<PAGE>


                       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, 1996

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

                         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)


                              121 West Grace Street
                               Old Forge, PA 18518
                                 (717) 457-1232
                    (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: November 11, 1996          Class: Common Stock, par value $.01 per share
                                 Shares Outstanding: 4,054,233


<PAGE>


                              DERMA SCIENCES, INC.

                                   FORM 10-QSB

                                      INDEX

Description                                                                Page

Part I - Financial Information

  Item 1.  Condensed Financial Statements

   Balance Sheet - September 30, 1996........................................  2

   Statements of Income - Three months ended September 30, 1995
      and September 30, 1996.................................................  3

   Statements of Income - Nine months ended September 30, 1995
      and September 30, 1996.................................................  4

   Statements of Cash Flows - Nine months ended September 30, 1995
      and September 30, 1996.................................................  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................................................  11

  Item 6.  Exhibits and Reports on Form 8-K.................................  11


<PAGE>    
                              DERMA SCIENCES, INC.
                                  BALANCE SHEET
                               September 30, 1996
                                   (Unaudited)

                                     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                    $        32,659
   Short-term investments                                             2,110,410
   Accounts receivable                                                1,411,882
   Inventory                                                            901,549
   Other current assets                                                 324,234
                                                         -----------------------
      Total Current Assets                                            4,780,734

PROPERTY AND EQUIPMENT, net                                             209,234

OTHER ASSETS                                                            834,705
                                                         -----------------------

TOTAL ASSETS                                                    $     5,824,673
                                                         =======================

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Demand note payable                                          $       800,000
   Accounts payable                                                     430,283
   Other current liabilities                                            306,513
                                                        ------------------------
      Total Current Liabilities                                       1,536,796

DEFERRED TAXES                                                           23,566

NOTES PAYABLE                                                           190,000

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value, authorized 15,000,000 shares, 
      issued and outstanding 4,054,233 shares                            40,542
   Additional paid-in capital                                         4,584,719
   Retained deficit                                                    (550,950)
                                                         -----------------------
      Total Shareholders' Equity                                      4,074,311
                                                         -----------------------
           Total Liabilities and Shareholders' Equity           $     5,824,673
                                                         =======================

See accompanying notes.



<PAGE>

                              DERMA SCIENCES, INC.
                              STATEMENTS OF INCOME
                                   (Unaudited)

                                                    Three Months Ended
                                                      September 30,
                                            ------------------------------------
                                                    1995                1996
                                            -----------------  -----------------

NET SALES                                       $  1,317,528       $  1,311,536

COST OF SALES                                        326,786            281,728
                                            -----------------  -----------------

GROSS PROFIT                                         990,742          1,029,808

OPERATING EXPENSES:
     Product development                             168,503            207,868
     Selling, general and administrative             771,533          1,012,216
                                            -----------------  -----------------
          Total Operating Expenses                   940,036          1,220,084
                                            -----------------  -----------------

INCOME (LOSS) FROM OPERATIONS                         50,706           (190,276)

OTHER INCOME (EXPENSE):
     Interest income                                  84,301             30,271
     Interest expense                                (13,159)           (16,546)
                                            -----------------  -----------------
          Total Other Income                          71,142             13,725

INCOME (LOSS) BEFORE INCOME TAXES:                   121,848           (176,551)
     Income taxes                                     20,812             (8,335)
                                            -----------------  -----------------

NET INCOME (LOSS)                              $     101,036      $    (168,216)
                                            =================  =================

NET INCOME (LOSS) PER COMMON SHARE             $        0.02      $       (0.04)
                                            =================  =================

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                                 4,054,233          4,054,233
                                            =================  =================

See accompanying notes.
                                            
<PAGE>

                              DERMA SCIENCES, INC.
                              STATEMENTS OF INCOME
                                   (Unaudited)

                                                     Nine Months Ended
                                                       September 30,
                                          --------------------------------------
                                                   1995                 1996
                                          -----------------  -------------------

NET SALES                                     $  4,020,293         $  3,807,934

COST OF SALES                                      937,198              766,945
                                          -----------------  -------------------

GROSS PROFIT                                     3,083,095            3,040,989

OPERATING EXPENSES:
     Product development                           501,671              610,153
     Selling, general and administrative         2,563,405            2,865,753
                                          -----------------  -------------------
          Total Operating Expenses               3,065,076            3,475,906
                                          -----------------  -------------------

INCOME (LOSS) FROM OPERATIONS                       18,019             (434,917)

OTHER INCOME (EXPENSE):
     Interest income                               191,497              109,099
     Interest expense                              (41,014)             (47,092)
     Deferred Merger & Aquisition Costs           (294,268)                   0
                                          -----------------  -------------------
          Total Other (Expense) Income            (143,785)              62,007

LOSS BEFORE INCOME TAXES:                         (125,766)            (372,910)
     Income taxes                                   (1,782)             (50,302)
                                          -----------------  -------------------

NET LOSS                                     $    (123,984)       $    (322,608)
                                          =================  ===================

NET LOSS PER COMMON SHARE                    $       (0.03)       $       (0.08)
                                          =================  ===================

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                               4,054,233            4,054,233
                                          =================  ===================


See accompanying notes.
<PAGE>
                              DERMA SCIENCES, INC.
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                             Nine Months Ended
                                                               September 30,
                                                       -------------------------
                                                            1995         1996
                                                       ------------- -----------
OPERATING ACTIVITIES:
 Net Loss                                              $  (123,999)  $ (322,608)
 Adjustments to Reconcile Net Loss to Net Cash
   Provided by (Used in) Operating Activities:
     Depreciation and amortization                          29,754       73,370
     Provision for bad debts                                     0       64,324
     Changes in operating assets and liabilities:
       Accounts receivable                                 242,002     (130,193)
       Inventory                                          (391,898)     168,136
       Other current assets                                (53,895)     (92,872)
       Other assets                                         30,176     (359,699)
       Accounts payable                                    227,679       48,650
       Income taxes payable                                      0      (88,123)
       Accrued expenses                                    (67,987)      19,437
                                                      ------------- ------------
         Net Cash Used in Operating Activities            (108,168)    (619,578)

INVESTING ACTIVITIES:
 Deferred merger & acquisition costs                       294,268            0
 (Increase) Decrease in short-term investments            (143,693)     269,065
 Purchases of property and equipment                       (48,068)     (64,668)
 Increase in patents and trademarks                        (19,443)     (37,686)
 Proceeds from sale of fixed assets                         10,000            0
                                                      ------------- ------------
   Net Cash Provided by Financing Activities                93,064      166,711

FINANCING ACTIVITIES:
 Net change in revolving line of credit                     70,000      100,000
 Principal payments on long-term debt and capitalized
   lease obligations                                        (6,235)        (247)
 Note payable from acquisition                                   0      190,000
                                                      ------------- ------------
   Net Cash Provided by Financing Activities                63,765      289,753

NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                         48,661     (163,114)
                                                       ------------- -----------

CASH AND CASH EQUIVALENTS AT BEGINNING
    OF PERIOD                                                8,693      195,773
                                                       ------------- -----------

CASH AND CASH  EQUIVALENTS AT END
    OF PERIOD                                          $    57,354   $   32,659
                                                       ============= ===========
See accompanying notes.
<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,
1996, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further  information,  refer to the financial
statements and footnotes thereto for the year ended December 31, 1995,  included
in Form 10-KSB filed with the  Securities  and Exchange  Commission on March 29,
1996.

Note 2 - 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.  In 1995,  the  Compensation
Committee approved forgiveness of one officer's promissory note in the amount of
$34,292 as part of the officer's severance package.

Note 3 - Morgan Paris Acquisition

     During May 1996, the Company  acquired the contract rights under the Morgan
Paris Master  Distributorship  Agreement for $350,000. The Company paid $160,000
at the date of closing.  The remaining  purchase price will be paid in two equal
installments of $95,000 on or before December 31, 1997 and 1998, respectively.

     The cost of the  acquisition  has been  capitalized  and is being amortized
over the remaining thirty-month term of the master distributorship agreement.



<PAGE>

                              DERMA SCIENCES, INC.

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


Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995

Results of Operations

Net Sales and Gross Profit

     Net sales for the third quarter,  1996 decreased $5,992, to $1,311,536 from
$1,317,528 in the third quarter,  1995.  Increases and decreases in the sales of
the Company's products are discussed below.

     Net sales of Dermagran Ointment increased $312,613,  or 47%, to $981,280 in
the third quarter,  1996 from $668,667 in the third quarter,  1995. Net sales of
Dermagran Spray decreased $21,134, or 24%, to $67,313 in the third quarter, 1996
from $88,447 in the third  quarter,  1995.  Net sales of  Dermagran  Hydrophilic
Wound  Dressing  decreased  $220,550,  or 51%, to $212,034 in the third quarter,
1996 from  $432,584 in the third  quarter,  1995.  The  decrease in net sales of
Dermagran  Hydrophilic Wound Dressing is primarily a result of the restructuring
of Medicare  reimbursement  relative to various  sizes of this  product used for
certain purposes.  A secondary factor in this decrease is the lowering of prices
for this type of dressing by the Company's  competition.  Net sales of Dermagran
Zinc-Saline  Wet  Dressing  decreased  $20,321,  or 60%, to $13,361 in the third
quarter, 1996 from $33,682 in the third quarter, 1995. The decrease in net sales
of Dermagran Zinc-Saline Wet Dressing is primarily a result of the restructuring
of  Medicare  reimbursement.  Net  sales  of  Dermagran  Wet  Dressing  (Saline)
decreased $41,073, or 93%, to $3,120 in the third quarter,  1996 from $44,193 in
the  third  quarter,  1995.  The  decrease  in the  sales  of this  dressing  is
attributable to the loss of Medicare reimbursement.

     Cost of sales,  expressed as a percentage of net sales,  decreased from 25%
in the third quarter, 1995 to 21% in the third quarter,  1996. Aggregate cost of
sales  decreased  $45,058,  or 14%, to $281,728 in the third quarter,  1996 from
$326,786 in the third quarter, 1995. These decreases resulted from shifts in the
product mix toward relatively higher margin products.

     Gross profit, expressed as a percentage of net sales, increased from 75% in
the third  quarter,  1995 to 79% in the third  quarter,  1996.  Aggregate  gross
profit increased $39,066,  or 4%, to $1,029,808 in the third quarter,  1996 from
$990,742 in the third quarter, 1995.

<PAGE>

Operating Expenses

     Operating expenses increased  $280,048,  or 30%, from $940,036 in the third
quarter,  1995 to $1,220,084 in the third  quarter,  1996.  Product  development
expense for the third  quarter,  1996  increased as a percentage of sales to 16%
from 13% in the third  quarter,  1995 and in the aggregate  $39,365,  or 23%, to
$207,868  from  $168,503 in the third  quarter,  1995.  The  increase in product
development expense is primarily attributable to: (1) submission of a patent and
the commencement of clinical trials relative to a new product; (2) submission of
a FDA 510(k) application  relative to extended claims with respect to one of the
Company's  products;  and,  (3) the hiring of a Director of Research and Medical
Communications and research consultants.

     Selling,  general and  administrative  expense for the third quarter,  1996
increased  as a  percentage  of net sales to 77% from 59% in the third  quarter,
1995 and increased  $240,683,  or 31%, to $1,012,216 in the third quarter,  1996
from $771,533 in the third quarter, 1995. The increase is primarily attributable
to increases in litigation expense,  travel and entertainment expense, sales and
marketing expense and salaries and wages expense.

     Litigation expense for the third quarter, 1996 expressed as a percentage of
sales increased to 10% from 3% in the third quarter,  1995. Aggregate litigation
expense increased  $94,957 to $129,518 for the third quarter,  1996 from $34,561
for the  third  quarter,  1995.  This  increase  is  primarily  attributable  to
depositions  and  continuing  discovery  in  ABS  LifeSciences,  Inc.  v.  Derma
Sciences,  Inc.  Travel and  entertainment  expense for the third quarter,  1996
expressed as a percentage of sales increased to 7% from 3% in the third quarter,
1995.  Aggregate travel and  entertainment  expense increased $52,006 to $95,259
for the third  quarter,  1996 from  $43,253 for the third  quarter,  1995.  This
increase  is  primarily   attributable   to  furthering   the   development   of
international business relationships.

     Sales and  marketing  expense for the third  quarter,  1996  expressed as a
percentage  of  sales  increased  to 12%  from 7% in the  third  quarter,  1995.
Aggregate sales and marketing expense increased $72,235, or 80%, to $162,000 for
the third quarter, 1996 from $89,765 for the third quarter,  1995. This increase
is primarily attributable to the continuance of the Company's disease management
program and increased advertising and product promotional expenses. Salaries and
wages expense for the third quarter,  1996,  expressed as a percentage of sales,
increased to 21% from 15% in the third  quarter,  1995.  Aggregate  salaries and
wages expense increased $79,525, or 41%, to $271,182 for the third quarter, 1996
from  $191,657  for  the  third  quarter,   1995.  This  increase  is  primarily
attributable  to the hiring of additional  personnel,  including the Chairman of
the Board and  Director  of  Clinical  Education,  and  raises in  salaries  for
existing personnel.

Loss from Operations

     The Company incurred a loss from operations for the third quarter,  1996 in
the amount of $190,276  compared to income  from  operations  of $50,706 for the
third  quarter,   1995.   This  quarter's  loss  from  operations  is  primarily
attributable to the increase in operating expenses as discussed above.
<PAGE>

Net Loss

     The Company had a net loss of  $168,216,  or $.04 per share,  for the third
quarter,  1996  compared to net income of $101,036,  or $.02 per share,  for the
third  quarter,  1995.  This  quarter's  loss is primarily  attributable  to the
reasons set forth under "Loss from Operations."

Nine Months Ended September  30,1996 Compared to Nine Months Ended September 30,
1995

Results of Operations

Net Sales and Gross Profit

     Net sales for the nine  months  ended 1996  decreased  $212,359,  or 5%, to
$3,807,934  from  $4,020,293 in the nine months ended 1995.  The decrease in net
sales is primarily attributable to lower sales during the first quarter, 1996.

     Net sales of Dermagran Ointment increased  $465,273,  or 21%, to $2,681,028
in the nine months ended 1996 from $2,215,755 in the nine months ended 1995. Net
sales of Dermagran  Hydrophilic Wound Dressing  decreased  $203,015,  or 21%, to
$754,384 in the nine months  ended 1996 from  $957,399 in the nine months  ended
1995. Net sales of Dermagran Spray decreased $71,259, or 24%, to $227,400 in the
nine months ended 1996 from $298,659 in the nine months ended 1995. Net sales of
Dermagran  Zinc-Saline Wet Dressing decreased $35,222, or 28%, to $91,866 in the
nine months ended 1996 from  $127,088 in the nine months  ended 1995.  Dermagran
Wet Dressing (Saline) decreased $141,769,  or 91%, to $14,402 in the nine months
ended 1996 from  $156,171  in the nine months  ended  1995.  The reasons for the
decreases  in sales of certain of the  Company's  products  are set forth  under
"Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 -
Results of Operations - Net Sales and Gross Profit."

     Cost of sales,  expressed as a percentage of net sales,  decreased from 23%
in the nine months  ended 1995 to 20% in the nine months  ended 1996.  Aggregate
cost of sales decreased  $170,253,  or 18%, to $766,945 in the nine months ended
1996 from  $937,198 in the nine months ended 1995.  The reason for this decrease
is set forth under "Quarter  Ended  September 30, 1996 Compared to Quarter Ended
September 30, 1995 - Results of Operations - Net Sales and Gross Profit."

     Gross profit, expressed as a percentage of net sales, increased from 77% in
the nine months ended 1995 to 80% in the nine months ended 1996. Aggregate gross
profit  decreased  $42,106,  or 1%, to  $3,040,989 in the nine months ended 1996
from $3,083,095 in the nine months ended 1995.


<PAGE>


Operating Expenses

     Operating expenses increased $410,830,  or 13%, from $3,065,076 in the nine
months  ended  1995  to  $3,475,906  in the  nine  months  ended  1996.  Product
development expense for the nine months ended 1996 increased  $108,482,  or 22%,
to $610,153 from $501,671 in the nine months ended 1995. The increase in product
development  expense is  primarily  attributable  to the reasons set forth under
"Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995 -
Results of Operations - Operating  Expenses." A secondary factor in the increase
is  research  relative  to the  expansion  of the  Company's  products  into the
dermatology market.

     Selling,  general and administrative expense for the nine months ended 1996
increased as a percentage  of net sales to 75% from 64% in the nine months ended
1995 and increased in the aggregate $302,348,  or 12%, to $2,865,753 in the nine
months ended 1996 from $2,563,405 in the nine months ended 1995. The increase in
selling,  general  and  administrative  expense  is  primarily  attributable  to
increases in litigation expense, sales and marketing expense, salaries and wages
expense and general administrative expense.

     Litigation expense for the nine months ended 1996 expressed as a percentage
of  sales  increased  to 5% from 3% in the nine  months  ended  1995.  Aggregate
litigation expense increased $82,108,  or 79%, to $185,469 from $103,361 for the
nine months ended 1995. The reason for this increase is set forth under "Quarter
Ended  September 30, 1996 Compared to Quarter Ended September 30, 1995 - Results
of Operations - Operating  Expenses."  Sales and marketing  expense for the nine
months ended 1996  expressed as a percentage of sales  increased to 14% from 10%
in the nine months ended 1995.  Aggregate sales and marketing  expense increased
$128,159,  or 33%, to $518,052 for the nine months ended 1996 from  $389,893 for
the nine months  ended 1995.  This  increase is  primarily  attributable  to the
development of the company's  interactive  wound care brochure,  development and
introduction of the Company's disease  management  program,  implementation of a
telemarketing   program  and  increased   advertising  and  product  promotional
expenses.

     Salaries and wages  expense for the nine months ended 1996,  expressed as a
percentage  of sales,  increased  to 19% from 15% in the nine months ended 1995.
Aggregate salaries and wages expense increased $141,561, or 24%, to $727,769 for
the nine months ended 1996 from  $586,208  for the nine months  ended 1995.  The
reason for this increase is set forth under  "Quarter  Ended  September 30, 1996
Compared to Quarter Ended September 30, 1995 - Results of Operations - Operating
Expenses."  General  administrative  expense  for the  nine  months  ended  1996
expressed  as a percentage  of sales  increased to 3% from 1% in the nine months
ended 1995. Aggregate general  administrative expense increased $55,571, or 93%,
to  $115,464  for the nine  months  ended 1996 from  $59,893 for the nine months
ended 1995. This increase is primarily  attributable to business consultants and
increased public relations activity.


<PAGE>

Loss from Operations

     The Company  incurred a loss from operations for the nine months ended 1996
in the amount of $434,917  compared to income from operations of $18,019 for the
nine months ended 1995. The loss from  operations is primarily  attributable  to
increased operating expenses discussed above.

Net Loss

     The Company  incurred a net loss of  $322,608,  or $.08 per share,  for the
nine months ended 1996  compared to a net loss of  $123,984,  or $.03 per share,
for the nine months ended 1995.

Liquidity and Capital Resources

     The  Company's  cash,  cash  equivalents  and  short-term   investments  at
September 30, 1996 decreased $621,880,  or 22%, to $2,143,069 from $2,764,949 at
September  30,  1995.  The  Company's  working  capital at  September  30,  1996
decreased $318,314, or 9%, to $3,243,938 from $3,562,252 at September 30, 1995.


                           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 29,
1996 and on Form 8-K on July 2, 1996 is incorporated herein by reference.

Item 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits.  Except for setforth below, 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 29,  1996 and on Form  10-QSB on
August 13, 1996 are incorporated herein by reference.

      Item              Description
       27               Financial Data Schedule

     (b)  Reports  of Form  8-K.  On July 2, 1996 the  Company  filed a Form 8-K
relative to the settlement of Morgan Paris, Inc. v. Derma Sciences, Inc.



<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 13, 1996      By:                                         
                                     By:  /s/ Gary L. Borthwick
                                          ---------------------
                                          Gary L. Borthwick, Vice President for
                                          Finance and Operations and Chief
                                          Financial Officer