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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 September 30, 1997

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

                         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:  September 30, 1997         Class:  Common Stock, par value $.01 per share
                                  Shares Outstanding:  4,067,632



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<PAGE>



                              DERMA SCIENCES, INC.

                                   FORM 10-QSB

<TABLE>
<CAPTION>
                                      INDEX

Description                                                                                      Page
<S>                                                                                             <C>

Part I - Financial Information

     Item 1.  Condensed Financial Statements

          Balance Sheet - September 30, 1997................................................       2

          Statements of Operations - Three months ended September 30, 1996
             and September 30, 1997.........................................................       3

          Statements of Operations - Nine months ended September 30, 1996
             and September 30, 1997.........................................................       4

          Statements of Cash Flows - Nine months ended September 30, 1996
             and September 30, 1997.........................................................       5

          Notes to Condensed Financial Statements...........................................       6

     Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.....................................................       7

Part II - Other Information

     Item 1.  Legal Proceedings.............................................................      12

     Item 2.  Changes in Securities and Use of Proceeds.....................................      12

     Item 6.  Exhibits and Reports on Form 8-K..............................................      12
</TABLE>


<PAGE>
                              DERMA SCIENCES, INC.
                                  BALANCE SHEET
                               SEPTEMBER 30, 1997
                                   (UNAUDITED)

                                     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                         $   87,251
   Short-term investments                                               561,443
   Accounts receivable, net                                             510,697
   Inventory                                                            710,449
   Other current assets                                                 256,262
                                                               ----------------
      Total Current Assets                                            2,126,102

PROPERTY AND EQUIPMENT, NET                                              83,371

OTHER ASSETS                                                            702,773
                                                                ----------------

TOTAL ASSETS                                                         $2,912,246
                                                                ================

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Demand note payable                                              $   789,000
   Accounts payable                                                     679,931
   Other current liabilities                                            543,121
                                                                ----------------
      Total Current Liabilities                                       2,012,052

NOTES PAYABLE                                                            95,000
                                                                ----------------

TOTAL LIABILITIES                                                     2,107,052
                                                                ----------------

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value, authorized 15,000,000 shares,
      issued and outstanding 4,067,632 shares                            40,676
   Additional paid-in capital                                         4,644,741
   Accumulated deficit                                               (3,880,223)
                                                                ----------------
      Total Shareholders' Equity                                        805,194
                                                                ----------------
           Total Liabilities and Shareholders' Equity                $2,912,246
                                                                ================

                            See accompanying notes.


                                       2

<PAGE>


                              DERMA SCIENCES, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                     -------------------------------------
                                                                     -------------------------------------
                                                                           1996                1997
                                                                     ------------------  -----------------

<S>                                                                  <C>                 <C>
NET SALES                                                                   $1,311,536        $ 1,128,292

COST OF SALES                                                                  281,728            183,446
                                                                     ------------------  -----------------

GROSS PROFIT                                                                 1,029,808            944,846
                                                                     ------------------  -----------------

OPERATING EXPENSES:
   Product development                                                         207,868             87,302
   Selling, general and administrative                                       1,012,216          1,604,902
                                                                     ------------------  -----------------

       Total Operating Expenses                                              1,220,084          1,692,204
                                                                     ------------------  -----------------

LOSS FROM OPERATIONS                                                          (190,276)          (747,358)
                                                                     ------------------  -----------------

OTHER  INCOME (EXPENSE):
   Interest income                                                              30,271             34,176
   Interest expense                                                            (16,546)           (18,040)
                                                                     ------------------  -----------------

       Total Other Income                                                       13,725             16,136
                                                                     ------------------  -----------------

LOSS BEFORE INCOME TAXES:                                                     (176,551)          (731,222)
   Income taxes                                                                 (8,335)                 0
                                                                     ------------------  -----------------

NET LOSS                                                                  ($   168,216)         ($731,222)
                                                                     ==================  =================

NET LOSS PER COMMON SHARE                                                       ($0.04)            ($0.18)
                                                                     ==================  =================

WEIGHTED AVERAGE NUMBER OF COMMON
      SHARES OUTSTANDING                                                     4,054,233          4,067,632
                                                                     ==================  =================
</TABLE>

                            See accompanying notes.


                                       3


<PAGE>


                                         DERMA SCIENCES, INC.
                                       STATEMENTS OF OPERATIONS
                                             (UNAUDITED)
<TABLE>
<CAPTION>

                                                                            NINE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                    -----------------------------------
                                                                    -----------------------------------
                                                                          1996              1997
                                                                    ----------------- -----------------

<S>                                                                 <C>               <C>
NET SALES                                                                 $3,807,934        $2,676,271

COST OF SALES                                                                766,945           593,153
                                                                    ----------------- -----------------

GROSS PROFIT                                                               3,040,989         2,083,118
                                                                    ----------------- -----------------

OPERATING EXPENSES:
   Product development                                                       610,153           317,411
   Selling, general and administrative                                     2,865,753         4,001,451
                                                                    ----------------- -----------------

       Total Operating Expenses                                            3,475,906         4,318,862
                                                                    ----------------- -----------------

LOSS FROM OPERATIONS                                                        (434,917)       (2,235,744)
                                                                    ----------------- -----------------

OTHER  INCOME (EXPENSE):
   Interest income                                                           109,099            65,588
   Interest expense                                                          (47,092)          (45,458)
                                                                    ----------------- -----------------

       Total Other Income                                                     62,007            20,130
                                                                    ----------------- -----------------

LOSS BEFORE INCOME TAXES:                                                   (372,910)       (2,215,614)
   Income taxes                                                              (50,302)                0
                                                                    ----------------- -----------------

NET LOSS                                                                 ($  322,608)      ($2,215,614)
                                                                    ================= =================

NET  LOSS PER COMMON SHARE                                                    ($0.08)           ($0.54)
                                                                    ================= =================

WEIGHTED AVERAGE NUMBER OF COMMON
      SHARES OUTSTANDING                                                   4,054,233         4,067,632
                                                                    ================= =================
</TABLE>

                            See accompanying notes.



                                       4
<PAGE>


                              DERMA SCIENCES, INC.
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                       NINE MONTHS ENDED
                                                                                                         SEPTEMBER 30,
                                                                                            -----------------------------------
                                                                                                  1996              1997
                                                                                            ----------------- -----------------
<S>                                                                                         <C>               <C>
OPERATING ACTIVITIES:
   Net Loss                                                                                      ($  322,608)      ($2,215,614)
   Adjustments to Reconcile Net Loss to Net Cash
     Used in Operating Activities:
       Depreciation and amortization                                                                  73,370           199,693
       Provision for bad debts                                                                        64,324           536,975
       Changes in operating assets and liabilities:
         Accounts receivable                                                                        (130,193)          272,181
         Inventory                                                                                   168,136           127,210
         Other current assets                                                                        (92,872)            7,848
         Other assets                                                                               (359,699)         (121,480)
         Accounts payable                                                                             48,650           (65,611)
         Accrued expenses                                                                             19,437          (110,831)
         Income taxes payable                                                                        (88,123)                0
                                                                                            ----------------- -----------------
           Net Cash Used in Operating Activities                                                    (619,578)       (1,369,629)
                                                                                            ----------------- -----------------

INVESTING ACTIVITIES:
       Decrease in short-term investments                                                            269,065         1,325,728
       Purchases of property and equipment, net                                                      (64,668)          (62,687)
       Increase in patents and trademarks                                                            (37,686)          (37,602)
                                                                                            ----------------- -----------------
           Net Cash Provided by Investing Activities                                                 166,711         1,225,439
                                                                                            ----------------- -----------------

FINANCING ACTIVITIES:
       Net change in revolving line of credit                                                        100,000           (11,000)
       Principal payments on long-term debt and
          capitalized lease obligations                                                                 (247)                0
       Proceeds from acquisition                                                                     190,000                 0
       Net change in officers' notes receivable                                                            0           182,233
                                                                                            ----------------- -----------------
           Net Cash Provided by Financing Activities                                                 289,753           171,233
                                                                                            ----------------- -----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                (163,114)           27,043

CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD                                                                                         195,773            60,208
                                                                                            ----------------- -----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                         $  32,659         $  87,251
                                                                                            ================= =================
</TABLE>

                            See accompanying notes.



                                       5

<PAGE>

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


NOTE 1 - 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 nine-month period ended September 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further  information,  refer to the financial
statements and footnotes thereto for the year ended December 31, 1996,  included
in Form 10-KSB filed with the  Securities  and Exchange  Commission on March 24,
1997.

NOTE 2 - CONTINGENCY

     ABS Life Sciences,  Inc. has instituted litigation against the Company. The
Company has denied having any liability to ABS Life Sciences,  Inc. and has been
advised  by its  counsel  that its  position  is  meritorious.  Accordingly,  no
provision for  litigation  has been included in the  financial  statements.  For
further information relative to the ABS litigation,  please refer to Form 10-KSB
filed by the Company on March 24, 1997.

NOTE 3 - OFFICERS' NOTE RECEIVABLE

     Various   officers  of  the  Company   received  draws  against   incentive
compensation  during 1994  totaling  approximately  $296,156.  The  Compensation
Committee of the Board of Directors  subsequently  determined  that no incentive
compensation was payable relative to 1994.  Accordingly,  the officers  executed
promissory notes requiring repayment of the incentive compensation over a period
of ten years  with  interest  of 8.01% per  annum.  The Board of  Directors  has
determined  that the officers may tender  either  common stock of the Company or
cash in payment of the promissory notes.

     In January, 1997, a former officer repaid his promissory note in the amount
of  $77,893  inclusive  of  principal  and  interest  from the  proceeds  of his
severance  compensation.  Also in January,  1997, two officers  tendered  common
stock of the Company at the stock's  closing  price quoted by Nasdaq on the date
of tender  ($2.00 per share) in  satisfaction  of payments  due during 1996 with
respect to their promissory  notes. In May, 1997, a former officer's  promissory
note  in the  amount  of  $74,247.68  was  forgiven  pursuant  to his  severance
agreement. For further information,  refer to Form 8-K filed with the Securities
and Exchange Commission on July 1, 1997.



                                       6

<PAGE>


                              DERMA SCIENCES, INC.

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


QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996

RESULTS OF OPERATIONS

Net Sales and Gross Profit

     Net  sales for the third  quarter,  1997  decreased  $183,244,  or 14%,  to
$1,128,292 from $1,311,536 in the third quarter, 1996. The decrease in net sales
is attributable both to the restructuring of the Company's  distribution  system
and the elimination or reduction of Medicare  reimbursement  for certain product
lines.

     Net sales of Dermagran Ointment decreased $165,262,  or 17%, to $816,018 in
the third quarter,  1997 from $981,280 in the third quarter,  1996. Net sales of
Dermagran  Hydrophilic  Wound Dressing  decreased  marginally to $198,463 in the
third quarter,  1997 versus  $212,034 in the third quarter,  1996. The decreases
are  attributable to the factors  discussed  above. Net sales of Dermagran Spray
increased $13,277, or 20%, to $80,590 in the third quarter, 1997 from $67,313 in
the  third  quarter,  1996.  Net sales of  Dermagran  Zinc-Saline  Wet  Dressing
increased $4,670, or 35%, to $18,031 in the third quarter,  1997 from $13,361 in
the third quarter,  1996. These increases are primarily  attributable to a price
increase  during the third quarter of 1997 which increased the overall net sales
of Dermagran Spray and Dermagran  Zinc-Saline  Wet Dressing.  Sales of Dermagran
Wet Dressing  (Saline) were not a material revenue producing factor in the third
quarter, 1997 or the third quarter, 1996.

     Cost of sales,  expressed as a percentage of net sales,  decreased from 21%
in the third quarter,  1996 to 16% in the third quarter,  1997. This decrease is
attributable  primarily  to the increase in net sales  resulting  from the price
increase,  discussed above.  Aggregate cost of sales decreased $98,282 or 35% to
$183,446 in the third quarter,  1997 from $281,728 in the third  quarter,  1996.
This  decrease is  primarily  attributable  to selling less product in the third
quarter, 1997 as discussed above.

     Gross profit, expressed as a percentage of net sales, increased from 79% in
the third  quarter,  1996 to 84% in the third  quarter,  1997.  Aggregate  gross
profit  decreased  $84,962,  or 8%, to $944,846 in the third quarter,  1997 from
$1,029,808  in the  third  quarter,  1996.  The  increase  in the  gross  profit
percentage is attributable to the price increase  discussed  above. The decrease
in the aggregate gross profit is primarily  attributable to the sales decreases,
discussed above.


                                       7

<PAGE>


Operating Expenses

     Operating expenses increased $472,120, or 39%, from $1,220,084 in the third
quarter, 1996 to $1,692,204 in the third quarter, 1997. This increase represents
the net effect of the increase in selling,  general and  administrative  expense
and the decrease in product development expense discussed below.

     Product development expense for the third quarter, 1997 decreased $120,566,
or 58%, to $87,302 from $207,868 in the third  quarter,  1996.  This decrease is
attributable  to a  decrease  in  product  development  staffing  together  with
increased outsourcing of product development functions.

     Selling,  general and  administrative  expense for the third quarter,  1997
increased  $592,686,  or 59%,  to  $1,604,902  in the third  quarter,  1997 from
$1,012,216  in the third  quarter,  1996.  The  aggregate  increase is primarily
attributable to increases in wages and benefits expense including the incurrence
of severance expense and an increase in bad debt expense.

     Wages and  benefits  expense for the third  quarter,  1997  expressed  as a
percentage  of  sales  increased  to 42% from 21% in the  third  quarter,  1996.
Aggregate  wages and  benefits  expense  increased  $204,720 to $474,902 for the
third quarter,  1997 from $270,182 for the third quarter,  1996. These increases
are attributable to severance costs of $135,000 and compensation incident to the
hiring of marketing and sales personnel of $156,845.

     Bad debt expense for the third  quarter,  1997 expressed as a percentage of
sales  increased to 33% from 2% in the third quarter,  1996.  Aggregate bad debt
expense,  net of  recoveries,  increased  $342,462  to  $370,498  for the  third
quarter,  1997 from $28,036 for the third  quarter,  1996.  These  increases are
primarily  attributable to the reserve and write off of  uncollectible  accounts
related to the restructuring of the Company's distribution system.

Loss from Operations

     The Company incurred a loss from operations for the third quarter,  1997 in
the amount of $747,358  compared to a loss from  operations  of $190,276 for the
third quarter,  1996. This increased loss from operations is attributable to the
decrease in net sales and increase in operating  expenses  discussed above under
"Net Sales and Gross Profit" and "Operating Expenses."

Net Loss

     The Company incurred a loss of $731,222,  or $0.18 per share, for the third
quarter,  1997 compared to a loss of $168,216,  or $.04 per share, for the third
quarter,  1996.  The loss for the third  quarter,  1997 is  attributable  to the
factors discussed above under "Loss from Operations."


                                       8
<PAGE>


NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996

RESULTS OF OPERATIONS

Net Sales and Gross Profit

     Net  sales  for  the  nine  months  ended   September  30,  1997  decreased
$1,131,663,  or 30%, to  $2,676,271  from  $3,807,934  in the nine months  ended
September 30, 1996. The decrease in net sales is attributable both to the second
quarter and third  quarter,  1997  restructuring  of the Company's  distribution
system and the  elimination or reduction of Medicare  reimbursement  for certain
product lines.

     Net sales of Dermagran Ointment decreased  $881,016,  or 33%, to $1,800,012
in the nine months ended  September 30, 1997 from  $2,681,028 in the nine months
ended  September 30, 1996.  Net sales of Dermagran  Hydrophilic  Wound  Dressing
decreased  $110,483,  or 15%, to $643,901 in the nine months ended September 30,
1997 from  $754,384 in the nine months ended  September  30, 1996.  Net sales of
Dermagran Spray decreased $62,494,  or 27%, to $164,906 in the nine months ended
September  30, 1997 from  $227,400 in the nine months ended  September 30, 1996.
Net sales of Dermagran  Zinc-Saline Wet Dressing decreased  $41,224,  or 45%, to
$50,642 in the nine months  ended  September  30, 1997 from  $91,866 in the nine
months ended  September 30, 1996.  Net sales of Dermagran Wet Dressing  (Saline)
decreased  $1,413 or 10%, to $12,989 in the nine months ended September 30, 1997
from $14,402 in the nine months ended  September 30, 1996.  These  decreases are
attributable to the factors discussed above. During the third quarter,  1997 the
Company increased the sales price on all product lines.

     Cost of sales,  expressed as a percentage of net sales,  increased from 20%
in the nine months  ended  September  30,  1996 to 22% in the nine months  ended
September  30,  1997.  This  increase  is  attributable  primarily  to the sales
decreases,  discussed  above, in the Company's  relatively high margin Dermagran
Ointment,  Dermagran  Hydrophilic Wound Dressing and Dermagran Spray.  Aggregate
cost of sales  decreased  $173,792 or 23% to  $593,153 in the nine months  ended
September 30, 1997 from $766,945 in the nine months ended September 30, 1996.

     Gross profit, expressed as a percentage of net sales, decreased from 80% in
the  nine  months  ended  September  30,  1996 to 78% in the nine  months  ended
September  30, 1997.  Aggregate  gross  profit  decreased  $957,871,  or 32%, to
$2,083,118 in the nine months ended  September  30, 1997 from  $3,040,989 in the
nine months ended September 30, 1996. These decreases are primarily attributable
to the increase in cost of sales discussed above.

Operating Expenses

     Operating expenses increased $842,956,  or 24%, from $3,475,906 in the nine
months ended September 30, 1996 to $4,318,862 in the nine months ended September
30, 1997.  This increase  represents  the net effect of the increase in selling,
general  and  administrative  expense and the  decrease  in product  development
expense discussed below.


                                       9

<PAGE>

     Product  development  expense for the nine months ended  September 30, 1997
decreased $292,742,  or 48%, to $317,411 from $610,153 for the nine months ended
September  30,  1996.  This  decrease is  attributable  to a decrease in product
development staffing together with increased  outsourcing of product development
functions.

     Selling,  general and  administrative  expense  for the nine  months  ended
September  30, 1997  increased  $1,135,698,  or 40%, to  $4,001,451  in the nine
months  ended  September  30,  1997 from  $2,865,753  in the nine  months  ended
September  30,  1996.  The  aggregate  increase  is  primarily  attributable  to
increases in wages and benefits  expense  including the  incurrence of severance
expense and an increase in bad debt  expense  together  with the  incurrence  of
recruiting expense.

     Wages and  benefits  expense for the nine months ended  September  30, 1997
expressed as a percentage of sales  increased to 52% from 19% in the nine months
ended  September  30,  1996.  Aggregate  wages and  benefits  expense  increased
$668,665  to  $1,396,434  for the nine  months  ended  September  30,  1997 from
$727,769  for the nine months ended  September  30, 1996.  These  increases  are
attributable  to severance  costs of $386,992 and  compensation  incident to the
hiring of marketing and sales personnel of $301,937.

     Bad debt expense for the nine months ended  September 30, 1997 expressed as
a  percentage  of  sales  increased  to 20%  from 2% in the  nine  months  ended
September 30, 1996.  Aggregate bad debt expense  increased  $472,651 to $536,975
for the nine months  ended  September  30, 1997 from $64,324 for the nine months
ended  September 30, 1996.  These  increases are primarily  attributable  to the
reserve and write off of uncollectible  accounts related to the restructuring of
the Company's distribution system.

     Recruiting fees of $97,000 were incurred in the nine months ended September
30, 1997, in connection  with the hiring of marketing  and sales  personnel.  No
comparable costs were incurred in the nine months ended September 30, 1996.

Loss from Operations

     The  Company  incurred a loss from  operations  for the nine  months  ended
September  30,  1997  in the  amount  of  $2,235,744  compared  to a  loss  from
operations  of $434,917  for the nine  months  ended  September  30,  1996.  The
increased loss from  operations for the nine months ended  September 30, 1997 is
attributable  to the decrease in net sales and  increase in  operating  expenses
discussed above under "Net Sales and Gross Profit" and "Operating Expenses."

Net Loss

     The Company  incurred a net loss of $2,215,614,  or $.54 per share, for the
nine months ended September 30, 1997 compared to a net loss of $322,608, or $.08
per share,  for the nine months ended September 30, 1996. The increased net loss
for the nine months  ended  September  30, 1997 is  attributable  to the factors
discussed above under "Loss from Operations."


                                       10

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  cash,  cash  equivalents  and  short-term   investments  at
September 30, 1997 decreased $1,494,375,  or 70%, to $648,694 from $2,143,069 at
September  30,  1996.  The  Company's  working  capital at  September  30,  1997
decreased $3,129,888, or 96%, to $114,050 from $3,243,938 at September 30, 1996.
These  decreases are  attributable  to lower net sales and  increased  operating
expenses which occasioned increased use of the Company's short-term  investments
and line-of-credit.

     The Company has a bank  line-of-credit,  secured by inventory  and accounts
receivable,   whose   balance  at  September   30,  1997  was   $789,000.   This
line-of-credit  is renewable  (payable in full)  November 15, 1997.  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  has  instituted  several  measures  with a view to  increasing
sales.  Among these are  included:  (a) the hiring of a new vice  president  for
marketing and a new vice  president for sales  together with four regional sales
managers and directors,  (b) restructuring of the Company's  distribution system
to eliminate  non-producing  distributors,  increase  profit margins and improve
territorial  coverage,  (c)  expansion  of the  Company's  product  line via the
licensing of wound care  products  from other  companies,  and (d) licensing the
Company's  proprietary  products for  distribution  under  private  labels.  The
Company has also taken steps to reduce its operating  expenses,  including:  (a)
downsizing  administrative staff, (b) reducing the size of leasehold facilities,
and (c) outsourcing  financial and product  development  functions.  The Company
expects that the foregoing  measures will enable it to significantly  narrow its
operating  loss in the  fourth  quarter,  1997 and meet its  obligations  in the
ordinary course of business.

     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.


                                       11

<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 24,
1997, 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. The proceeds have been used for the following purposes: repayment of
indebtedness  ($470,000),  working capital  ($1,729,830),  professional services
relative to a merger ($300,000) and acquisition of Morgan Paris,  Inc., a former
master  distributor  of the Company  ($160,000).  The remainder of the proceeds,
$561,443,  are invested in 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 24, 1997 and on Form 8-K on July
1, 1997 are incorporated herein by reference.

            Item                      Description
            -----                     -----------------------------------
            10.01                     Generic Products Agreement between
                                      Innovative Technologies Limited and
                                      the Company dated September 29, 1997.

            10.02                     Private Label Agreement between
                                      Innovative Technologies Limited and
                                      the Company dated September 29, 1997.

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


     (B)  REPORTS  ON FORM  8-K.  On July 1,  1997 the  Company  filed  Form 8-K
relative to the resignation of Gary L. Borthwick, its Vice President for Finance
and Operations and Chief Financial Officer, and the severance agreement incident
thereto.


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<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:  November 10, 1997                          By:  /s/ Stephen T. Wills
                                                      --------------------------
                                                      Stephen T. Wills, CPA, MST
                                                      Chief Financial Officer


























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