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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, 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)


                              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: March 31, 1997             Class: Common Stock, par value $.01 per share
                                 Shares Outstanding: 4,067,632


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                              DERMA SCIENCES, INC.

                                   FORM 10-QSB

                                      INDEX

Description                                                                 Page
-----------                                                                 ----

Part I - Financial Information

  Item 1.  Condensed Financial Statements

   Balance Sheet - March 31, 1997............................................ 2

   Statements of Operations - Three months ended March 31, 1996
      and March 31, 1997..................................................... 3

   Statements of Cash Flows - Three months ended March 31, 1996
      and March 31, 1997..................................................... 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................................................. 8

  Item 6.  Exhibits and Reports on Form 8-K.................................. 8
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                              DERMA SCIENCES, INC.
                                  BALANCE SHEET
                                 March 31, 1997
                                   (Unaudited)

                                     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                     $      131,382
   Short-term investments                                             1,911,832
   Accounts receivable                                                  851,698
   Inventory                                                            805,020
   Other current assets                                                 259,018
                                                                ----------------
      Total Current Assets                                            3,958,950

PROPERTY AND EQUIPMENT, net                                             110,538

OTHER ASSETS                                                            698,094
                                                                ----------------

TOTAL ASSETS                                                      $   4,767,582
                                                                ================

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Demand note payable                                           $      930,000
   Accounts payable                                                     649,265
   Accrued expenses                                                     438,866
                                                                ----------------
      Total Current Liabilities                                       2,018,131

NOTES PAYABLE                                                            95,000

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
   Retained deficit                                                  (2,030,966)
                                                                ----------------
      Total Shareholders' Equity                                      2,654,451
                                                                ----------------
           Total Liabilities and Shareholders' Equity             $   4,767,582
                                                                ================
See accompanying notes.
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                              DERMA SCIENCES, INC.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                        Three Months Ended
                                                             March 31,
                                                -------------------------------
                                                       1996              1997
                                                ---------------  --------------

NET SALES                                        $   1,043,174   $     751,733

COST OF SALES                                          259,862         183,855
                                                ---------------  --------------

GROSS PROFIT                                           783,312         567,878

OPERATING EXPENSES:
     Product development                               204,575         196,588
     Selling, general and administrative               893,193         750,839
                                                ---------------  --------------
          Total Operating Expenses                   1,097,768         947,427
                                                ---------------  --------------

LOSS FROM OPERATIONS                                  (314,456)       (379,549)

OTHER INCOME (EXPENSE):
     Interest income                                    41,451          29,684
     Interest expense                                  (14,482)        (16,492)
                                                ---------------  --------------
          Total Other Income                            26,969          13,192

LOSS BEFORE INCOME TAXES:                             (287,487)       (366,357)
     Income taxes                                      (18,163)              0
                                                ---------------  --------------

NET LOSS                                        $     (269,324)  $    (366,357)
                                                ===============  ==============

NET LOSS PER COMMON SHARE                       $        (0.07)  $       (0.09)
                                                ===============  ==============

WEIGHTED AVERAGE NUMBER OF COMMON
  SHARES OUTSTANDING                                 4,054,233       4,067,632
                                                ===============  ==============

See accompanying notes.

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                               DERMA SCIENCES, INC
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                            Three Months Ended
                                                                March 31,
                                                       -------------------------
                                                            1996          1997
                                                       -----------   -----------
OPERATING ACTIVITIES:
 Net Loss                                              $ (269,324)    $(366,357)
 Adjustments to Reconcile Net Loss to Net Cash
   Provided by (Used in) Operating Activities:
     Depreciation and amortization                         12,319        54,231
     Changes in operating assets and liabilities:
        Accounts receivable                               437,915       468,155
        Inventory                                         (42,131)       32,639
        Other current assets                                5,327        (7,541)
        Other assets                                       22,679        (2,000)
        Accounts payable                                  235,662       (96,277)
        Accrued expenses                                 (118,415)     (215,087)
        Income taxes payable                              (42,598)            0
                                                      ------------  ------------
          Net Cash Provided by (Used in) Operating    
            Activities                                    241,434      (132,237)

INVESTING ACTIVITIES:
 Increase in short-term investments                      (341,461)      (24,661)
 Purchases of property and equipment                      (20,136)       (8,028)
 Increase in patents and trademarks                       (11,219)       (4,741)
                                                      ------------  ------------
  Net Cash Used in Investing Activities                  (372,816)      (37,430)

FINANCING ACTIVITIES:
 Net change in revolving line of credit                         0       130,000
 Officers' note receivable                                      0       110,841
                                                      ------------  ------------
  Net Cash Provided by Financing Activities                     0       240,841

NET (INCREASE) DECREASE IN CASH AND                   -------------  -----------
     CASH EQUIVALENTS                                    (131,382)       71,174

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD             $   64,391    $  131,382
                                                      =============  ===========

See accompanying notes.



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                              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  three-month  period ended March 31,
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. 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 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.  In January,  1997, a former officer repaid his promissory  note in the
amount of $77,893  inclusive of principal and interest and 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.



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                              DERMA SCIENCES, INC.

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


Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996

Results of Operations

Net Sales and Gross Profit

     Net  sales for the first  quarter,  1997  decreased  $291,441,  or 28%,  to
$751,733 from $1,043,174 in the first quarter,  1996. This decrease is partially
attributable to the Company's decision not to impose a first quarter, 1997 price
increase and customers'  consequent lack of incentive to front-load inventory in
the first quarter.  In the past, the Company has announced  price  increases for
its products effective April 1. This announcement typically results in customers
increasing inventory levels during the first quarter.

     While sales are down as compared to the first quarter, 1996 they are steady
as  compared  with the fourth  quarter,  1996.  Management  believes  that sales
decreases have stabilized.  The Company has hired two seasoned executives in the
positions  of Vice  President  for Sales and Vice  President  for  Marketing  in
connection with its strategic plan to increase sales.

     A  product-by-product  sales  comparison  follows.  Net sales of  Dermagran
Ointment decreased $122,033, or 20%, to $473,413 in the first quarter, 1997 from
$595,446 in the first quarter,  1996. Net sales of Dermagran  Hydrophilic  Wound
Dressing decreased $65,802, or 23%, to $218,929 in the first quarter,  1997 from
$284,731 in the first  quarter,  1996.  Net sales of Dermagran  Spray  decreased
$24,743, or 36%, to $43,622 in the first quarter, 1997 from $68,365 in the first
quarter, 1996. Net sales of Dermagran Wet Dressing (Saline) decreased $5,945, or
60%,  to $4,027 in the first  quarter,  1997 from  $9,972 in the first  quarter,
1996. Net sales of Dermagran Zinc-Saline Wet Dressing decreased $25,698, or 68%,
to $11,836 in the first quarter, 1997 from $37,534 in the first quarter, 1996.

     Cost of sales,  expressed as a  percentage  of net sales,  remained  steady
while in the aggregate cost of sales decreased  $76,007,  or 29%, to $183,855 in
the first quarter, 1997 from $259,862 in the first quarter,  1996. This decrease
is attributable to lower net sales.

     Gross profit, expressed as a percentage of net sales, remained steady while
in the aggregate  gross profit  decreased  $215,434,  or 28%, to $567,878 in the
first quarter, 1997 from $783,312 in the first quarter, 1996.


<PAGE>


Operating Expenses

     Operating expenses decreased $150,341, or 14%, from $1,097,768 in the first
quarter,  1996 to  $947,427  in the first  quarter,  1997.  Product  development
expense for the first quarter,  1997 decreased  $7,987,  or 4%, to $196,588 from
$204,575 in the first  quarter,  1996 and increased as a percentage of net sales
from 20% in the first quarter, 1996 to 26% in the first quarter, 1997.

     Selling,  general and  administrative  expense for the first quarter,  1997
decreased $142,354, or 16%, to $750,839 in the first quarter, 1997 from $893,193
in the first  quarter,  1996.  The  aggregate  decrease in selling,  general and
administrative  expense is largely  attributable  to  decreases  in  commissions
expense,  promotions/sales  support and advertising expense and legal litigation
expense.

     Commission expense for the first quarter,  1997 decreased $58,186,  or 37%,
to $99,327 for the first  quarter,  1997 from  $157,513  for the first  quarter,
1996.   This   decrease  is   attributable   to  the   decrease  in  net  sales.
Promotions/sales  support and  advertising  expense for the first quarter,  1997
decreased $60,161, or 57%, to $45,977 for the first quarter,  1997 from $106,138
for the first quarter,  1996. This decrease is primarily  attributable to budget
cut-backs.  Legal  litigation  expense  for the first  quarter,  1997  decreased
$32,291, or 67%, to $15,757 in the first quarter, 1997 from $48,048 in the first
quarter, 1996. This decrease is primarily attributable to the settlement in 1996
of Morgan Paris, Inc. v. Derma Sciences, Inc.

Loss from Operations

     The Company incurred a loss from operations for the first quarter,  1997 in
the amount of $379,549 compared to $314,456 for the first quarter, 1996.

Net Loss

     The Company  incurred a net loss of $366,357,  or $0.09 per share,  for the
first  quarter,  1997  compared to $269,324,  or $0.07 per share,  for the first
quarter, 1996.

Liquidity and Capital Resources

     The Company's  cash, cash  equivalents and short-term  investments at March
31, 1997 decreased $742,113,  or 27%, to $2,043,214 from $2,785,327 at March 31,
1996. The Company's working capital at March 31, 1997 decreased  $1,539,046,  or
44%, to  $1,940,819  from  $3,479,865  at March 31, 1996.  These  decreases  are
attributable to lower net sales which occasioned  increased use of the Company's
short-term investments and line-of-credit.
<PAGE>

     Statements that are not historical facts,  including statements about Derma
Sciences,  Inc.'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  product and prices,
product development,  commercialization or technological delays or difficulties,
and trade, legal, social and economic risks.

                           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 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits.  Except as set forth 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 24, 1997 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 January 6, 1997 the  Company  filed a Form 8-K
relative to the restructuring of its operations.



<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, 1997                By: /s/ Gary L. Borthwick
                                        ----------------------         
                                        Gary L. Borthwick, Vice President for
                                        Finance and Operations and Chief
                                        Financial Officer