<PAGE>   1
EXHIBIT *(10.39)


                               SECURITY AGREEMENT


         THIS SECURITY AGREEMENT, is entered into as of October 29, 1999 (as
from time to time amended, modified, restated, supplemented and in effect, this
"Security Agreement"), by and among IGI, INC., a Delaware corporation ("IGI"),
IGEN, INC., a Delaware corporation ("Igen"), IMMUNOGENETICS, INC., a Delaware
corporation ("ImmunoGenetics"), and BLOOD CELLS, INC., a Delaware corporation
("Blood Cells") (IGI, Igen, ImmunoGenetics and Blood Cells are collectively
referred to herein as the "Grantors"), in favor of AMERICAN CAPITAL STRATEGIES,
LTD., a Delaware corporation (the "Secured Party").

                                    RECITALS

         A. As of the date hereof, the Grantors and Secured Party have entered
into a Subordinated Note Purchase Agreement dated as of even date herewith (the
"Note Agreement") pursuant to which the Secured Party has agreed to purchase:
(i) Senior Subordinated Notes of the Grantors in the aggregate original
principal amount of $7,000,000 (collectively, the "Notes") and (ii) warrants to
purchase 1,907,543 shares of Common Stock (as defined in the Note Agreement) of
IGI (the "Warrants").

         B. In order to induce the Secured Party to purchase the Notes and the
Warrants, and in consideration therefor, the Grantors have agreed to grant to
the Secured Party a perfected lien on and security interest in all of the
Grantors' assets and properties, whether now or hereafter existing, owned or
acquired all pursuant to the terms of this Security Agreement in order to secure
(i) the due and punctual payment of (A) the principal and interest (including
interest accruing during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or
allowable in such proceeding) on the Notes, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, and (B) all other monetary obligations, including but not limited to,
fees, costs, expenses and indemnities, whether primary, secondary, direct,
contingent, fixed or otherwise (including monetary obligations incurred during
the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding regardless of whether allowed or allowable in such proceeding), of
the Grantors under the Note Agreement, the Notes, this Security Agreement, or
any of the other Purchase Documents (as defined in the Note Agreement), and (ii)
the due and punctual performance of all covenants, agreements, obligations and
liabilities of the Grantors under or pursuant to the Note Agreement, the Notes,
this Security Agreement and the other Purchase Documents (collectively, the
"Obligations").

         C. It is a condition precedent to the purchase of the Notes and the
Warrants that the Grantors execute and deliver this Security Agreement.
<PAGE>   2
                                    AGREEMENT

         NOW THEREFORE, for and in consideration of the covenants and provisions
set forth herein, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

                                   ARTICLE 1

                                SECURITY INTEREST

         SECTION 1.1 GRANT OF SECURITY INTEREST. As security for the
Obligations, each Grantor hereby sells, conveys, assigns, pledges and grants a
continuing and unconditional security interest to the Secured Party, its
successors and assigns, in and to:

         (a) all equipment (including all "Equipment" as term is defined in
Section 9-109(2) of the Uniform Commercial Code as in effect from time to time
(such code, together with any other successor or applicable adoption of the
Uniform Commercial Code in any applicable jurisdiction, the "Code")) in the
machinery, vehicles, fixtures, improvements, supplies, office furniture, fixed
assets, all as now owned or hereafter acquired by such Grantor or in which such
Grantor has or hereafter acquires any interest, and any items substituted
therefor as replacements and any additions or accessions thereto;

         (b) all goods (including all "Goods" as defined in Section 9-105 of the
Code) and all inventory (including all "Inventory" as defined in Section
9-109(4) of the Code) of such Grantor, now owned or hereafter acquired by such
Grantor or in which such Grantor has or hereafter acquires any interest,
including but not limited to, raw materials, scrap inventory, work in process,
products, packaging materials, finished goods, all documents of title, chattel
paper and other instruments covering the same and all substitutions therefor and
additions thereto (all of the property described in this clause (b) being
hereinafter collectively referred to as "Inventory");

         (c) all present and future accounts in which such Grantor has or
hereafter acquires any interest (including all "Accounts" as defined in Section
9-106 of the Code), contract rights (including all rights to receive payments
and other rights under all equipment and other leasing contracts) and rights to
payment and rights or accounts receivable evidencing or representing
Indebtedness due or to become due such Grantor on account of goods sold or
leased or services rendered, claims, instruments and other general intangibles
(including tax refunds, royalties and all other rights to the payment of money
of every nature and description), including but not limited to, any such right
evidenced by chattel paper, and all liens, securities, guaranties, remedies,
security interests and privileges pertaining thereto (all of the property
described in this clause (c) being hereinafter collectively referred to as
"Accounts");


                                     - 2 -
<PAGE>   3
         (d) all investment property now owned or hereafter acquired by such
Grantor, including, without limitation, all securities (certificated and
uncertificated), securities accounts, securities entitlements, commodity
contracts and commodity accounts;

         (e) all general intangibles now owned or hereafter acquired by such
Grantor or in which such Grantor has or hereafter acquires any interest,
(including all "General Intangibles" as defined in Section 9-106 of the Code)
including but not limited to, choses in action and causes of action and all
licenses and permits (to the extent the collateral assignment of such licenses
and permits is not prohibited by applicable law), registrations, franchises,
corporate or other business records, systems, designs, software, goodwill,
logos, indicia, business identifiers, inventions, processes, production methods,
proprietary information, know-how and trade-secrets of such Grantor, and all
trade-names, copyrights, patents, trademarks (including service marks) or patent
or trademark applications, contract rights (including but not limited to all
rights to receive payments and other rights under all equipment and other
leasing contracts, instruments and documents owned or used by such Grantor, and
any goodwill relating thereto);

         (f) all other property owned by such Grantor or in which such Grantor
has or hereafter acquires any interest, wherever located, and of whatever kind
or nature, tangible or intangible;

         (g) all insurance policies of any kind maintained in effect by such
Grantor, now existing or hereafter acquired, under which any of the property
referred to in clauses (a) through (f) above is insured, including but not
limited to, any proceeds payable to such Grantor pursuant to such policies;

         (h) all moneys, cash collateral, chattel paper, checks, notes, bills of
exchange, documents of title, money orders, negotiable instruments, commercial
paper, and other securities, instruments, documents, deposit accounts, deposits
and credits from time to time whether or not in the possession of or under the
control of any of the Secured Party;

         (i) any consideration received when all or any part of the property
referred to in clauses (a) through (h) above is sold, transferred, exchanged,
leased, collected or otherwise disposed of, or any value received as a
consequence of possession thereof, including but not limited to, all products,
proceeds (including all "Proceeds" as defined in Section 9-306(l) the Code),
cash, negotiable instruments and other instruments for the payment of money,
chattel paper, security agreements or other documents, insurance proceeds or
proceeds of other proceeds now or hereafter owned by such Grantor or in which
such Grantor has an interest.

         The property set forth in clauses (a) through (i) of the preceding
sentence, together with property of a similar nature which such Grantor
hereafter owns or in which such Grantor hereafter acquires any interest, is
referred to herein as the "Collateral."


                                     - 3 -
<PAGE>   4
                                   ARTICLE 2

                         REPRESENTATIONS AND WARRANTIES

         SECTION 2.1 REPRESENTATIONS AND WARRANTIES. The Grantors represent,
warrant and agree that:

         (a) the Grantors have and shall have absolute, good and exclusive title
to all the Collateral, wherever and whenever acquired, free and clear of any
lien except as permitted by the Note Agreement and the Grantors have not filed,
nor is there on record, a financing statement under the Code (or similar
statement or instrument of registration under the law of any jurisdiction)
covering any Collateral except as permitted by the Note Agreement;

         (b) the Grantors have paid or will pay when due all taxes, fees,
assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and which may not
result in any material impairment of the Lien of the Secured Party on such
Collateral;

         (c) as a result of the execution and delivery of this Security
Agreement and the filing of any financing statements or other documents
necessary to assure, preserve and perfect the security interest created hereby
and except as permitted by the Note Agreement, the Secured Party shall have a
valid, perfected, enforceable lien on, and a continuing security interest in,
the Collateral, enforceable and superior as such as against creditors and
purchasers (other than purchasers of Inventory in the ordinary course of
business) and as against any owner of real property where any of the equipment
or Inventory is located and as against any purchaser of such real property and
any present or future creditor obtaining a mortgage or other lien on such real
property, and such lien shall be superior and prior to all other Liens, except
as otherwise permitted by the Note Agreement;

         (d) the amount that has been or that shall be represented by the
Grantors to the Secured Party from time to time owing by all obligors (such
obligors being hereinafter referred to as the "Account Debtors") in the
aggregate with respect to Accounts has not and will not materially deviate from
the correct amount actually and unconditionally owing at such time by such
Account Debtors; all Accounts represented bona fide transactions completed in
accordance with the terms and provisions contained in the invoices and other
documents evidencing the same; there are no material setoffs, counterclaims or
disputes existing or asserted with respect to Accounts and the Grantors have not
made any agreement with any Account Debtor for any material deduction therefrom;
to the Grantors' knowledge, all Account Debtors have the capacity to contract
and are solvent; the goods giving rise to Accounts are not subject to any lien,
claim or encumbrance, except in favor of the Secured Party and except as
permitted by the Note Agreement; and the Grantors have no knowledge of any fact
or circumstances which would impair the validity or collectability of Accounts;
and


                                     - 4 -
<PAGE>   5
         (e) none of the Collateral is held by a third party in any location as
assignee, trustee, bailee, consignee or in any similar capacity.

         (f) Exhibit A hereto lists (i) each Grantor's chief executive office
and place of business, (ii) the address where records relating to the Collateral
are maintained, (iii) any other location of any other equipment and goods (other
than mobile goods) included in the Collateral, and (iv) any fictitious name used
by such Grantor.

         SECTION 2.2 Survival. All representations, warranties and agreements of
the Grantors contained in this Security Agreement shall survive the execution,
delivery and performance of this Security Agreement until the termination of
this Security Agreement pursuant to Section 6.5 hereof.


                                   ARTICLE 3

                                    COVENANTS

         SECTION 3.1 COVENANTS. The Grantors hereby jointly and severally
covenant and agree with the Secured Party that so long as this Security
Agreement shall remain in effect or any Obligations shall remain unpaid or
unperformed: (a) the Grantors shall promptly give written notice to the Secured
Party of any levy or attachment, execution or other process against any of the
Collateral; (b) at their own cost and expense, the Grantors shall take any and
all actions reasonably necessary or desirable to defend the Collateral against
the claims and demands of all Persons other than the Secured Party and holders
of adverse Liens permitted by the Purchase Agreement and to defend the security
interest of the Secured Party in the Collateral and the priority thereof against
any adverse Lien of any nature not permitted by the Purchase Agreement; (c) the
Grantors shall keep all tangible Collateral properly insured in the manner and
form required under the Note Agreement and in good order and repair (normal wear
and tear excepted) and immediately notify the Secured Party of any event causing
any material loss, damage or depreciation in value of the Collateral and of the
extent of such loss, damage or depreciation; (d) the Grantors shall mark any
Collateral that is chattel paper with a legend showing the Secured Party's lien
and security interest therein; (e) the Grantors shall promptly give written
notice to the Secured Party of any change in the Intellectual Property Rights
material to their businesses; and (f) the Grantors shall not: amend or terminate
any contract or other document or instrument constituting part of the
Collateral, except for transactions in the ordinary course of business
substantially consistent with past practice; voluntarily or involuntarily
exchange, lease, sell, transfer or otherwise dispose of any Collateral, except
as permitted by the Note Agreement; make any compromise, settlement, discharge
or adjustment or grant any extension of time for payment with respect to any
Account or any Lien, Guaranty or remedy pertaining thereto, except for
transactions in the ordinary course of business substantially consistent with
past practice; change their name or use any fictitious or trade name; change the
location of their chief executive offices; or permit any of the Collateral
(other than Collateral that constitutes goods which are mobile and which are of
a type normally used in more than one jurisdiction) to be removed from or
located in any place not identified as the location


                                     - 5 -
<PAGE>   6
of such Collateral to the Secured Party, as the case may be, except after
written notice to and with written consent of the Secured Party and compliance
with such procedures as the Secured Party may reasonably impose to prevent any
interruptions or discontinuity in the security interest granted pursuant to this
Security Agreement.


                                   ARTICLE 4

                                REMEDIAL MATTERS

         SECTION 4.1 Powers of Attorney.

         (a) Grantor hereby irrevocably appoints the Secured Party (and any
officer or agent of the Secured Party) as its true and lawful attorney-in-fact,
with power of substitution for and in the name of the Secured Party or
otherwise, for the use and benefit of the Secured Party, effective upon the
occurrence and during the continuance of an Event of Default: (i) to receive,
endorse the name of such Grantor upon and deliver any notes, acceptances,
checks, drafts, money orders or other evidences of payment that may come into
the possession of the Secured Party with respect to the Collateral; (ii) to
cause such Grantor's mail to be transferred to the Secured Party's own offices
and to receive and open all mail addressed to such Grantor for the purposes of
removing any such notes, acceptances, checks, drafts, money orders or other
evidences of payment; (iii) to demand, collect and receive payment in respect of
the Collateral and to apply any such payments directly to the payment of the
Obligations in accordance with Section 4.6 hereof; (iv) to receive and give
discharges and releases of all or any of the Collateral; (v) to commence and
prosecute any and all suits, actions or proceedings at law or in equity in any
court of competent jurisdiction, to collect or otherwise realize on all or any
part of the Collateral or to enforce any rights in respect thereof; (vi) to sign
the name of such Grantor on any invoice or bill of lading relating to any of the
Collateral; (vii) to send verification of any Accounts to any Account Debtor or
customer; (viii) to notify any Account Debtor or other obligor of the company
with respect to any Collateral to make payment to the Secured Party; (ix) to
settle, compromise, compound, adjust or defend any actions, suits or proceedings
relating or pertaining to all or any of the Collateral; (x) to take any action
for purposes of carrying out of the terms of this Security Agreement; (xi) to
enforce all of each Grantor's rights and powers under and pursuant to any and
all agreements with respect to the Collateral; and (xii) generally to sell,
assign, transfer, pledge, make any agreement with respect to or otherwise deal
with all or any of the Collateral, and to do all other acts and things necessary
to carry out this Security Agreement, as fully and completely as though the
Purchaser were the absolute owner of the Collateral for all purposes; provided,
however, that nothing herein contained shall be construed as requiring or
obligating the Secured Party to make any commitment or to make any inquiry as to
the nature or sufficiency of any payment received by the Secured Party, or to
present or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby, and no action taken by the Secured
Party or omitted to be taken with respect to the Collateral or any part thereof
shall give rise to any defense, counterclaim or offset in favor of such Grantor
or to any claim or action against the Secured Party. It is


                                     - 6 -
<PAGE>   7
understood and agreed that the power of attorney granted to the Secured Party
for the purposes set forth above in this Section 4.1 is coupled with an interest
and is irrevocable and such Grantor hereby ratifies all actions taken by its
attorney-in-fact by virtue hereof. The provisions of this Section 4.1 shall in
no event relieve such Grantor of any of its obligations hereunder or under any
of the other Security Documents with respect to the Collateral or any part
thereof or impose any obligation on the Secured Party to proceed in any
particular manner with respect to the Collateral or any part thereof, or in any
way limit the exercise by the Secured Party of any other or further right which
it may have on the date of this Security Agreement or hereafter, whether
hereunder, under any of the other Security Documents, by law or otherwise.

         (b) The Secured Party shall not, under any circumstance or in any event
whatsoever, have any liability for any part of the Collateral, nor shall the
Secured Party have any liability for any error or omission or delivery of any
kind incurred in the good faith settlement, collection or payment of any of the
Collateral or any monies received in payment therefor or for any damages
resulting therefrom, nor shall this Security Agreement impose upon the Secured
Party any obligation to perform any obligation with respect to the Collateral.
The costs of collection, notification and enforcement, including but not limited
to, attorneys' fees and out-of-pocket expenses, shall be borne solely by the
Grantors, whether the same are incurred by the Grantors or the Secured Party.
The Grantors jointly and severally agree to indemnify, defend and hold the
Secured Party harmless from and against any and all other claims, demands,
losses, judgments and liabilities (including but not limited to, liabilities for
penalties) of any nature, and to reimburse the Secured Party for all reasonable
costs and expenses, including but not limited to attorneys' fees and expenses,
arising from this Security Agreement or the exercise of any right or remedy
granted to the Secured Party hereunder other than those incurred solely as a
result of the gross negligence and willful misconduct of the Secured Party. In
no event shall the Secured Party be liable for any matter or thing in connection
with this Security Agreement other than to account for moneys actually received
by the Secured Party in accordance with the terms hereof, and matters arising
out of the gross negligence or willful misconduct of the Secured Party.

         SECTION 4.2 COLLATERAL RESERVE ACCOUNT. Subject to the rights of any
other secured party having rights senior to the Secured Party, if requested by
the Secured Party to do so on or at any time after an Event of Default has
occurred and during its continuance, the Grantors shall establish and thereafter
maintain with the Secured Party or its designee a demand deposit account for the
concentration and collection of proceeds of certain Collateral (the "Collateral
Reserve Account") into which the Grantors shall transfer and deliver all cash,
checks, drafts, items and other instruments for the payment of money which it
now has or may at any time hereafter receive in full or partial payment for the
Collateral or otherwise as proceeds of the Collateral and, pending such transfer
and delivery, the Grantor shall be deemed to hold same in trust for the benefit
of the Secured Party. The Grantors shall not be entitled to withdraw funds on
deposit in the Collateral Reserve Account after its inception without the prior
written consent of the Secured Party; provided, however, that, at any time
during which collected funds exist on deposit in the Collateral Reserve Account,
the Secured Party may withdraw such


                                     - 7 -
<PAGE>   8
deposits, or any portion thereof, therefrom, for application against the
Obligations in such manner as the Secured Party, in its sole discretion, may
determine.

         SECTION 4.3 COLLECTIONS. Upon the occurrence and during the continuance
of an Event of Default, the Secured Party may, in its sole discretion, in its
name or in the name of any of the Grantors, or otherwise, (a) demand, sue for,
collect or receive any money or property at any time payable or receivable on
account of or in exchange for, or make any compromise or settlement deemed
desirable with respect to any of the Collateral, but shall be under no
obligation to do so, or (b) extend the time of payment, arrange for payment in
installments, or otherwise modify the term of, or release, any of the
Collateral, without thereby incurring responsibility to, or discharging or
otherwise affecting any liability of, the Grantors, other than to discharge the
Grantors in so doing with respect to liabilities of the Grantors to the extent
that the liabilities are paid or repaid. After the occurrence and during the
continuance of an Event of Default, any money, checks, notes, bills, drafts, or
commercial paper received by the Grantors shall be held in trust for the Secured
Party and any other secured party having rights thereto senior to the Secured
Party and shall be promptly turned over to the Secured Party or any other
secured party having rights thereto senior to the Secured Party as their
interest shall appear. The Secured Party may make such payments and take such
actions as the Secured Party, in its sole discretion, deems necessary to protect
its security interest in the Collateral or the value thereof, and the Secured
Party is hereby unconditionally and irrevocably authorized (without limiting the
general nature of the authority hereinabove conferred) to pay, purchase, contest
or compromise any Liens which in the judgment of the Secured Party appear to be
equal to, prior to or superior to its security interest in the Collateral and
any Liens not expressly permitted by this Security Agreement, the Note Agreement
or the other Security Documents.

         SECTION 4.4 POSSESSION; SALE OF COLLATERAL.

         (a) Upon the occurrence and during the continuance of an Event of
Default, the Secured Party may, subject to the rights of any other secured party
having rights senior the Secured Party (i) require the Grantors to assemble the
tangible assets which comprise part of the Collateral and make them available to
the Secured Party at any place or places reasonably designated by the Secured
Party, (ii) to the extent permitted by applicable law, with or without notice or
demand for performance and without liability for trespass, enter any premises
where the Collateral may be located and peaceably take possession of the same,
and may demand and receive such possession from any person who has possession
thereof, and may take such measures as it may deem necessary or proper for the
care or protection thereof, including but not limited to, the right to remove
all or any portion of the Collateral, and (iii) with or without taking such
possession may sell or cause to be sold, in one or more sales or parcels, for
cash, on credit or for future delivery, without assumption of any credit risk,
all or any portion of the Collateral, at public or private sale or at any
broker's board or any securities exchange, without demand of performance or
notice of intention to sell or of time or place of sale, except ten (10)
Business Days' written notice to the Grantors of the time and place of such sale
or sales (and such other notices as may be required by applicable statute, if
any, and which cannot be waived), which the Grantors hereby expressly
acknowledge is commercially


                                     - 8 -
<PAGE>   9
reasonable. The Collateral may be sold or disposed of for cash, upon credit or
for future delivery as the Secured Party shall deem appropriate. Each such
purchaser at any such sale shall hold the property sold absolutely, free from
any claim or right on the part of any of the Grantors, and each Grantor hereby
waives (to the extent permitted by law) all rights of redemption, stay and
appraisal that such Grantor now has or may at any time in the future have under
any rule of law or statute now existing or hereafter enacted. At any such sale,
the Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as the Secured Party may (in its sole and
absolute discretion) determine. The Secured Party shall not be obligated to make
any sale of any Collateral if it shall determine not to do so, regardless of the
fact that notice of sale of such Collateral shall have been given. The Secured
Party may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further notice, be made at the
time and place to which the same was so adjourned. In case any sale of all or
any part of the Collateral is made on credit or for future delivery, the
Collateral so sold may be retained by the Secured Party until the sale price is
paid by the purchaser or purchasers thereof, but the Secured Party shall not
incur any liability for the failure to collect or realize upon any or all of the
Collateral or for any delay in doing so and, in case of any such failure, shall
not be under any obligation to take any action with respect thereto; provided,
however, that such Collateral may be sold again upon like notice. At any public
sale made pursuant to this Section 4.4, the Secured Party may bid for or
purchase, free from any right of redemption, stay or appraisal and all rights of
marshalling, the Collateral and any other security for the Obligations or
otherwise on the part of the Grantors (all said rights being also hereby waived
and released by the Grantors to the fullest extent permitted by law), the
Collateral or any part thereof offered for sale and may make payment on account
thereof by using any claim then due and payable to the Secured Party from the
Grantors as a credit against the purchase price, and the Secured Party may, upon
compliance with the terms of sale, hold, retain and dispose of such property
without further accountability to the Grantors therefor. For purposes hereof, a
written agreement to purchase the Collateral or any portion thereof shall be
treated as a sale thereof; the Secured Party shall be free to carry out such
sale pursuant to such agreement, and the Grantors shall not be entitled to the
return of the Collateral or any portion thereof subject thereto, notwithstanding
the fact that after the Secured Party shall have entered into such an agreement,
all Events of Default shall have been remedied and any obligations to the
Secured Party shall have been paid in full. As an alternative to exercising the
power of sale herein conferred upon it, the Secured Party may proceed by a suit
or suits at law or in equity to foreclose this Security Agreement and to sell
the Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver. In any action hereunder, the Secured Party shall be
entitled to the appointment of a receiver without notice, to peaceably take
possession of all or any portion of the Collateral and to exercise such powers
as the court shall confer upon the receiver. Notwithstanding the foregoing, if
an Event of Default shall occur and be continuing, the Secured Party shall be
entitled to apply, without notice to the Grantors, any cash or cash items
constituting Collateral in their possession to payment of the Obligations.


                                     - 9 -
<PAGE>   10
         (b) If an Event of Default shall occur and be continuing, the Secured
Party shall, in addition to exercising any and all rights and remedies afforded
to them hereunder, have all the rights and remedies of a secured party under all
applicable provisions of law, including but not limited to, the Code.

         (c) The Grantors agree that notwithstanding anything to the contrary
contained in this Security Agreement, the Grantors shall remain liable under
each contract or other agreement giving rise to Accounts and general intangibles
and all other contracts or agreements constituting part of the Collateral and
the Secured Party shall not have any obligation or liability in respect thereof.

         (d) After the occurrence and during the continuance of an Event of
Default, upon the Secured Party's request, but subject to the rights of any
other secured party having rights senior to the Secured Party, the Grantors
shall deliver to the Secured Party all original and other documents, evidencing
and relating to the sale and delivery of Inventory or Accounts, including but
not limited to, all original orders, invoices and shipping receipts. The
Grantors shall also furnish to the Secured Party, promptly upon the request of
the Secured Party, such reports, reconciliations and aging balances regarding
Accounts as the Secured Party may request from time to time.

         SECTION 4.5 EVENT OF DEFAULT. An "Event of Default "shall exist
hereunder (a) if the Grantors shall breach in any material respect any agreement
contained herein or otherwise default in any material respect in the observance
or performance of any of the covenants, terms, conditions or agreements on the
part of the Grantors contained in this Security Agreement and, with respect to
nonmonetary covenants, terms, conditions or agreements, such non observance or
non performance continues for a period of thirty (30) days after the earlier of
(i) written notice from the Secured Party of such default or (ii) actual
knowledge of the Grantors of such default, or (b) if an "Event of Default" under
(and as defined in) the Note Agreement shall have occurred and be continuing.

         SECTION 4.6 Application of Proceeds. Unless the Secured Party otherwise
directs pursuant to the Purchase Agreement, the proceeds of any sale of
Collateral pursuant to this Security Agreement or otherwise, as any Collateral
consisting of cash, shall be applied after receipt by the Secured Party as
follows, subject to the rights of any other secured party having rights senior
to the Secured Party:

                  FIRST, to the payment of all reasonable costs, fees and
         expenses of the Secured Party and their agents, representatives and
         attorneys incurred in connection with such sale or with the retaking,
         holding, handling, preparing for sale (or other disposition) of the
         Collateral or otherwise in connection with the Note, this Security
         Agreement or any of the Obligations, including but not limited to, the
         reasonable fees and expenses of the Secured Party's agents and
         attorneys and court costs (whether at trial, appellate or
         administrative levels), if any, incurred by the Secured Party in so
         doing;


                                     - 10 -
<PAGE>   11
                  SECOND, to the payment of the outstanding principal balance
         and accrued interest and fees on the Obligations;

                  THIRD, to pay all other amounts payable by the Grantors under
         the Notes; and

                  FOURTH, to the Grantors or to such other Person as a court may
         direct.

         SECTION 4.7 AUTHORITY OF SECURED PARTY. The Secured Party shall have
and be entitled to exercise all such powers hereunder as are specifically
delegated to the Secured Party by the terms hereof, together with such powers as
are reasonably incidental thereto. The Secured Party may execute any of their
duties hereunder by or through their agents or employees and shall be entitled
to retain counsel and to act in reliance upon the advice of such counsel
concerning all matters pertaining to their duties hereunder.

         SECTION 4.8 CERTAIN WAIVERS; GRANTORS NOT DISCHARGED. The Grantors
expressly and irrevocably waive (to the extent permitted by applicable law)
presentment, demand of payment and protest of nonpayment in respect of their
Obligations under this Security Agreement. The obligations and duties of the
Grantors hereunder are irrevocable, absolute, and unconditional and shall not be
discharged, impaired or otherwise affected by (a) the failure of the Secured
Party to assert any claim or demand or to enforce any right or remedy against
the Grantors or any grantee under the provisions of this Security Agreement or
any other Security Document or any grantee under the provisions of this Security
Agreement or any other Security Document or any waiver, consent, extension,
indulgence or other action or inaction in respect thereof, (b) any extension or
renewal of any part of the Obligations, (c) any rescission, waiver, amendment or
modification of any of the terms or provisions of the Purchase Agreement or any
Security Document or of any agreement related thereto, (d) the release of any
liens on or security interests in any part of the Collateral or the release,
sale or exchange of or failure to foreclose against any security held by or for
the benefit of the Secured Party for payment or performance of the Obligations,
(e) the bankruptcy, insolvency or reorganization of the Grantors or any grantee
or any other Persons, (f) the invalidity or unenforceability of the Note
Agreement or the Security Documents, (g) any change, restructuring or
termination of the corporate structure or existence of the Grantors or any
grantee or any restructuring or refinancing of all or any portion of the
Obligations, or (h) any other event which under law would discharge the
obligations of a surety.

         SECTION 4.9 TRANSFER OF SECURITY INTEREST. The Secured Party may
transfer to any other Person all or any part of the liens and security interests
granted hereby, and all, or any part of the Collateral which may be in the
Secured Party's possession after the occurrence and during the continuance of an
Event of Default or, if to a successor Secured Party in accordance with the Note
Agreement, at any time. Upon such transfer, the transferee shall be vested with
all the rights and powers of the Secured Party hereunder with respect to such of
the Collateral as is so transferred, but, with respect to any of the Collateral
not so transferred, the Secured Party shall retain all of their rights and
powers (whether given to it in this Security Agreement, or otherwise).


                                     - 11 -
<PAGE>   12
The Secured Party or any of them may, at any time, assign their rights as the
secured party hereunder to any Person, in the Secured Party's discretion, and
upon notice to the Grantors, but without any requirement for consent or approval
by or from Grantors, and any such assignment shall be valid and binding upon the
Grantors, as fully as it had expressly approved the same.

                                   ARTICLE 5

                            SECURED PARTY'S INTERESTS

         SECTION 5.1 PRO RATA INTERESTS. The security interests and other rights
granted or reserved to the Secured Party and its successors and assigns (the
"Note Holders") under this Security Agreement (the "Contractual Rights") and the
other rights available to the Note Holders under applicable law by reason of the
existence of this Security Agreement and the attachment and perfection of the
security interests created under this Security Agreement (the "Statutory
Rights") are for the pro rata benefit of the Note Holders according to the
outstanding principal amount of Notes held by each Note Holder, respectively,
expressed as a percentage of the aggregate outstanding principal amount of all
Notes, and shall be held by the Note Holders in such percentages, pari passu,
regardless of the time or order of the attachment or perfection of their
respective security interests or the time or manner of filing of their
respective financing statements or assignments thereof and regardless of which
Note Holder may hold possession of Collateral. All Contractual Rights and
Statutory Rights shall be exercised from time to time as shall be determined by
Note Holders representing a majority of the outstanding principal amount of the
Notes (the "Majority Holders"). No waiver of any Contractual Rights or Statutory
Rights shall be binding upon a Note Holder unless set forth in a written
document signed by such Note Holder or signed by the Majority Holders. All
recoveries attributable to enforcement of Contractual Rights or Statutory
Rights, or both, shall be shared ratably by the Note Holders according to their
respective pro rata interests as provided in this Security Agreement. All
reasonable expenses incurred by any Note Holder in the enforcement of
Contractual Rights or Statutory Rights, or both, on behalf of or for the benefit
of the Note Holders shall be shared ratably by the Note Holders according to
their respective pro rata interests as provided in this Security Agreement.

         SECTION 5.2 GRANTORS' OBLIGATION. The provisions of this Article 5 are
for the purpose of defining the relative rights of the Note Holders with respect
to the Collateral and the exercise of Contractual Rights and Statutory Rights.
Nothing herein shall impair the obligations of the Grantors, which are absolute
and unconditional, to pay and perform the Obligations as and when due. No
provision of this Security Agreement shall be construed to prevent any Note
Holder from exercising remedies that may otherwise be available to it.

         SECTION 5.3 POWER OF ATTORNEY. As may be necessary for the proper
enforcement of the Contractual Rights and Statutory Rights on behalf of the Note
Holders, each Note Holder hereby constitutes and appoints as its agent and
attorney-in-fact such Person as shall be designated or appointed to act by, or
be otherwise acting at the direction of, the Majority Holders.


                                     - 12 -
<PAGE>   13
                                   ARTICLE 6

                                  MISCELLANEOUS

         SECTION 6.1 FURTHER ASSURANCES. The Grantors agree, at their expense,
to do such further things, to execute, acknowledge, deliver and cause to be duly
filed all such further instruments and documents and take all such actions as
the Secured Party may from time to time reasonably request for the better
assuming and preserving of the security interests and the rights and remedies
created hereby, including but not limited to, the execution and delivery of such
additional conveyances, assignments, agreements and instruments, the payment of
any fees and taxes required in connection with the execution and delivery of
this Security Agreement, the granting of the security interests created hereby
and the execution, filing and recordation of any financing statements (including
fixture filings) or other documents as the Secured Party may deem reasonably
necessary or desirable for the perfection of the security interests granted
hereunder. The Grantors hereby authorize the Secured Party, as secured party
under the Code, to file financing statements or continuation statements signed
only by the Secured Party, and agree to pay all expenses in connection with any
such filing. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note or other
instrument, such note or instrument shall be immediately pledged and delivered
to the Secured Party, duly endorsed in a manner satisfactory to the Secured
Party, subject to the rights of any other secured party having rights senior to
the Secured Party. If at any time the Grantors shall take and perfect a security
interest in any property to secure payment and performance of an Account, the
Grantors, upon the request of the Secured Party, shall promptly assign such
security interest to the Secured Party, subject to the rights of any other
secured party having rights senior to the Secured Party. The Grantor agrees to
notify the Secured Party thirty (30) days prior to any change (a) in such
Grantor's corporate name, (b) in the location of such Grantor's chief executive
office, (c) in such Grantor's chief place of business, or (d) in the office or
offices where such Grantor keeps its records relating to the Collateral. The
Grantors agree that, after the occurrence and during the continuance of an Event
of Default, they shall upon request of the Secured Party, take any and all
actions, to the extent permitted by applicable law, at the Grantors' own
expense, to obtain the approval of any governmental authority for any action or
transaction contemplated by this Security Agreement which is then required by
law, and specifically, without limitation, upon request of the Secured Party, to
prepare, sign and file with any governmental authority the Grantors' portion of
any application or applications for consent to the assignment of licenses held
by the Grantors, or for consent to the possession and sale of any of the
Collateral by or on behalf of the Secured Party. The Grantors further agree that
they shall at all times, at Grantors' own expense and cost, keep accurate and
complete records with respect to the Collateral, including but not limited to, a
record of all payments and proceeds received in connection therewith or as a
result of the sale thereof and of all credits granted, and agree that the
Secured Party or its representatives shall have the right at any reasonable time
and from time to time to call at the Grantors' place or places of business to
inspect the Collateral and to examine or cause to be examined all of the books,
records, journals and other data relating to the Collateral and to make extracts
therefrom or copies thereof as are reasonably requested.


                                     - 13 -
<PAGE>   14
         SECTION 6.2 EFFECTIVENESS. This Security Agreement shall take effect
immediately upon execution by the Grantors.

         SECTION 6.3 INDEMNITY; REIMBURSEMENT OF SECURED PARTY; DEFICIENCY. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Secured Party
hereunder or under the other Security Documents, the Grantors jointly and
severally agree (a) to indemnify, defend and hold harmless the Secured Party
from and against any and all claims, demands, losses, judgments and liabilities
(including but not limited to, liabilities for penalties) of whatever nature,
relating thereto or resulting therefrom, and (b) to reimburse the Secured Party
for all costs and expenses, including but not limited to, the fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all costs incurred by the Secured Party
in connection with any litigation relating to the Collateral whether or not the
Secured Party shall be a party to such litigation, including but not limited to,
the fees and disbursements of attorneys for the Secured Party, and any
out-of-pocket costs incurred by the Secured Party in appearing as a witness or
in otherwise complying with legal process served upon it. In no event shall the
Secured Party be liable, in the absence of gross negligence or willful
misconduct on its part, for any matter or thing in connection with this Security
Agreement other than to account for moneys actually received by it in accordance
with the terms hereof and the Grantors hereby release the Secured Party from any
and all claims, causes of action and demands at any time arising out of or with
respect to this Security Agreement, any other Security Document or the
Collateral. All indemnities contained in this Section 6.3 and elsewhere in this
Security Agreement shall survive the expiration or earlier termination of this
Security Agreement. After application of the proceeds by the Secured Party
pursuant to Section 4.6 hereof, the Grantors shall remain liable to the Secured
Party for any deficiency.

         SECTION 6.4 CONTINUING LIEN. It is the intent of the parties hereto
that (a) this Security Agreement shall constitute a continuing agreement as to
any and all future, as well as existing transactions, between the Grantors and
the Secured Party under or in connection with the Notes, and (b) the security
interest provided for herein shall attach to after-acquired as well as existing
Collateral and the Obligations covered by this Security Agreement shall include
any future advances under or in connection with the Purchase Agreement.

         SECTION 6.5 TERMINATION. Upon payment in full of all Obligations and
termination of all commitments relating thereto, the Secured Party shall
reassign and redeliver (or cause to be so reassigned and redelivered), without
recourse upon or warranty by the Secured Party, and at the sole expense of the
Grantors, to the Grantors, against receipt therefor, such of the Collateral (if
any) as shall not have been sold or otherwise applied by the Secured Party
pursuant to the terms hereof and not theretofore reassigned and redelivered to
the Grantors, together with appropriate instruments of reassignment and release.

         SECTION 6.6 NOTICES. All notices and other communications given to or
made upon any party hereto in connection with this Security Agreement shall,
except as


                                     - 14 -
<PAGE>   15
otherwise expressly herein provided, be in writing (including telecopy, telexed
or telegraphic communication) and mailed via certified mail, delivered by
guaranteed overnight delivery service, telecopied (with a confirming copy sent
by another permitted delivery method), telexed, telegraphed or delivered by hand
to the respective parties, as follows:


         to the Grantors:

                  c/o IGI, Inc.
                  Wheat Road and Lincoln Avenue
                  Buena, NJ  08310
                  Attn:   President

                  Telecopier:  (609)697-2259


         to ACAS:

                  American Capital Strategies, Ltd.
                  2 Bethesda Metro Center, 14th Floor
                  Bethesda, Maryland  20814
                  Attn:  President

                  Telecopier:  (301) 654-6714


         SECTION 6.7 SUCCESSORS AND ASSIGNS. Whenever in this Security Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party, and all covenants, promises
and agreements by or on behalf of the Secured Party that are contained in this
Security Agreement shall bind and inure to the benefit of its respective
successors and assigns. The Grantors may not assign or transfer any of their
rights or obligations hereunder without the prior written consent of the Secured
Party.

         SECTION 6.8 APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MARYLAND, WITHOUT
GIVING EFFECT TO MARYLAND CHOICE OF LAW DOCTRINE.

         SECTION 6.9 WAIVERS. No failure or delay of the Secured Party in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or future exercise thereof or the exercise of any other right
or power. The rights and remedies of the Secured Party hereunder are cumulative
and not exclusive of any rights or remedies which they would otherwise have. No
waiver of any provision of this Security


                                     - 15 -
<PAGE>   16
Agreement or consent to any departure by the Grantors therefrom shall in any
event be effective unless the same shall be authorized as provided in Section
5.1 or Section 6.10, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on the Grantors in any case shall entitle the Grantors to any other or
further notice or demand in similar or other circumstances.

         SECTION 6.10 AMENDMENTS. Neither this Security Agreement nor any
provision hereof may be amended or modified except pursuant to an agreement or
agreements in writing entered into by the Grantors and the Secured Party.

         SECTION 6.11 SEVERABILITY. In the event any one or more of the
provisions contained in this Security Agreement should be held invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.

         SECTION 6.12 COUNTERPARTS. This Security Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered or mailed to the Secured Party.

         SECTION 6.13 HEADINGS. Article and Section headings used herein are for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Security Agreement.

         SECTION 6.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY EXPRESSLY
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN CONNECTION WITH THIS SECURITY
AGREEMENT AND AGREE THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL
INDUCEMENT FOR THE PARTIES ENTERING INTO THIS SECURITY AGREEMENT.

         SECTION 6.15 INTERPRETATION. In the event of a conflict between this
Security Agreement and the Note Agreement, the terms of Note Agreement shall
control.

         SECTION 6.16 SUBORDINATION. THE OBLIGATIONS SECURED HEREBY AND THE
SECURITY INTERESTS GRANTED HEREUNDER ARE SUBORDINATE IN THE MANNER AND TO THE
EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE "SUBORDINATION
AGREEMENT") DATED AS OF OCTOBER 29, 1999, AMONG AMERICAN CAPITAL STRATEGIES,
LTD., AND FLEET CAPITAL CORPORATION, A RHODE ISLAND CORPORATION, TO THE
INDEBTEDNESS AND OTHER LIABILITIES OWED BY THE GRANTORS UNDER AND PURSUANT TO
THE CREDIT AGREEMENT DATED AS OF OCTOBER 29, 1999, AND EACH RELATED "LOAN


                                     - 16 -
<PAGE>   17
DOCUMENT" (AS DEFINED THEREIN), AND EACH SECURED PARTY HEREUNDER, BY ITS
ACCEPTANCE HEREOF, ACKNOWLEDGES AND AGREES TO BE BOUND BY THE PROVISIONS OF THE
SUBORDINATION AGREEMENT.

                                    * * * * *


                                     - 17 -
<PAGE>   18
         IN WITNESS WHEREOF, the Grantors have executed this Security Agreement
as of the date first above written.

                                        IGI, INC.



                                        By: /s/ Paul Woitach
                                           ______________________
                                           Name: Paul Woitach
                                           Title: President


                                        IGEN, INC.



                                        By: /s/ Paul Woitach
                                           ______________________
                                           Name: Paul Woitach
                                           Title: President

                                        IMMUNOGENETICS, INC.



                                        By: /s/ Paul Woitach
                                           ______________________
                                           Name: Paul Woitach
                                           Title: President

                                        BLOOD CELLS, INC.



                                        By: /s/ Paul Woitach
                                           ______________________
                                           Name: Paul Woitach
                                           Title: President

                                     - 18 -
<PAGE>   19
         IN WITNESS WHEREOF, the Secured Party has executed this Security
Agreement as of the date first above written.


                                     AMERICAN CAPITAL STRATEGIES, LTD.



                                     By: /s/ JOHN ERICKSON
                                        ______________________________
                                        Name: JOHN ERICKSON
                                        Title: CHIEF FINANCIAL OFFICER


                                     - 19 -