Form 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                For the Quarterly Period Ended September 30, 1996

                          Commission File No. 000-19495



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


          North Carolina                               56-1469825
   (State or other jurisdiction of                 (IRS Employer
    incorporation or organization)                Identification No.)


                       1035 Swabia Court, Durham, NC 27703
               (Address of principal executive offices) (Zip Code)


         Registrant's telephone no. including area code: (919) 941-5185



Check  whether  the  registrant  (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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 X No

The number of shares of Common Stock, $0.01 par value, outstanding as of October
31, 1996, was 7,379,960.



                                        

<PAGE>




                                  EMBREX, INC.
                                      INDEX



Part I                                                            Page
 
        Financial Information:

            Item 1:

                Balance Sheets....................................3 of 12

                Statements of Operations..........................4 of 12

                Statements of Cash Flows..........................5 of 12

                Notes to Consolidated Financial Statements........6 of 12

            Item 2:

                Management's Discussion and Analysis of
                Financial Condition and Results of Operations.....7 of 12

Part II

        Other Information........................................10 of 12

        Signatures...............................................11 of 12

        Exhibit Index ...........................................12 of 12



<PAGE>



PART I - FINANCIAL INFORMATION
        Item 1 - Financial Statements




                                            CONSOLIDATED BALANCE SHEETS
                                                   EMBREX, INC.

<TABLE>
<CAPTION>

                                                                                              (Dollars in thousands)

                                                                               September 30          December 31
                                                                                   1996                  1995
                                                                            ------------------     ---------------
ASSETS                                                                          (unaudited)
<S>                                                                            <C>                <C>   
CURRENT ASSETS
    Cash and cash equivalents ..............................................   $      5,366       $       5,354
    Short-term investments..................................................          1,875               1,972
    Inventories:
        Materials and supplies..............................................          1,206               1,027
        Product ............................................................            577                 600
    Accounts receivable - trade.............................................          2,230               1,787
    Other current assets....................................................            279                 108
                                                                                ------------     --------------
        TOTAL CURRENT ASSETS.................................................        11,533              10,848

INOVOJECT(R)SYSTEMS UNDER CONSTRUCTION.......................................           565                 801

INOVOJECT(R)SYSTEMS ..........................................................       17,497              13,846
    Less accumulated depreciation...........................................        ( 7,826)             (5,271)
                                                                                ------------        ------------
                                                                                      9,671               8,575

EQUIPMENT, FURNITURE AND FIXTURES...........................................          2,495               2,274
    Less accumulated depreciation ..........................................         (1,599)             (1,441)
                                                                                 -----------       -------------
                                                                                        896                 833
OTHER ASSETS:
    Patents and exclusive licenses of patentable technology, net...........             127                 131
    Debt issuance costs, net..............................................               32                 201
    Other non-current assets................................................            302                 400
                                                                                ------------       ------------
TOTAL ASSETS..................................................................     $ 23,126           $  21,789
                                                                                   =========          =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
    Accounts payable and accrued expenses...................................        $ 2,563           $   2,581
    Current portion of capital lease obligations............................          2,993               2,333
    Current portion of long-term debt......................................           1,613                   0
                                                                                    --------          ---------
            TOTAL CURRENT LIABILITIES.......................................          7,169               4,914

CAPITAL LEASE OBLIGATIONS, less current portion.............................          6,633               7,172

LONG-TERM DEBT, less current portion.....................................                 8               3,225

SHAREHOLDERS' EQUITY 
Common Stock, $.01 par value:
        Authorized - 30,000,000 shares
        Issued and outstanding - 7,221,553 and 6,714,724 shares at
            September 30, 1996 and December 31, 1995, respectively..........         48,506              46,122
    Additional paid-in capital.............................................             371                 371
    Accumulated deficit.....................................................        (39,561)            (40,015)
                                                                                    --------          ----------
        TOTAL SHAREHOLDERS' EQUITY...........................................         9,316               6,478
                                                                                    --------         ----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................      $ 23,126            $ 21,789
                                                                                   =========           ========
</TABLE>

                                                         3

<PAGE>



                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                   EMBREX, INC.
                                                    (Unaudited)

<TABLE>
<CAPTION>


                                                                  (Dollars in thousands, except per share data)

                                                                   Three Months Ended           Nine Months Ended
                                                                       September 30                  September 30
                                                                -------------------------       -----------------
                                                                    1996           1995          1996         1995
                                                                    ----           ----          ----         ----
<S>                                                          <C>                <C>          <C>           <C>  
REVENUES
    INOVOJECT(R)revenue....................................  $    5,188         $3,480       $14,129       $8,783
    Product revenues.....................................           408             30         1,043          816
    Other revenue.......................................             45             27           132           61
                                                             -----------   ------------    ---------  -----------
            TOTAL REVENUES................................        5,641          3,537        15,304        9,660

COST OF REVENUES..........................................        2,321          1,635         6,557        4,778
                                                               ---------     ----------     --------    ---------
                                                                  3,320          1,902         8,747        4,882

OPERATING EXPENSES
    General and administrative............................        1,182            833         3,057        2,664
    Sales and marketing..................................           473            678         1,221        1,634
    Research and development.............................         1,092            803         2,860        2,566
                                                               --------     -----------     ---------   ---------
        TOTAL OPERATING EXPENSES..........................        2,747          2,314         7,138        6,864

OTHER INCOME (EXPENSE)
    Interest income.....................................             94            116           250          264
    Interest expense.....................................          (398)          (503)       (1,241)      (1,179)
                                                              ----------    -----------     ---------   ----------
        TOTAL OTHER EXPENSE..............................          (304)          (387)         (991)        (915)
                                                              ----------    -----------    ----------  -----------
                INCOME (LOSS) BEFORE TAXES...............           269           (799)          618       (2,897)

INCOME TAXES                                                         66              0           164            0
                                                              ----------    ------------    ----------   ---------
                NET INCOME (LOSS).........................     $    203     $ (    799)     $    454     $ (2,897)
                                                               =========    ===========     =========    =========

Net income (loss) per share of Common Stock..............     $     .03    $      (.12)    $     .06   $     (.46)
                                                              ==========   ============    ==========  ===========

Weighted average shares of
    Common Stock outstanding (in thousands)...............        7,442          6,518        7,266         6,237


</TABLE>


                                        4

<PAGE>



                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   EMBREX, INC.
                                                    (Unaudited)

<TABLE>
<CAPTION>

                                                                                             (Dollars in thousands)


                                                                                     Nine Months Ended September 30
                                                                                        1996                1995

<S>                                                                                 <C>               <C>    
OPERATING ACTIVITIES
    Net income (loss)...........................................................    $   454           $  (2,897)
    Adjustments to reconcile net income (loss) to net cash provided by
    (used in) operating activities:
        Depreciation and amortization..........................................       2,851               2,338
        Changes in operating assets and liabilities:
            Accounts receivable, inventories and other current assets..........        (770)             (1,021)
            Accounts payable and accrued expenses..............................         150                 318
                                                                                   ---------           --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................       2,685              (1,262)

INVESTING ACTIVITIES
    Purchases of short-term investments.......................................           97                (414)
    Purchases of INOVOJECT(R)systems, equipment, furniture
        and fixtures............................................................     (3,597)             (5,879)
    Proceeds from capital lease obligations.....................................      2,141               6,017
                                                                                      ------              -----
NET CASH USED IN INVESTING ACTIVITIES...........................................     (1,359)               (276)

FINANCING ACTIVITIES
    Issuance of Common Stock...................................................         260                 348
    Issuance of long-term debt...............................................             8               5,385
    Proceeds from short-term borrowings........................................         468                   0
    Repayments on short-term borrowings.......................................          (30)                  0
    Payments on capital lease obligations.......................................     (2,020)             (1,202)
                                                                                     -------            --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............................      (1,314)              4,531
                                                                                   ---------            -------
INCREASE IN CASH AND CASH EQUIVALENTS.........................................           12               2,993
    Cash and cash equivalents at beginning of period     .......................      5,354               2,803
                                                                                    --------            -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................    $ 5,366             $ 5,796
                                                                                    ========            =======
</TABLE>


Supplemental Schedule of Noncash Financing Activity:

In May 1995,  American Cyanamid Company,  a subsidiary of American Home Products
Corporation,  converted the promissory  note issued by Embrex,  Inc. to American
Cyanamid in 1991.  The $1.2 million  note,  which would have been due on May 27,
1995, was converted into 320,000 shares of Common Stock.

Also, during the 1995 period, $2.5 million of the debentures issued in May 1995,
along with $34,000 of accrued  interest were  converted  into 507,678  shares of
Common Stock net of unamortized debt issuance costs totaling $211,000.

During 1996,  an  additional  $2.05  million  debentures  along with $168,000 of
accrued  interest  were  converted  into  444,021  shares of Common Stock net of
unamortized debt issuance costs totaling $94,000.

                                        5

<PAGE>





                                  EMBREX, INC.

                                    FORM 10-Q

                               September 30, 1996



NOTES TO CONSOLIDATED INTERIM CONDENSED FINANCIAL STATEMENTS (Unaudited)


NOTE 1 -- BASIS OF PRESENTATION

The accompanying  unaudited financial statements include the accounts of Embrex,
Inc. and its wholly owned subsidiaries,  Embrex Europe Limited and Embrex Sales,
Inc.  (collectively  referred  to as the  Company)  and have  been  prepared  in
accordance with generally accepted  accounting  principles for interim financial
information and with the  instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly,  they do not include all of the information and notes required
by generally accepted accounting principles.  In the opinion of management,  all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair  presentation  of financial  condition and results of operations  have been
included.  Operating  results for the nine month period ended September 30, 1996
are not  necessarily  indicative  of the results  that may be  attained  for the
entire year.  For further  information,  refer to the financial  statements  and
notes thereto  included in the Company's  Form 10-K for the year ended  December
31, 1995.

NOTE 2 - CASH AND CASH EQUIVALENTS

In connection with the secured line of credit discussed in NOTE 3 which follows,
the Company  has  deposited  $447,000 as  compensating  cash  balances  with the
lender.

NOTE 3 - LONG-TERM DEBT

During  June  1996  the  Company  closed  on a $2.0  million  secured  equipment
financing  line  which  will  be  used  to  support  the  Company's   continuing
international  expansion efforts.  The financing line is secured by compensating
cash  balances,  has a four-year  term which calls for  quarterly  repayments of
principal,  and carries an  interest  rate one  percentage  point above the rate
being earned by the Company on the compensating cash balances.  At September 30,
1996, the Company owed approximately $438,000 under this line.

NOTE 4 - NET INCOME PER SHARE

Primary  earnings per share are  computed by dividing  net income  (loss) by the
weighted  average number of shares of Common Stock and common stock  equivalents
outstanding  during  the  period.  Common  stock  equivalents  consist  of stock
options,  warrants,  and common  shares  purchasable  under the  Employee  Stock
Purchase Plan and are computed using the treasury  stock method.  The difference
between primary and fully diluted net income per common share is not significant
in all periods presented.

                                        6

<PAGE>



Item 2.   Management's Discussion and Analysis of Financial Condition and 
          Results of Operations.


RESULTS OF OPERATIONS

Three Months Ended September 30, 1996 and 1995

Consolidated  revenues  totaled $5.6 million for the quarter ended September 30,
1996,  up  $2.1  million,  or 59  percent,  from  a year  earlier.  INOVOJECT(R)
revenues, which increased from $3.5 million to $5.2 million,  accounted for $1.7
million of the overall  increase.  Sales of the Company's  proprietary  BDA-BLEN
product in the U.S. and  pre-licensing  sales of VNF to Arthur Webster Pty. Ltd.
of Australia (Websters),  the Company's  manufacturing and marketing partner for
Europe, the Middle East, and Africa,  generated $408,000 of product revenues for
the 1996 quarter compared to $30,000 for the same period in 1995.

Cost of  revenues  totaled  41  percent  of total  revenues  in the 1996  period
compared to 46 percent during the comparable 1995 period.

Operating expenses increased by $0.4 million, from $2.3 million during the third
quarter of 1995 to $2.7 million  during the third quarter of 1996.  The increase
in operating  expenses during the 1996 period reflects  increased  international
expansion,  accruals  associated  with the  appointment  and  relocation  of two
officers who filled vacated  positions,  and legal expenses related to corporate
and patent  activity,  including  expenses  related  to the patent  infringement
lawsuit  filed  by  the  Company  as  described  in  Part  II,  Item  1-  "Legal
Proceeding".

Net interest  expense  decreased from $387,000 in the 1995 period to $304,000 in
the 1996 period,  following further  conversions of the Company's 8% convertible
debentures.

Net income for the quarter ended September 30, 1996 totaled  $203,000,  or $0.03
per share,  compared  to a net loss of  $799,000,  or $0.12 per  share,  for the
comparable 1995 period.  Weighted average shares outstanding  increased from 6.5
million in the 1995 period to 7.4 million in the 1996 period,  principally  as a
result of the conversion of debentures into Common Stock.


Nine Months Ended September 30, 1996 and 1995

Consolidated  revenues for the nine months ended September 30, 1996 increased 58
percent over the same 1995 period,  or $5.6 million,  to $15.3 million primarily
due to expanding  INOVOJECT(R)  operations.  During the same period INOVOJECT(R)
revenues,  which included the sale of one system to a pharmaceutical company for
use in the production of human influenza  vaccine in the 1996 period,  increased
by 61 percent from $8.8 million in the 1995 period to $14.1  million in the 1996
period.  Revenues  derived from sources outside of North America  increased from
3.6 percent of total revenues  during the 1995 period to 8.1 percent of revenues
in the 1996 period.

Cost of revenues totaled $6.6 million, or 43 percent of total revenues,  for the
first  nine  months of 1996  compared  to $4.8  million,  or 49 percent of total
revenues, for the same 1995 period.


                                        7

<PAGE>


Operating  expenses for the first nine months of 1996 totaled  $7.1  million,  4
percent  higher  than the  comparable  1995  period.  This  increase  in overall
operating  expenses is  attributable  to the 1996 third  quarter  operations  as
discussed above.

Net interest  expense  increased from $915,000 for the first nine months of 1995
to $991,000 for the same 1996  period.  This  increase  results  primarily  from
INOVOJECT lease financing obtained during 1995 and the first half of 1996.

Net income for the nine months ended  September  30, 1996 totaled  $454,000,  or
$.06 per share of Common Stock, compared to a net loss of $2.9 million , or $.46
per share of Common Stock, for the same period in 1995.

Management anticipates further revenue growth over 1995 levels for the remainder
of the year from the Company's  existing  INOVOJECT(R)  operations in the United
States and Canada, new INOVOJECT(R) system leases in other countries,  and sales
of its BDA-BLEN  product to poultry  producers.  To date, U.S. sales of BDA-BLEN
have been of product labeled for post-hatch use. However, management anticipates
that the USDA will give final  approval  for the in ovo use of  BDA-BLEN  in the
U.S.  market  near the end of this  year or early  in  1997.  Additionally,  the
Company  anticipates that during this same time frame a provisional license will
be  issued  in the U.K.  allowing  initial  sales of a  complex  containing  the
Company's  VNF product  combined with a bursal  disease  vaccine in the European
market.  However,  whether these  approvals will occur and their precise timing,
the rate at which  the  marketplace  will  accept  the  INOVOJECT(R)  technology
outside the United  States and Canada,  the timing of approvals  of  third-party
vaccines  for in ovo use outside  the United  States and  Canada,  and  possible
variability  in U.S.  hatchery bird  production  as a result of continuing  high
grain prices will impact the pace of revenue  growth and the  attainment  of, or
increase in, profitability from the installation and operational  throughputs of
INOVOJECT(R) systems. Management will continue to carefully manage operations in
an effort to maintain or improve gross margins and profitability.


CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

At September 30, 1996, cash and short-term investments totaled $7.2 million. The
Company has maintained cash and short-term  investment  balances of just over $7
million throughout the year.

Operating activities generated over $2.6 million during the first nine months of
1996 despite a $770,000 increase in accounts  receivable,  inventory,  and other
current assets associated with the Company's expanding operations.

During  the  same  period,  net  investing  activities  consumed  $1.4  million,
primarily as a result of the Company  relying on internal  cash flows to finance
international INOVOJECT(R) construction requirements.

Net financing  activities  consumed an additional  $1.3 million during the first
nine  months of 1996  principally  as a result of  repayments  on capital  lease
obligations.  Additionally,  as noted in the Company's  1996 second quarter Form
10-Q,  the Company  closed on a $2.0 million  secured  equipment  financing line
which will be used to support the Company's continuing  international  expansion
efforts.  At September 30, 1996,  the Company owed  $438,000  under this line of
credit.

                                        8

<PAGE>



As of September 30, 1996 the Company had  outstanding  purchase  commitments  of
approximately  $4.3 million for the  production  of BDA-BLEN  product as well as
materials and supplies for the  construction  and  maintenance  of  INOVOJECT(R)
systems.

SUBSEQUENT EVENTS

On November 7, 1996, warrants to purchase approximately 640,000 shares of Common
Stock of the Company were  exercised by the  underwriter  of the Company's  1991
initial public  offering at an aggregate  exercise price of  approximately  $3.1
million.

Also on November 7,  warrants to purchase  approximately  3.5 million  shares of
Common Stock at exercise prices ranging from $9.02 to $15.52 per share expired.

Subsequent  to the above  noted  transactions,  warrants  to purchase a total of
360,775 shares of Common Stock at prices ranging from $6.00 to $9.50, subject to
adjustment, remain outstanding. These outstanding warrants have expiration dates
ranging from July 28, 1998 through June 9, 2001.

CERTAIN RISKS AND UNCERTAINTIES

Except for the historical  information  contained  herein,  this report contains
various  forward-  looking  statements,   including  statements   pertaining  to
anticipated revenue growth,  profitability,  and regulatory approvals,  that are
subject to risks and uncertainties  and actual results could differ  materially.
Potential  risks  and  uncertainties  include,  without  limitation,   quarterly
fluctuations  in results;  the ability for the Company,  its  manufacturing  and
marketing partners,  and others to obtain regulatory approval for products to be
delivered in ovo  (including the Company's  BDA-Blen  product,  Websters  bursal
disease complex containing the Company's  proprietary VNF compound, or any other
product for in ovo use) which are dependent upon a number of factors,  including
the results of trials,  the  discretion of regulatory  officials,  any potential
changes in regulations;  the Company's ability to generate future cash flow from
operations;  continued customer demand for the INOVOJECT(R)  system; the ability
of the Company to manage growth and to expand  internationally;  and other risks
detailed from time to time in the Company's  Securities and Exchange  Commission
filings, including the Company's Forms 10-Q, 10-K and 8-K.



                                        9

<PAGE>



PART II.  OTHER INFORMATION


Item 1.      Legal Proceedings.

             On  September   20,  1996,   Embrex  filed  an  action  for  patent
             infringement  and breach of contract  against  Service  Engineering
             Corp. and Edward G. Bounds in the United States  District Court for
             the Eastern  District of North  Carolina  (Raleigh  Division).  The
             infringement  action is for the  infringement  of U.S.  Patent  No.
             4,458,630 to Sharma et al.; the breach of contract  action is based
             on the Consent  Judgment  in a previous  infringement  action,  now
             concluded,  by Embrex  against these two  defendants.  The case has
             been assigned  Civil Action No.  5:96-CV-824-BR(3).  The Defendants
             filed an answer and  counterclaims  on November 4, 1996,  asserting
             various  affirmative  defenses,  seeking a declaratory  judgment of
             invalidity and non- infringement of the Sharma patent, and alleging
             that Embrex has: made  misrepresentations  of Defendant's  goods or
             commercial  activities  in  violation  of the  Lanham  Act,  15 USC
             ss.1125 (a); defamed the defendant;  tortiously interfered with the
             defendant's business  relationships;  sought to maintain prices for
             in ovo  vaccination at an  artificially  high level by removal of a
             prospective  competitor  in  violation  of North  Carolina  General
             Statute ss.75-5; and engaged in unfair methods of competition under
             North Carolina law.

Item 2.  Changes in Securities.  Not applicable

Item 3.  Defaults Upon Senior Securities.   Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders. Not applicable.

Item 5.  Other information.    Not applicable.

Item 6.  Exhibits and Reports on Form 8-K.

             a.   Exhibit Table

                  Exhibit 27       Financial Data Schedule

             b.   The Company did not file any reports on Form 8-K during the
                  quarterly period ended September 30, 1996.


                                       10

<PAGE>


                                   SIGNATURES




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



Date:  November 12, 1996

                                  EMBREX, INC.




                         By:   /s/ Randall L. Marcuson
                             ------------------------------- 
                             Randall L. Marcuson
                             President and Chief Executive Officer



                         By:   /s/ Don T. Seaquist
                            ----------------------------------------  
                             Don T. Seaquist
                             Vice President, Finance and Administration




                                       11

<PAGE>






                                  Embrex, Inc.
                               File No. 000-19495

                                    Form 10-Q
                            For the Quarterly Period
                            Ended September 30, 1996



                                  EXHIBIT INDEX




                                                                Sequential
  Exhibit                                                       Page Number

    27         Financial Data Schedule





<PAGE>