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                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                 --------------


                                   FORM 10-QSB


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


         For Quarter Ended                             March 31, 1998
         Commission File Number                        1-31070


                              DERMA SCIENCES, INC.
        (Exact name of small business issuer as specified in its Charter)

     Pennsylvania                                             23-2328753
(State or other jurisdiction                                (IRS employer
      of Incorporation)                                 identification number)


                         214 Carnegie Center, Suite 100
                               Princeton, NJ 08540
                                 (609) 514-4744
                    (Address including zip code and telephone
                     number, of principal executive offices)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act 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 [ ]

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

Date:  March 31, 1998             Class:  Common Stock, par value $.01 per share
Shares Outstanding:  4,567,632



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<PAGE>

                              DERMA SCIENCES, INC.

                                   FORM 10-QSB

                                      INDEX

Description                                                                 Page

Part I - Financial Information

     Item 1.  Condensed Financial Statements

          Balance Sheet - March 31, 1998 ...................................   2

          Statements of Operations - Three months ended March 31, 1997
             and March 31, 1998 ............................................   3

          Statements of Cash Flows - Three months ended March 31, 1997
             and March 31, 1998 ............................................   4

          Notes to Condensed Financial Statements ..........................   5

     Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations ....................................   6

Part II - Other Information

     Item 1.  Legal Proceedings ............................................   9

     Item 2.  Changes in Securities and Use of Proceeds ....................   9

     Item 6.  Exhibits and Reports on Form 8-K .............................   9


<PAGE>


                              DERMA SCIENCES, INC.
                                  BALANCE SHEET
                                 March 31, 1998
                                   (Unaudited)

                                     ASSETS

CURRENT ASSETS
   Cash and cash equivalents ....................................  $ 1,530,412
   Accounts receivable, net .....................................      523,924
   Inventory ....................................................      856,906
   Prepaid expenses and other current assets ....................      390,585
                                                                   ------------
      Total Current Assets ......................................    3,301,827

PROPERTY AND EQUIPMENT, NET .....................................      134,440

OTHER ASSETS, NET ...............................................      516,377
                                                                   ------------

           Total Assets .........................................  $ 3,952,644
                                                                   ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Bank line of credit ..........................................  $   689,000
   Accounts payable .............................................      540,663
   Accrued expenses and other current liabilities ...............      510,911
                                                                   ------------
      Total Current Liabilities .................................    1,740,574
                                                                   ------------

SHAREHOLDERS' EQUITY
   Common stock, $.01 par value, authorized 15,000,000 shares,
      issued and outstanding 4,567,632 shares ...................       45,676
   Convertible preferred stock, $.01 par value, authorized 1,750,000
      shares, issued and outstanding 1,750,000 shares ...........       17,500
   Additional paid-in capital ...................................    6,170,250
   Accumulated deficit ..........................................   (4,021,356)
                                                                   ------------
      Total Shareholders' Equity ................................    2,212,070
                                                                   ------------

           Total Liabilities and Shareholders' Equity ...........  $ 3,952,644
                                                                   ============

See accompanying notes.

                                       2

<PAGE>

                              DERMA SCIENCES, INC.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                Three Months Ended
                                                    March 31,
                                           ---------------------------
                                                1997         1998
                                           ------------   ------------

NET SALES ..............................   $   751,733    $ 1,749,546

COST OF SALES ..........................       183,855        243,862
                                           ------------   ------------

GROSS PROFIT ...........................       567,878      1,505,684
                                           ------------   ------------

OPERATING EXPENSES
     Product development ...............       196,588        180,127
     Selling, general and administrative       750,839      1,275,729
                                           ------------   ------------
          Total Operating Expenses .....       947,427      1,455,856
                                           ------------   ------------

INCOME (LOSS) FROM OPERATIONS ..........      (379,549)        49,828
                                           ------------   ------------

OTHER INCOME (EXPENSE)
     Interest income ...................        29,684         24,374
     Interest expense ..................       (16,492)       (14,705)
                                           ------------   ------------
          Total Other Income ...........        13,192          9,669
                                           ------------   ------------

INCOME (LOSS) BEFORE INCOME TAXES ......      (366,357)        59,497
     Income taxes ......................             0              0
                                           ------------   ------------

NET INCOME (LOSS) ......................   $  (366,357)   $    59,497
                                           ============   ============

NET INCOME (LOSS) PER COMMON SHARE -
    BASIC AND DILUTED ..................   $     (0.09)   $      0.01
                                           ============   ============

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING ...................     4,067,632      4,567,632
                                           ============   ============

See accompanying notes.


                                       3

<PAGE>

                               DERMA SCIENCES, INC
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                                        March 31,
                                                              ---------------------------
                                                                  1997           1998
                                                              ------------   ------------
OPERATING ACTIVITIES
<S>                                                           <C>            <C>        
   Net Income (Loss) ......................................   $  (366,357)   $    59,497
   Adjustments to Reconcile Net Income (Loss) to Net Cash
       Used in Operating Activities:
          Depreciation and amortization ...................        54,231         54,345
          Medicaid rebate adjustment ......................             0       (150,000)
          Changes in operating assets and liabilities
             Accounts receivable ..........................       468,155        (36,517)
             Inventory ....................................        32,639        (82,234)
             Prepaid expenses and other current assets ....        (7,541)      (156,051)
             Other assets .................................        (2,000)             0
             Accounts payable .............................       (96,277)      (230,090)
             Accrued expenses and other current liabilities      (215,087)      (237,970)
                                                              ------------   ------------
                Net Cash Used in Operating Activities .....      (132,237)      (779,020)
                                                              ------------   ------------

INVESTING ACTIVITIES
   Increase in short-term investments .....................       (24,661)             0
   Purchases of property and equipment, net ...............        (8,028)        (3,828)
   Increase in patents and trademarks .....................        (4,741)             0
                                                              ------------   ------------
      Net Cash Used in Investing Activities ...............       (37,430)        (3,828)
                                                              ------------   ------------

FINANCING ACTIVITIES
   Net change in bank line of credit ......................       130,000        139,367
   Collection of officers' notes receivable ...............       110,841              0
                                                              ------------   ------------
      Net Cash Provided by Financing Activities ...........       240,841        139,367
                                                              ------------   ------------

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS .....................................        71,174       (643,481)

CASH AND CASH EQUIVALENTS AT BEGINNING
     OF PERIOD ............................................        60,208      2,173,893
                                                              ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ................   $   131,382    $ 1,530,412
                                                              ============   ============

</TABLE>
See accompanying notes.


                                       4

<PAGE>


                              DERMA SCIENCES, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 - THE COMPANY

Derma Sciences,  Inc. (the "Company") is engaged in the  development,  marketing
and sale of  proprietary  sprays,  ointments and dressings for the management of
certain chronic non-healing skin ulcerations such as pressure and venous ulcers,
surgical  incisions  and burns.  The Company  markets its  products  principally
through independent  distributors,  mainly to healthcare agencies throughout the
United  States.  In addition,  the Company's  products are available in selected
markets throughout the world through strategic alliances with local companies.

NOTE 2 - BASIS OF PRESENTATION

The accompanying  unaudited condensed financial statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information  and  with the  instructions  to Form  10-QSB  and  Item  310(b)  of
Regulation  S-B.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been  included.  Operating  results for the  three-month  period ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further  information,  refer to the financial
statements and footnotes thereto for the year ended December 31, 1997,  included
in Form 10-KSB filed with the Securities and Exchange Commission.

NOTE 3 - INCOME TAXES

The Company  accounts for income taxes under the  liability  method.  Under this
method,  deferred tax assets and liabilities are determined based on differences
between  financial  reporting  and tax bases of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.

As of December 31, 1997 the Company had a net  operating  loss  carryforward  of
approximately  $3,240,000  expiring  in years  2011 and  2016.  Accordingly,  no
provision  for income  taxes has been  included  in the  accompanying  financial
statements.

NOTE 4 - CONTINGENCY

ABS Life  Sciences,  Inc. has  instituted  litigation  against the Company.  For
further information relative to the ABS litigation,  please refer to Form 10-KSB
filed by the Company on March 31, 1998.

                                       5

<PAGE>

                              DERMA SCIENCES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997

RESULTS OF OPERATIONS

Net Sales and Gross Profit

Net sales for the first quarter, 1998 increased $997,813, or 133%, to $1,749,546
from  $751,733  in the  first  quarter,  1997.  The  increase  in net  sales  is
attributable   primarily  to  the   restructuring   of  the  Company's   product
distribution  system,  including the  institution of a direct sales force during
1997 and price  increases  during the third quarter of 1997 and first quarter of
1998.

The  Company  introduced  new  product  lines  during the first  quarter of 1998
consisting  of  Alginate  Dressings   (NutraStat  and  DermaStat)   Hydrocolloid
Dressings (NutraCol and DermaCol) and Film Dressings (DermaFilm and DermaSite).

Medicaid  rebates incurred by the Company are reflected as a reduction to sales.
The quarter  ended March 31, 1998 included  Medicaid  rebate  adjustments  which
resulted in an increase to sales of $150,000.

Cost of sales, expressed as a percentage of net sales, decreased from 25% in the
first  quarter,  1997  to 14% in the  first  quarter,  1998.  This  decrease  is
attributable  primarily  to the  increase  in net  sales  resulting  from  price
increases and the adjustment of Medicaid rebates as discussed  above.  Aggregate
cost of sales increased $60,007, or 33%, to $243,862 in the first quarter,  1998
from  $183,855 in the first  quarter,  1997.  The increase in aggregate  cost of
sales is attributable to the increase in net sales discussed above.

Gross profit,  expressed as a percentage of net sales, increased from 76% in the
first quarter,  1997 to 86% in the first quarter,  1998.  Aggregate gross profit
increased  $937,806,  or 165%,  to $1,505,684  in the first  quarter,  1998 from
$567,878 in the first quarter, 1997. The increase in the gross profit percentage
is  attributable  to the price  increases  and Medicaid  rebate  adjustments  as
discussed  above.  The increase in the aggregate gross profit is attributable to
the sales increases, discussed above.

Operating Expenses

Operating  expenses  increased  $508,429,  or 54%,  from  $947,427  in the first
quarter, 1997 to $1,455,856 in the first quarter, 1998. This increase represents
the net effect of the increase in selling,  general and  administrative  expense
and the decrease in product development expense discussed below.

                                       6

<PAGE>

Product  development  expense for the first quarter,  1998 decreased $16,461, or
8%, to $180,127  from  $196,588 in the first  quarter,  1997.  This  decrease is
attributable to a decrease in product development staffing.

Selling,  general  and  administrative  expense  for  the  first  quarter,  1998
increased  $524,890,  or 70%,  to  $1,275,729  in the first  quarter,  1998 from
$750,839  in the first  quarter,  1997.  The  aggregate  increase  is  primarily
attributable  to costs  associated  with the institution of a direct sales force
including increases in wages and benefits, travel and entertainment expenses and
product pricing and sales growth incentives.

Aggregate  wages and  benefits  expense  increased  $120,810 to $372,430 for the
first quarter,  1998 from $251,620 for the first quarter,  1997. These increases
are  attributable to compensation  incident to the hiring of marketing and sales
personnel.

Aggregate travel and entertainment expense increased $91,093 to $138,492 for the
first quarter,  1998 from $47,399 for the first quarter,  1997.  These increases
are  primarily  attributable  to the  institution  of a  direct  sales  force as
discussed above.

During 1997, the Company restructured the method of compensating its wholesalers
and distributors replacing sales commissions to master distributors with various
product  pricing and sales growth  incentives.  Incentive  expense for the first
quarter,  1998  expressed as a percentage of sales  increased to 19% from 13% in
the first quarter,  1997.  Aggregate  incentive  expense  increased  $231,320 to
$330,647 for the first quarter, 1998 from $99,327 for the first quarter, 1997.

Income (Loss) from Operations

The Company generated income from operations for the first quarter,  1998 in the
amount of $49,828  compared to a loss from  operations of $379,549 for the first
quarter,  1997.  This income from  operations is attributable to the increase in
net sales discussed above under "Net Sales and Gross Profit."

Net Income (Loss)

The Company  generated net income of $59,497,  or $0.01 per share, for the first
quarter,  1998 compared to a loss of $366,357, or $0.09 per share, for the first
quarter, 1997. The net income for the first quarter, 1998 is attributable to the
factors discussed above under "Income (Loss) from Operations."

LIQUIDITY AND CAPITAL RESOURCES

The Company's  cash, cash  equivalents  and short-term  investments at March 31,
1998  decreased  $512,802,  or 25%, to $1,530,412  from  $2,043,214 at March 31,
1997. The Company's  working  capital at March 31, 1998 decreased  $379,566,  or

                                       7

<PAGE>


20%, to $1,561,253 from  $1,940,819 at March 31, 1997. The Company  utilized its
short-term  investments in operations  during 1997 to fund the Company's  losses
and to reduce the outstanding balance on the bank line of credit by $241,000.

In  November,  1997 the  Company  issued  convertible  securities  and  received
$1,571,211  net of issuance  costs.  Please  refer to Form  10-KSB  filed by the
Company on March 31, 1998 and "Part II - Other  Information,  Item 2. Changes in
Securities and Use of Proceeds" herein.

The Company has a bank line-of-credit, secured by accounts receivable, inventory
and the Company's  United States patent and  trademarks,  whose balance at March
31, 1998 was $689,000.  This  line-of-credit is renewable  (payable in full) May
31, 1998. The Company  believes that it will be able either to secure renewal of
its current  credit line or secure  credit upon  comparable  terms with  another
financial institution.

The Company is presently  investigating  several  sources of investment  capital
relative to the  financing of its growth  strategies.  Although  there can be no
assurance  that these efforts will be successful,  the Company  believes that it
will be able to secure financing in the amounts,  and upon terms,  acceptable to
it.

Statements  that  are not  historical  facts,  including  statements  about  the
Company's  confidence and  strategies,  and  expectations  about new or existing
products, technologies and opportunities,  market demand or acceptance of new or
existing  products  are  forward-looking   statements  that  involve  risks  and
uncertainties.  These  uncertainties  include,  but are not limited to,  product
demand and market acceptance risks,  impact of competitive  products and prices,
product development,  commercialization or technological delays or difficulties,
and trade, legal, social, financial and economic risks.












                                       8
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Information  required by Item 103 of Regulation S-B and required  hereunder,  as
filed with the  Securities  and Exchange  Commission on Form 10-KSB on March 31,
1998, is incorporated herein by reference.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On May 13, 1994, the Company  consummated an initial public  offering of 900,000
shares  of its  $.01 par  value  common  stock  and  received  net  proceeds  of
$3,221,273.  On  November  19,  1997  the  Company  closed  on  an  offering  of
convertible  securities  and received net proceeds of  $1,571,211.  The proceeds
have been used for the following purposes: repayment of indebtedness ($470,000),
working  capital  ($2,226,734),  professional  services  relative  to  a  merger
($300,000) and acquisition of Morgan Paris, Inc., a former master distributor of
the Company ($285,000). The remainder of the proceeds,  $1,510,750, are invested
in short-term investment grade commercial paper and Money Market funds. For more
information  relative to the use of proceeds  please refer to the Company's Form
SR as filed with the U. S.  Securities  and  Exchange  Commission  on August 21,
1997.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS. With the exception of the following, all exhibits required by Item
601 of Regulation S-B and required  hereunder,  as filed with the Securities and
Exchange  Commission on Form 10-KSB on March 31, 1998 are incorporated herein by
reference.

      Item          Description
      ----          -----------
      27            Financial Data Schedule (filed electronically with the U. S.
                    Securities and Exchange Commission only)

(B) REPORTS ON FORM 8-K. On February 12,  1998,  February 19, 1998 and April 16,
1998 the Company  filed  current reports on Form 8-K relative to fourth  quarter
1997 results of operations and the  appointments of Timothy J. Patrick and Srini
Conjeevaram to the Board of Directors, respectively.


                                       9



<PAGE>


Pursuant  to 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.


                                                  DERMA SCIENCES, INC.



Dated:  May 14, 1998                              By:  /s/ Stephen T. Wills
                                                      ----------------------
                                                      Stephen T. Wills, CPA, MST
                                                      Chief Financial Officer