings on favorable market terms.

                                                                              14
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                                        

Year 2000
---------

   The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures.  Software failures due to the
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.  The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems.  The
Company has established a management committee to evaluate the risk and costs
associated with this problem.  An initial assessment has been completed and the
cost of achieving Year 2000  compliance is currently estimated to be
approximately $350,000 over the cost of normal hardware and software upgrades
and replacements and will be incurred from October 1998 through fiscal 1999.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

                           PART II OTHER INFORMATION
                                        

Item 1 - Legal Proceedings
--------------------------

   There were no material developments in the litigation previously described in
   the Company's Annual Report on Form 10-K for the year ended December 31,
   1997.

Item 2 - Changes in Securities and Use of Proceeds
--------------------------------------------------

   On April 29, 1998, the Company issued warrants for 540,000 shares of Common
   Stock to the Company's bank lenders, Fleet Bank-NH and Mellon Bank, N.A., in
   connection with the Extension Agreement. The warrants were issued in
   consideration of the Extension Agreement. Each warrant may be exercised for
   shares of Common Stock at an exercise price of $3.50 per share. See the
   description of the warrants in "Management's Discussion and Analysis of
   Financial Conditions and Results of Operations -Liquidity and Capital
   Resources" which is incorporated herein by reference. For this issuance, the
   Company has relied upon an exemption from registration under Section 4(2) of
   the Securities Act of 1933 as an issuance not involving a public offering.

Item 3 - Defaults Upon Senior Securities
----------------------------------------

   The Company was in violation of a covenant in its bank credit agreement
   during the quarter ended and at June 30, 1998.  The Company entered into an
   Extension Agreement with its bank lenders as of April 29, 1998 which provided
   a waiver of the then existing defaults.  In addition, in August 1998, the
   Company received a waiver of covenant defaults from its bank lenders.  See
   "Management's Discussion and Analysis of Financial Conditions and Results of
   Operations-Liquidity and Capital Resources".

Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

     None

                                                                              15
<PAGE>
 
                           IGI, INC. AND SUBSIDIARIES
                   PART II OTHER INFORMATION     (Continued)
                                        

Item 5 - Other Information
--------------------------

     None

Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
 
<TABLE> 
<CAPTION> 
(a)                  Exhibits:
<S>                  <C>     
     Exhibit 11      -  Computation of Net Income Per Common Share
 
     Exhibit 27.1    -  Financial Data Schedule for six months ended June 30, 1998
 
     Exhibit 27.2    -  Restated Financial Date Schedule for six months ended June 30, 1997
</TABLE> 
(b)    Reports on Form 8-K

     On April 17, 1998, the Company filed a Current Report Form 8-K, dated April
16, 1998, to report under Item 5 (Other Events) that the filing of its 1997
annual report on Form 10-K continued to be delayed because of the ongoing
investigation by special counsel of information which could have a material
impact on the Company's financial reporting for 1997 and prior periods.  The
Company also announced that it made extensive changes in its management team
following regulatory compliance actions brought by the United States Department
of Agriculture.  No financial statements were required to be filed with such
report.

     On May 7, 1998, the Company filed a Current Report on Form 8-K, dated May
1, 1998, to report under Item 5 (Other Events) that it had been advised by its
former independent accountants, Coopers & Lybrand L.L.P. ("C&L") that the
reports of C&L with respect to the consolidated financial statements of the
Company as of and for the years ended December 31, 1996 and 1995 should no
longer be relied on.  The Company also reported that it commenced a lawsuit on
April 21, 1998, against its former President and Chief Operating Officer, John
P. Gallo, and that Mr. Gallo commenced a lawsuit on April 28, 1998 against the
Company and two of its Directors.  No financial statements were required to be
filed with such report.

                                                                              16
<PAGE>
 
                                   SIGNATURES
                                        

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                      IGI, INC.
                                      (Registrant)



Date:  August 24, 1998                By: /s/ John F. Wall
                                         ----------------------------------
                                          John F. Wall
                                          Senior Vice President and
                                          Chief Financial Officer

                                                                              17