<PAGE>   1
EXHIBIT *(10.38)

         This Warrant was originally issued on October 29, 1999, and such
issuance was not registered under the Securities Act of 1933, as amended. The
transfer of this Warrant and the securities obtainable upon exercise thereof is
subject to the conditions on transfer specified in the Note and Equity Purchase
Agreement, dated as of October 29, 1999 (as amended from time to time, the
"Purchase Agreement") by and among the issuer hereof (the "Company") and the
Purchaser (as such term is defined in the Purchase Agreement), and the Company
reserves the right to refuse the transfer of such security until such conditions
have been fulfilled with respect to such transfer. Upon written request, a copy
of such conditions will be furnished by the Company to the holder hereof without
charge. This Warrant and the Common Stock or other securities issuable upon
exercise hereof may not be offered or sold except pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or an
applicable exemption from registration under the Securities Act of 1933, as
amended.



                                     WARRANT




Date of Issuance: October 29, 1999                           Certificate No. W-1



         FOR VALUE RECEIVED, IGI, INC., a Delaware corporation (the "Company"),
hereby grants to American Capital Strategies, Ltd., or its registered assigns
(the "Registered Holder") the right to purchase from the Company 1,907,543
shares (as adjusted from time to time hereunder, the "Exercise Shares"), of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"), at a
price per share of $0.01 (as adjusted from time to time hereunder, but in no
event less than the par value per share of the Common Stock, the "Exercise
Price"). This Warrant is one of one or more Warrants (collectively, the
"Warrants") originally issued by the Company to certain investors on October 29,
1999. Certain capitalized terms used herein are defined in Section 4 hereof.
Certain capitalized terms used and not defined herein are defined in the
Purchase Agreement. The amount and kind of securities purchasable pursuant to
the rights granted hereunder and the Exercise Price for such securities are
subject to adjustment pursuant to the provisions contained in this Warrant.

         This Warrant is subject to the following provisions:

         Section 1. Exercise of Warrant.

         1A. Exercise Period. The Registered Holder may exercise, in whole or in
part (but not as to a fractional share of Common Stock), the purchase rights
represented by this Warrant at any time and from time to time, to and including
October 29, 2009 (the "Exercise Period"). The Company will give the Registered
Holder written notice at least 30 days but not more than 90 days prior to the
expiration of the Exercise Period.

             (i) Exercise Procedure. This Warrant will be deemed to have been
exercised on the date (the "Exercise Time") on which the Company has received
all of the following items:
<PAGE>   2
                 (a) a completed Exercise Agreement, as described in paragraph
1B below, executed by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");

                 (b) this Warrant;

                 (c) if this Warrant is not registered in the name of the
initial Purchaser, an Assignment or Assignments in the form set forth in Exhibit
II hereto evidencing the assignment of this Warrant to the Purchaser, in which
case the Registered Holder will have complied with the provisions set forth in
Section 6 hereof; and

                 (d) a check payable to the Company in an amount equal to the
product of the Exercise Price multiplied by the number of shares of Common Stock
being purchased upon such exercise (the "Aggregate Exercise Price"); provided,
however, that the Registered Holder may exercise this Warrant in whole or in
part by the surrender of this Warrant to the Company, with a duly executed
Exercise Agreement marked to reflect "Net Issue Exercise" and specify the number
of shares of Common Stock to be purchased and upon such Net Issue Exercise, the
Registered Holder shall be entitled to pay the exercise price for Common Stock
purchased hereunder by cancellation of shares of Common Stock to be purchased
hereunder, valued at Fair Market Value less the Exercise Price thereof.

            (ii) Certificates for shares of Common Stock purchased upon exercise
of this Warrant will be delivered by the Company to the Purchaser within five
business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company will prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and will, within such five-day period, deliver such
new Warrant to the Person designated for delivery in the Exercise Agreement.

            (iii) The Common Stock issuable upon the exercise of this Warrant
will be deemed to have been issued to the Purchaser at the Exercise Time, and
the Purchaser will be deemed for all purposes to have become the record holder
of such Common Stock at the Exercise Time.

            (iv) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant will be made without charge to the Registered Holder or
the Purchaser for any issuance tax in respect thereof or other cost incurred by
the Company in connection with such exercise and the related issuance of shares
of Common Stock. Each share of Common Stock issuable upon exercise of this
Warrant will, upon payment of the Exercise Price therefor, be fully paid and
nonassessable and free from all liens and charges with respect to the issuance
thereof.

            (v) The Company will not close its books against the transfer of
this Warrant or of any share of Common Stock issued or issuable upon the
exercise of this Warrant in any manner that interferes with the timely exercise
of this Warrant. The Company will from time to time take all such action as may
be necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.


                                     - 2 -
<PAGE>   3
             (vi) The Company shall assist and cooperate with any Registered
Holder or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company).

             (vii) Notwithstanding any other provision hereof, if an exercise of
any portion of this Warrant is to be made in connection with a public offering
or sale of the Company, the exercise of any portion of this Warrant may, at the
election of the holder hereof, be conditioned upon the consummation of the
public offering or sale of the Company in which case such exercise shall not be
deemed to be effective until the consummation of such transaction.

             (viii) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock solely for the purpose
of issuance upon the exercise of the Warrants, such number of shares of Common
Stock issuable upon the exercise of all outstanding Warrants. All shares of
Common Stock that are so issuable shall, when issued, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges.
The Company shall take all such actions as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or governmental regulation or any requirements of any domestic securities
exchange upon which shares of Common Stock may be listed (except for official
notice of issuance which shall be immediately delivered by the Company upon each
such issuance).

         1B. Exercise Agreement. Upon any exercise of this Warrant, the Exercise
Agreement will be substantially in the form set forth in Exhibit I hereto,
except that if the shares of Common Stock are not to be issued in the name of
the Person in whose name this Warrant is registered, the Exercise Agreement will
also state the name of the Person to whom the certificates for the shares of
Common Stock are to be issued, and if the number of shares of Common Stock to be
issued does not include all the shares of Common Stock purchasable hereunder, it
will also state the name of the Person to whom a new Warrant for the unexercised
portion of the rights hereunder is to be delivered. Such Exercise Agreement will
be dated the actual date of execution thereof.

         1C. Fractional Shares. If a fractional share of Common Stock would, but
for the provisions of paragraph 1A, be issuable upon exercise of the rights
represented by this Warrant, the Company will, within five business days after
the date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between Fair Market Value of such fractional share as of the date of the
Exercise Time and the Exercise Price of such fractional share.

         Section 2. Adjustment of Number of Exercise Shares. In order to prevent
dilution of the rights granted under this Warrant, the number of Exercise Shares
shall be subject to adjustment from time to time as provided in this Section 2.

         2A. Adjustment of Number of Exercise Shares upon Issuance of Shares of
Common Stock or Stock Equivalents. If and whenever, on or after the Closing
Date, the Company issues or sells, or in accordance with paragraph 2B is deemed
to have issued or sold, any shares of Common Stock for a consideration per share
of Common Stock less than the Fair Market Value per share of Common Stock at the
time of such issue or sale (not including the issuance of shares of Common Stock
pursuant to exercise of (i) the Warrants or (ii) any other Stock Equivalent),


                                     - 3 -
<PAGE>   4
then forthwith upon such issue or sale, the Exercise Shares will be increased by
multiplying such number by a fraction, (A) the numerator of which is the Fair
Market Value per share of Common Stock at the time of such issue or sale and (B)
the denominator of which is the amount determined by dividing (a) the sum of (1)
the product derived by multiplying the Fair Market Value per share of Common
Stock at the time of such issue or sale times the number of shares of Common
Stock outstanding on a Fully Diluted Basis immediately prior to such issue or
sale, plus (2) the aggregate consideration, if any, received by the Company upon
such issue or sale, by (b) the number of shares of Common Stock outstanding on a
Fully Diluted Basis immediately after such issue or sale; provided, however,
there shall be no such adjustment in respect of shares of Common Stock purchased
by an employee of the Company under the Company's employee stock purchase plan
as in effect as of the date of this Warrant and as amended from time to time in
accordance with the Purchase Agreement.

         2B. Effect on Exercise Shares of Certain Events. For purposes of
determining the adjusted Exercise Shares of Common Stock under paragraph 2A
above, the following will be applicable:

             (i) Issuance of Stock Equivalents. If the Company in any manner
grants or issues Stock Equivalents as permitted by the Purchase Agreement and
the lowest price per share of Common Stock for which any one share of Common
Stock of the Company or analogous economic right is issuable upon the exercise
of any such Stock Equivalent is less than the Fair Market Value at the time of
the granting or issuing of such Stock Equivalent, then such shares of Common
Stock will be deemed to have been issued and sold by the Company for such price
per share of Common Stock. For purposes of this paragraph, the "lowest price per
share of Common Stock for which any one share of Common Stock or analogous
economic right is issuable" will be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock or analogous economic right upon the exercise of the
Stock Equivalent (whether by conversion, exchange or otherwise) or other similar
indication of the price per share of Common Stock as of the time of granting
(such as the floor value for stock appreciation rights). No further adjustment
of the Exercise Shares will be made upon the actual issue of such shares of
Common Stock or upon the exercise of any rights under the Stock Equivalents.

             (ii) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Stock Equivalent, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Stock Equivalent, or
the rate at which any Stock Equivalent is convertible into or exchangeable for
shares of Common Stock changes at any time, the Exercise Shares in effect at the
time of such change will be readjusted to the Exercise Shares that would have
been in effect at such time had such Stock Equivalent still outstanding provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold;
provided that if such adjustment would result in a decrease in the Exercise
Shares then in effect, such adjustment will not be effective until thirty (30)
days after written notice thereof has been given by the Company to all holders
of the Warrants.

             (iii) Treatment of Expired and Unexercised Stock Equivalents. Upon
the expiration of any Stock Equivalent or the termination of any right to
convert or exchange any Stock Equivalent without the exercise of such Stock
Equivalent, the Exercise Shares then in


                                     - 4 -
<PAGE>   5
effect will be adjusted to the Exercise Shares which would have been in effect
at the time of such expiration or termination had such Stock Equivalent, to the
extent outstanding immediately prior to such expiration or termination, never
been issued; provided that if such expiration or termination would result in a
decrease in the Exercise Shares then in effect, such decrease shall not be
effective until thirty (30) days after written notice thereof has been given to
all holders of the Warrants.

             (iv) Calculation of Consideration Received. If any shares of Common
Stock or Stock Equivalents are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor will be deemed to be the net
amount received by the Company. In case any shares of Common Stock or Stock
Equivalents are issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Company will be the Fair
Market Value of such consideration. In case any shares of Common Stock or Stock
Equivalents are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the Fair Market Value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock or Stock Equivalents, as the case
may be.

             (v) Integrated Transactions. In case any Stock Equivalent is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Stock Equivalent by the parties thereto, the
Stock Equivalent will be deemed to have been issued without consideration.

             (vi) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, or Stock Equivalents or (B) to
subscribe for or purchase Common Stock or Stock Equivalents, then such record
date will be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.

         2C. Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Shares in effect immediately prior to
such subdivision will be proportionately increased. If the Company at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Shares in effect immediately prior to such combination will be proportionately
decreased.

         2D. Reorganization, Reclassification, Consolidation, Merger or Sale.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets to another Person or
other transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as "Organic Change." Prior to the consummation of any Organic Change,
the Company will make appropriate provision (in form and substance reasonably
satisfactory to the


                                     - 5 -
<PAGE>   6
Registered Holders of the Warrants representing a majority of the Common Stock
obtainable upon exercise of all Warrants then outstanding) to ensure that each
of the Registered Holders of the Warrants will thereafter have the right to
acquire and receive in lieu of or addition to (as the case may be) the shares of
Common Stock immediately theretofore acquirable and receivable upon the exercise
of such holder's Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
such holder's Warrant had such Organic Change not taken place. In any such case,
the Company will make appropriate provision (in form and substance satisfactory
to the Registered Holders of the Warrants representing a majority of the Common
Stock obtainable upon exercise of all Warrants then outstanding) with respect to
such holders' rights and interests to ensure that the provisions of this Section
2 and Sections 3 and 4 hereof will thereafter be applicable to the Warrants
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Company, an immediate
adjustment of the Exercise Price to the value for the Common Stock reflected by
the terms of such consolidation, merger or sale, and a corresponding immediate
adjustment in the number of Exercise Shares, if the value so reflected is less
than the Exercise Price in effect immediately prior to such consolidation,
merger or sale). The Company will not effect any such consolidation, merger or
sale, unless prior to the consummation thereof, the successor entity (if other
than the Company) resulting from consolidation or merger or the corporation
purchasing such assets assumes by written instrument (in form and substance
satisfactory to the Registered Holders of Warrants representing a majority of
the Common Stock obtainable upon exercise of all of the Warrants then
outstanding), the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.

         2E. Notices.

             (i) Immediately upon any adjustment of the Exercise Shares, the
Company will give written notice thereof to the Registered Holder, setting forth
in reasonable detail and certifying the calculation of such adjustment.

             (ii) The Company will give written notice to the Registered Holder
at least 20 days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Organic Change,
dissolution or liquidation.

             (iii) The Company will also give written notice to the Registered
Holders at least 20 days prior to the date on which any Organic Change,
dissolution or liquidation will take place.

         Section 3. Dividends

         3A. In the event that, during the term of the Warrants, the Company
pays any cash dividend or makes any cash distribution to any holder of Common
Stock each Registered Holder shall be entitled to receive in respect of its
Warrant a dilution fee in cash (the "Dilution Fee") on the date of payment of
such dividend or distribution, which Dilution Fee shall be equal to the
difference between (a) the product of (i) the highest amount per share paid to
holders of


                                     - 6 -
<PAGE>   7
Common Stock times (ii) the number of Exercise Shares to which the Holder is
then entitled. No such dividend or distribution shall be paid unless the Holders
shall have received advance written notice thereof at least ten (10) days prior
to the record date therefor.

         3B. If the Company declares or pays a dividend upon the Common Stock
payable otherwise than in cash out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently applied)
except for a stock dividend payable in shares of Common Stock (a "Liquidating
Dividend"), then the Company will pay to the Registered Holder of this Warrant
at the time of payment thereof the Liquidating Dividend which would have been
paid to such Registered Holder on the Common Stock had this Warrant been fully
exercised immediately prior to the date on which a record is taken for such
Liquidating Dividend, or, if no record is taken, the date as of which the record
holders of Common Stock entitled to such dividends are to be determined.

         Section 4. Definitions. The following terms have meanings set forth
below:

         "Common Stock" means the common stock of the Company and, except for
purposes of the shares obtainable upon exercise of this Warrant, any capital
stock of any class of the Company hereafter authorized which is not limited to a
fixed sum or percentage of par or stated value in respect to the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon any liquidation, dissolution or winding up of the Company.

         "Fair Market Value" shall have the meaning set forth in the Purchase
Agreement.

         "Fully Diluted Basis" means, at any given time, the number of shares of
Common Stock actually outstanding at such time, plus the number of Stock
Equivalents then outstanding (including Warrants), regardless of their exercise
price or its equivalent.

         "Person" means an individual, a partnership, a joint venture, a limited
liability company, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

         "Stock Equivalents" means any option, warrant, right or similar
security or claim exercisable into, exchangeable for, or convertible to shares
of Common Stock or the economic equivalent value of shares of Common Stock
(including, by way of illustration, stock appreciation rights).

         Section 5. No Voting Rights; Limitations of Liability. This Warrant
will not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.

         Section 6. Warrant Transferable. Subject to the transfer conditions
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.


                                     - 7 -
<PAGE>   8
         Section 7. Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
will represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. The date the Company initially issues this
Warrant will be deemed to be the "Date of Issuance" hereof regardless of the
number of times new certificates representing the unexplored and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."

         Section 8. Replacement. Upon receipt of evidence reasonably
satisfactory to the Company (an affidavit of the Registered Holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing this Warrant, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is a financial institution or other institutional
investor its own agreement will be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Company will (at its expense)
execute and deliver in lieu of such certificate a new certificate of like kind
representing the same rights represented by such lost, stolen, destroyed or
mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.

         Section 9. Notices. Except as otherwise expressly provided herein, all
notices referred to in this Warrant will be in writing and will be delivered
personally, sent by reputable express courier service (charges prepaid) or sent
by registered or certified mail, return receipt requested, postage prepaid and
will be deemed to have been given when so delivered, one business day after
being so sent or three business days after being so deposited in the U.S. Mail
(i) to the Company, at its principal executive offices and (ii) to the
Registered Holder of this Warrant, at such holder's address as it appears in the
records of the Company (unless otherwise indicated by any such holder).

         Section 10. Amendment and Waiver. Except as otherwise provided herein,
the provisions of the Warrants may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Registered Holders of Warrants representing a majority of the shares of Common
Stock obtainable upon exercise of the Warrants; provided that no such action may
change the Exercise Price of the Warrants or the number of shares or class of
stock obtainable upon exercise of each Warrant without the written consent of
the Registered Holders of Warrants representing at least 60% of the shares of
Common Stock obtainable upon exercise of the Warrants.

         Section 11. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The construction,
validity and interpretation of this Warrant will be governed by the internal
law, and not the conflicts law, of the State of Delaware.


                                *   *   *   *   *

                                     - 8 -
<PAGE>   9
                            SIGNATURE PAGE TO WARRANT





                  IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed and attested by its duly authorized officers under its corporate seal and
to be dated the Date of Issuance hereof.





                                     IGI, INC.




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


                                     - 9 -
<PAGE>   10
                                                                       EXHIBIT I





                               EXERCISE AGREEMENT



         To:


         Dated:






                  The undersigned, pursuant to the provisions set forth in the
attached Warrant (Certificate No. W- ), hereby agrees to subscribe for the
purchase of 1,907,543 shares of the Common Stock covered by such Warrant and
makes payment herewith in full therefor at the price per share provided by such
Warrant.





                  / /    CHECK BOX FOR NET ISSUE EXERCISE







                                     Signature _________________________________



                                     Address ___________________________________


                                     - 10 -
<PAGE>   11
                                                                      EXHIBIT II





                                   ASSIGNMENT


                  FOR VALUE RECEIVED, IGI, Inc. hereby sells, assigns, and
transfers all of the rights of the undersigned under the attached Warrant
(Certificate No. W-   ) with respect to the number of shares of the Common Stock
covered thereby set forth below, unto:


<TABLE>
<CAPTION>
         Names of Assignee                       Address                                     No. of Shares
         -----------------                       -------                                     -------------
<S>                                              <C>                                         <C>
       American Capital Strategies, Ltd.         2 Bethesda Metro Center, 14th Floor           1,907,543
                                                 Bethesda, Maryland 20814

</TABLE>




                                        Signature ______________________________


                                     - 11 -