EMPLOYMENT AGREEMENT


     THIS  AGREEMENT  made this 1st day of August,  1996,  by and between  Derma
Sciences,   Inc.,  a  Pennsylvania   corporation  (hereinafter  referred  to  as
"Employer") and Edward J. Quilty (hereinafter referred to as "Employee").
     WHEREAS,  Employer  desires to employ Employee as the Chairman of the Board
of Employer, and
     WHEREAS, Employee desires to so act,
     NOW, THEREFORE, the parties hereto, in consideration of the mutual promises
and covenants herein contained,  and intending to be legally bound, hereby agree
as follows:
     1. Employment.  Employer employs Employee, and Employee accepts employment,
as the  Chairman  of the Board of  Employer  with  powers  and  duties as may be
determined, from time to time, by Employer's Board of Directors which powers and
duties  shall  not be  inconsistent  with  the  powers  and  duties  customarily
performed,  undertaken and exercised by persons holding the position of chairman
of the  board or  equivalent  thereof.  Provided,  however,  the  employment  of
Employee  hereunder  is  contingent  upon  Employee's  election  as  director of
Employer by the  shareholders  of Employer.  Provided,  further,  Employer shall
undertake and perform all acts reasonably  necessary or desirable to effect such
election.
     2. Term. The term of this Agreement  shall begin on May 22, 1996, and shall
terminate  on May 21, 1999,  unless  sooner  terminated  pursuant to paragraph 9
hereof or unless extended by mutual consent of the parties hereto (the "Term").
     3.  Compensation.  Employer  shall pay Employee  compensation  for services
rendered under this Agreement as set forth hereunder ("Compensation"):
          (a) Base Compensation. Base salary of $75,000 per year, payable weekly
     ("Salary").
          (b) Bonus.  Bonus  Compensation of $25,000 per year payable monthly in
     consideration   of  Employee's   experience  in  building   value  via  the
     establishment of strategic alliances and relationships.
          (c) Incentive  Compensation.  Incentive Compensation as may, from time
     to time, be recommended by Employer's  Compensation  Committee and approved
     by its Board of Directors.  Provided, however, such Incentive Compensation,
     if any,  shall be based upon,  inter alia, the following  factors:  (1) the
     extent to which  Employer  attains  its  objectives  relative to net sales,
     income from operations and net income, (2) the extent to which Employee, by
     virtue  of his  responsibilities,  is able  to,  and  does,  influence  the
     foregoing results, and (3) Employee's strategic  contributions to Employer.
     Provided  further,  that any such incentive  compensation  shall not exceed
     $25,000 in any year.
     4.  Stock  Options.  As  additional  compensation  for  services  rendered,
Employer  grants to Employee on the date hereof the right and option to purchase
all or any part of an aggregate  of 150,000  shares of  Employer's  Common Stock
(the  "Option"),  subject to the vesting  schedule set forth in  subparagraph  c
hereof and the adjustments set forth in subparagraph g hereof, which Option is a
nonqualified stock option. The Option is in all respects limited and conditioned
as provided hereunder.
          (a) Purchase  Price.  Except as otherwise  provided in  subparagraph g
     hereof,  the purchase  price (the "Option  Price") of the shares covered by
     the Option  ("Option  Shares")  shall be the  closing  price of  Employer's
     Common  Stock on the last day on which the  Common  Stock has traded on the
     National  Association  of Securities  Dealers  Automated  Quotation  System
     (Nasdaq)  preceding  the  date  of  execution  of this  Agreement,  to wit:
     $2.50.
          (b) Option Term. Except as otherwise provided herein, the Option shall
     expire on the first to occur of: (i) Ninety (90) days following  Employee's
     termination of employment with Employer, or (ii) May 22, 2007.
          (c) Exercise of Option.  (i) Except as otherwise  provided herein, the
     right of Employee to exercise the Option is conditioned upon Employee:  (A)
     being in the employ of the Employer,  whether pursuant to this Agreement or
     otherwise,  or (B) serving as a director of  Employer.  The Option shall be
     exercisable: (1) during the period commencing on May 22, 1996 and ending on
     May 21, 1997 with respect to up to 20% of the Option Shares, (2) during the
     period  commencing  on May 22, 1997 and ending on May 21, 1998 with respect
     to up to 40% of the Option Shares,  (3) during the period commencing on May
     22, 1998 and ending on May 21, 1999 with respect to up to 60% of the Option
     Shares,  (4) during the period commencing on May 22, 1999 and ending on May
     21, 2000 with respect to up to 80% of the Option Shares, and (5) during the
     period  commencing  on May 22, 2000 and ending on May 22, 2007  (subject to
     subparagraph b hereof) 100% of the Option Shares.
               (ii) The Option  may be  exercised,  in whole or in part,  at any
          time or times prior to the expiration or other termination thereof.
               (iii) If this Agreement, and Employee's employment with Employer,
          is  terminated  other than For Cause (as defined in paragraph 9) prior
          to the expiration date of the Option,  such Option may be exercised by
          Employee,  to the extent the  Options are  exercisable  on the date of
          such   termination,   or  to  any  greater  extent  permitted  by  the
          Compensation Committee, at any time prior to the earlier of: (i) Three
          (3) months after the date of termination,  or (ii) the expiration date
          of such Option.  Provided,  however, if this Agreement, and Employee's
          employment,  was terminated For Cause, Employee shall have no right to
          exercise his Option on or after the date of such termination.
               (iv) The Option shall accelerate and become 100% exercisable upon
          the occurrence of the following: (A) Employee's Legal Disability;  (B)
          Employer's  termination  of this Agreement  other than For Cause;  (C)
          "Change in  Control"  of  Employer  (as  hereinafter  defined)  or (D)
          termination  of this  Agreement  by  Employee  for "Good  Reason"  (as
          hereinafter defined).
               (v) The Option shall  accelerate in the following manner upon the
          occurrence of Employee's  death:  25% exercisable if Employee's  death
          occurs within 6 months of the beginning  date of this  Agreement;  50%
          exercisable  if  Employee's  death occurs  between 6 months and 1 year
          from the beginning  date of this  Agreement;  and 100%  exercisable if
          Employee's death occurs thereafter.
               (vi) For purposes of this  Agreement  the  following  definitions
          apply:
               (A) "Legal Disability" shall mean either Employee has been unable
          to  substantially  perform his duties  hereunder by reason of illness,
          accident  or other  physical  or mental  disability  for a  continuous
          period  of 180 days or an  aggregate  period  of 270 days  during  any
          continuous twelve-month period, or that in the opinion of the Board of
          Directors,  such  opinion to be derived  from the reports of three (3)
          physicians of its choosing,  Employee will be unable to  substantially
          perform his duties  hereunder by reason of illness,  accident or other
          physical or mental  disability for a continuous  period of 180 days or
          an  aggregate  period of 270 days during any  continuous  twelve-month
          period.
               (B)  "Good  Reason"  shall  mean  a  breach  by  Employer  of its
          obligations  under this Agreement.  Provided,  however,  "Good Reason"
          shall not  include any  failure of  shareholders  of Employer to elect
          Employee as a director of Employer under paragraph 1 hereof.
               (C) "Change in Control"  shall mean:  (1) the sale by Employer of
          all or substantially  all of its assets to any person (as such term is
          used in Sections  13(d) and 14(d) of the  Securities  Exchange  Act of
          1934), the consolidation of Employer with any person, or the merger of
          Employer  with any person as a result of which merger  Employer is not
          the surviving entity, or if the surviving entity, Employer is owned by
          a  parent  company;  or (2)  the  sale or  transfer  by one or more of
          Employer's  shareholders  in  one or  more  transactions,  related  or
          unrelated,  to one or more  persons  under  circumstances  whereby any
          person and its "affiliates" (as defined herein) shall own, as a result
          of such sale or transfer  thereafter,  at least Fifty percent (50%) of
          the  outstanding  shares  of  Employer.   Nothing  contained  in  this
          definition  shall  limit or  restrict  the right of  Employee,  in his
          capacity as Chairman of the Board of Directors,  from participating in
          any  discussions  or  voting  on any  matter  relative  to a Change in
          Control  of  Employer  at any  meeting of the Board of  Directors.  An
          "affiliate" shall mean any person that directly, or indirectly through
          one or more intermediaries, controls, or is controlled by, or is under
          common control with, any other person.
          (d) Method of  Exercising  Option.  (i) The Option may be exercised by
     giving  written  notice,  in form  substantially  as set forth in Exhibit 1
     hereof,  to  Employer at its  principal  office,  specifying  the number of
     Option  Shares to be purchased  and  accompanied  by payment in full of the
     aggregate  purchase  price  for the  Shares.  Only  full  Shares  shall  be
     delivered and any  fractional  share which might  otherwise be  deliverable
     upon exercise of an Option granted hereunder shall be forfeited.
                    (ii) The  purchase  price  shall be  payable  in cash or its
               equivalent.
                    (iii) Upon  receipt of such  notice and  payment,  Employer,
               within three (3) business days after  Exercise,  shall deliver or
               cause to be delivered a certificate or certificates  representing
               the Shares  with  respect to which the Option is  exercised.  The
               certificate or  certificates  for such Shares shall be registered
               in the name of the person  exercising the Option (or, if Employee
               shall so request in the notice exercising the Option, in the name
               of Employee and his spouse,  jointly, with right of survivorship)
               and shall be delivered  as provided  above to or upon the written
               order of the  person  exercising  the  Option.  In the  event the
               Option  is  exercised  by any  person  after  the  death or Legal
               Disability  of  Employee,  such notice  shall be  accompanied  by
               appropriate  proof of the right of such  person to  exercise  the
               Option.  All shares  purchased upon the exercise of the Option as
               provided  herein  shall  be  fully  paid  and   nonassessable  by
               Employer.
          (e)  Non-transferability  of Option.  The Option is not  assignable or
     transferable,  in whole or in part, by Employee,  otherwise than by will or
     by the laws of descent and  distribution.  During the lifetime of Employee,
     the Option  shall be  exercisable  only by Employee or, in the event of his
     Legal Disability, by his legal representative.
          (f) Withholding of Taxes. The obligation of Employer to deliver Shares
     upon the exercise of any Option shall be subject to any applicable federal,
     state and local tax withholding requirements.
          (g)  Adjustments.  The number of Option  Shares  and the Option  Price
     shall be  adjusted  as set  forth  herein:  (i) In the  event  that a stock
     dividend  shall be  declared on the Common  Stock  payable in shares of the
     Common Stock,  the Option Shares shall be adjusted by adding to each Option
     Share the number of shares  which  would be  distributable  thereon if such
     Option Share had been  outstanding  on the date fixed for  determining  the
     shareholders entitled to receive such stock dividend.
               (ii) In the event that the outstanding shares of the Common Stock
          shall be changed into or exchanged  for a different  number or kind of
          shares  of stock or  other  securities  of  Employer  whether  through
          recapitalization,  stock split,  combination of shares,  or otherwise,
          then there shall be  substituted  for each Option Share the number and
          kind of shares of stock or the securities into which each  outstanding
          share of the Common  Stock  shall be so changed or for which each such
          share shall be exchanged.
               (iii) In the event  that the  outstanding  shares  of the  Common
          Stock shall be changed into or exchanged  for shares of stock or other
          securities of another  corporation,  whether  through  reorganization,
          sale of  assets,  merger or  consolidation  in which  Employer  is the
          surviving corporation, then there shall be substituted for each Option
          Share the  number and kind of shares of stock or the  securities  into
          which each  outstanding  share of the Common Stock shall be so changed
          or for which each such share shall be exchanged.
               (iv) In the event that any sale of shares of Common Stock (except
          any  such  sale  made  pursuant  to  any  right,  option,  warrant  or
          convertible security outstanding prior to the date of this Agreement),
          or the issuance of any rights,  options,  or warrants to subscribe for
          or  purchase   Common  Stock  (or  securities   convertible   into  or
          exchangeable   for  Common  Stock)  occurs  after  the  date  of  this
          Agreement,  which sale or issuance  will increase the number of shares
          of Common Stock  outstanding  during the Term by Forty percent  (40%),
          then,  upon  each  such  sale or  issuance,  Employee  shall be issued
          additional  Option Shares such that, when the additional Option Shares
          are aggregated  with the Option Shares  heretofore  owned by Employee,
          Employee  has the right to  purchase,  at the same  times set forth in
          paragraph  4(c), the same percentage of Common Stock at the same price
          per share as Employee maintained prior to such sale or issuance.
          (h)  Share   Ownership.   Neither   Employee  nor   Employee's   legal
     representatives  nor the executors or administrators of his estate shall be
     or be deemed to be the  holder of any share of Common  Stock  covered by an
     Option  unless  and until a  certificate  for such  share  shall  have been
     issued.
     5. Time and Efforts.  Employee shall devote approximately 15 hours per week
of his business time and efforts to the affairs of Employer.
     6. Disclosure of Information.  Employee recognizes and acknowledges that he
will have access to certain  confidential  information of Employer and that such
information  constitutes  valuable,  special and unique  property  of  Employer.
Employee will not, during or after the term of his  employment,  disclose any of
such confidential information to any person, firm, corporation,  association, or
other entity for any reason or purpose  whatsoever  unless ordered to do so by a
court or other tribunal or government  agency with jurisdiction over the subject
matter and Employee.  In the event of a breach or threatened  breach by Employee
of the provisions of this paragraph, Employer shall be entitled to an injunction
restraining  Employee  from  disclosing,  in  whole  or  in  part,  confidential
information  of Employer,  or from  rendering any services to any person,  firm,
corporation, association, or other entity to whom such confidential information,
in whole or in  part,  has been  disclosed  or is  threatened  to be  disclosed.
Nothing  herein shall be construed as  prohibiting  Employer  from  pursuing any
other  remedies  available  to Employer  for such breach or  threatened  breach,
including the recovery of damages from Employee.
     7.  Expenses.   Employee  may  incur  reasonable   expenses  for  promoting
Employer's business,  including expenses for entertainment,  travel, and similar
items. Employer will reimburse Employee for all such expenses in accordance with
Employer's  applicable  policies,  rules  and  regulations  as from time to time
issued and amended.
     8. Insurance.  During the term of this Agreement,  Employee will be covered
under Employer's Directors' and Officers' liability insurance to the same extent
Employer's directors and officers are covered.
     9.  Termination  of  Agreement.  (a) This  Agreement  may be  terminated by
Employer in the following instances:
               (i) For Cause.  If  Employee  willfully  breaches  or  habitually
          neglects  or fails to  perform  the  duties  which he is  required  to
          perform under the terms of this Agreement,  materially fails to follow
          the  reasonable  directives  or  policies  established  by or  at  the
          direction of the Board of Directors,  or conducts  himself in a manner
          materially detrimental to the interests of Employer and such breach or
          failure of  performance  is not cured  within  Thirty (30) days of the
          delivery to Employee of written  notice  thereof,  which  notice shall
          have been  approved by a majority of  Employer's  Board of  Directors,
          Employer may terminate this  Agreement and  Employee's  employment For
          Cause.
               (ii) Failure of  Shareholders  to Elect.  If the  shareholders of
          Employer  fail  to  elect  Employee  as  director  of  Employer,  this
          Agreement shall forthwith terminate, cease and determine.
          (b) This  Agreement may be terminated by Employee for: (i) Good Reason
     (as defined in paragraph  4(c)(vi)(B)) if Employer fails to cure its breach
     of  obligation  within  Thirty  (30) days of the  delivery  to  Employer of
     written  notice  of such  breach,  or (ii)  upon a  Change  in  Control  of
     Employer.
          (c) This Agreement, and therefore Employee's employment with Employer,
     shall terminate  automatically  upon Employee's death. If Employee has been
     unable to substantially perform his duties hereunder by virtue of his Legal
     Disability  (as defined in  paragraph  4(c)(vi)(A)),  and  Employee has not
     resumed his duties to the  satisfaction  of the Board of  Directors  within
     Thirty (30) days of the  delivery to  Employee of written  notice  thereof,
     which notice shall have been approved by a majority of Employer's  Board of
     Directors, Employer may terminate this Agreement and Employee's employment.
     10. Payments on Termination.
          (a)  If,  prior  to  the  expiration  of  this  Agreement,  Employee's
     employment  is  terminated  by Employee by reason of a Change in Control of
     Employer,  Employer  shall pay to  Employee:  (i)  Employee's  full  Salary
     through  the  date of his  termination,  and  (ii) an  amount  equal to the
     greater of the aggregate Salary payments which Employee would have received
     during the balance of the Term if such  termination  had not  occurred,  or
     $100,000.  All such Salary  payments shall be made not later than the fifth
     business day following the date of his termination.
          (b) During the Term, if Employee's  employment is terminated  pursuant
     to  paragraph  9,  Employee  shall  receive,  on the next  normal  pay date
     following the date of his  termination,  the Salary to which he is entitled
     through the date of his termination.
          (c)  Employee  shall not be  required  to  mitigate  the amount of any
     payment provided for herein by seeking other  employment or otherwise,  nor
     shall the  amount of any  payment  provided  for  herein be  reduced by any
     compensation  or  retirement  benefits  heretofore  or hereafter  earned by
     Employee  as  the  result  of  employment  by any  other  person,  firm  or
     corporation.
     11.  Restrictive  Covenant.  For  a  period  of  One  (1)  year  after  the
termination  by Employer For Cause or by Employee  other than for Good Reason or
pursuant to a Change in Control or expiration of this  Agreement,  Employee will
not, within the greater of the currently  existing marketing area of Employer or
any future marketing area of Employer  established during Employee's  employment
under the terms of this Agreement, directly or indirectly, own, manage, operate,
control,  be employed by, participate in, or be connected in any manner with the
ownership,  management,  operation,  or control of any business related to wound
care  therapeutics  or  otherwise  similar to the type of business  conducted by
Employer  at the  time of the  termination  or  expiration  of  this  Agreement.
Provided,  however,  the aforementioned  restrictions shall not be applicable to
activities in which Employee was, and continued to be, engaged in on the date of
this Agreement.  In the event of Employee's  actual or threatened  breach of the
provisions  of this  paragraph,  Employer  shall be  entitled  to an  injunction
restraining Employee therefrom. Nothing herein shall be construed as prohibiting
Employer  from  pursuing  any  other  available  remedies  for  such  breach  or
threatened breach, including the recovery of damages from Employee.
     12.  Waiver of Breach.  The waiver by Employer of a breach of any provision
of this  Agreement by Employee  shall not operate or be construed as a waiver of
any subsequent breach by Employee.  No waiver shall be valid unless in a writing
signed by an authorized officer of Employer and approved by an absolute majority
of Employer's board of directors.
     13. Assignment.  Employee  acknowledges that the services to be rendered by
him are unique and  personal.  Accordingly,  Employee  may not assign any of his
rights or delegate any of his duties or obligations  under this  Agreement.  The
rights and  obligations  of  Employer  under this  Agreement  shall inure to the
benefit of and shall be binding upon the successors and assigns of Employer.
     14. Entire Agreement.  This Agreement contains this entire understanding of
the parties.  It may be changed  only by an  agreement in writing  signed by the
party against whom enforcement of any waiver, change,  modification,  extension,
or discharge is sought to be charged.

     IN WITNESS WHEREOF,  the parties have set their hands and seals the day and
year first written above.
    
                          EMPLOYER 
                          DERMA SCIENCES, INC.



                          By:  /s/  John T. Borthwick  
                                    -----------------
                                    John T. Borthwick, President



                          EMPLOYEE
     
                          By:  /s/ Edward J. Quilty
                                   ----------------
                                   Edward J. Quilty

                     
<PAGE>


                                                      
                                    EXHIBIT 1
                              DERMA SCIENCES, INC.
                       NOTICE OF EXERCISE OF STOCK OPTION

     I hereby  exercise  the  nonqualified  stock  options  granted  to me as of
_______________ by Derma Sciences,  Inc. with respect to the following number of
shares  of Derma  Sciences,  Inc.  Common  Stock,  $.01  par  value  per  share,
("Shares") covered by said option:
         Number of Shares to be purchased:  ________________
         Option price per Share:            ________________
         Total option price:                ________________
     Enclosed  is my  check  in  the  amount  of  $_________.  Please  have  the
certificate or certificates  representing the purchased Shares registered in the
following    name(s)1    ______________________________________and    sent    to
_________________________________.

DATED: ______________, ____.

                                 OPTIONEE



                                 __________________________________




1.  Certificates  may be registered in the name of the Optionee  alone or in the
joint names of the Optionee and his spouse.