---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934   For Quarter Ended
     
     June 30, 2001Commission 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 of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)  214 Carnegie Center, Suite 100Princeton, New Jersey
08540(609) 514-4744(Address including zip code and telephonenumber,
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 Issuer 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 of each of the issuer's classes of common equity,
as of the latest practicable date.

|Date: June 30, 2001 | Class: Common Stock, par value $.01 per share
|------------------- | ---------------------------------------------
|                    | Shares Outstanding: 2,407,109                

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

|Description |  | Page
|----------- |  | ----

Part I - Financial Information

|        |                                                                                                   |   
|------- | ------------------------------------------------------------------------------------------------- | --
|Item 1. | Consolidated Financial Statements                                                                 |   
|        |                                                                                                   |   
|        | Balance Sheets - June 30, 2001 and
     December 31, 2000                                         | 2 
|        |                                                                                                   |   
|        | Statements of Operations - Three
     months ended June 30, 2001and June 30, 2000                 | 3 
|        |                                                                                                   |   
|        | Statements of Operations - Six
     months ended June 30, 2001and June 30, 2000                   | 4 
|        |                                                                                                   |   
|        | Statements of Cash Flows - Six months
     ended June 30, 2001and June 30, 2000                   | 5 
|        |                                                                                                   |   
|        | Notes to Consolidated Financial
     Statements                                                   | 6 
|        |                                                                                                   |   
|Item 2. | Management's Discussion and Analysis of
     Financial Condition
       and Results of Operations | 13
|        |                                                                                                   |   

Part II - Other Information

|Item 1. | Legal Proceedings                | 19
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 19
|        |                                  |   

1

---

DERMA SCIENCES, INC.Consolidated Balance Sheets (Unaudited)

`==========================================================================================
                                                                June 30,     December 31,
ASSETS                                                            2001           2000
------------------------------------------------------------------------------------------
                                                                              (Restated)
Current Assets
 Cash and cash equivalents, including restricted cash of
  $580,455 in 2001 and $640,000 in 2000                       $ 1,079,910     $ 1,064,165
 Accounts receivable, net                                       1,123,535       1,561,633
 Inventories, net                                               1,515,761       1,282,370
 Prepaid expenses and other current assets                        138,540          75,916
------------------------------------------------------------------------------------------
Total current assets                                            3,857,746       3,984,084

Property and equipment, net                                       192,975         204,029
Goodwill, patents and trademarks                                1,330,659       1,392,495
------------------------------------------------------------------------------------------
Total Assets                                                  $ 5,381,380     $ 5,580,608
------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS EQUITY
------------------------------------------------------------------------------------------
Current Liabilities
 Bank line of credit                                            $ 580,455     $   640,000
 Accounts payable                                                 848,842         977,080
 Accrued expenses and other current liabilities                   378,283         501,922
 Convertible bonds, net of bond discount                          395,000            -
------------------------------------------------------------------------------------------
Total current liabilities                                       2,202,580       2,119,002
------------------------------------------------------------------------------------------
Long-term liabilities
 Convertible bonds                                                 -              475,000
------------------------------------------------------------------------------------------
Total Liabilities                                               2,202,580       2,594,002
------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 30,000,000 share authorized;
 issued and outstanding: 2,407,109 shares in 2001;
 2,120,940 shares in 2000                                          24,071          21,209
Convertible preferred stock, $.01 par value; 11,750,000 shares
  authorized; issued and outstanding: 1,960,009 shares in 2001;
  2,189,178 shares in 2000                                         19,600          21,892
Additional paid-in capital                                     14,028,280      13,866,849
Accumulated deficit                                           (10,893,151)    (10,923,344)
------------------------------------------------------------------------------------------
Total Shareholders' Equity                                      3,178,800       2,986,606
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $ 5,381,380     $ 5,580,608
==========================================================================================`

See accompanying notes.

2

---

DERMA SCIENCES, INC.Consolidated Statement of Operations (Unaudited)

`==========================================================================================
                                                                   Three months ended
                                                                        June 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)
NET SALES                                                     $ 2,381,808     $ 2,378,537

Cost of sales                                                    1,222,871      1,117,955
------------------------------------------------------------------------------------------
GROSS PROFIT                                                     1,158,937      1,260,582
------------------------------------------------------------------------------------------
Operating expenses                                               1,115,501      1,478,503
Other expense, net (including interest expense of $60,432
  and $165,527 in 2001 and 2000)                                    20,417        148,814
------------------------------------------------------------------------------------------
Total Expenses                                                   1,135,918      1,627,317
------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                     23,019       (366,735)
Provision for income taxes                                           2,015          -
------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                             $     21,004    $  (366,735)
------------------------------------------------------------------------------------------

Income (loss) per common share - basic                        $       0.00    $     (0.26)
------------------------------------------------------------------------------------------
Income (loss) per common share - fully diluted                $       0.00    $     (0.26)
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - basic                                                  2,407,109      1,409,272
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - fully diluted                                         10,242,237      1,409,272
==========================================================================================`

See accompanying notes.

3

---

DERMA SCIENCES, INC.Consolidated Statement of Operations (Unaudited)

`==========================================================================================
                                                                   Six months ended
                                                                        June 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)
NET SALES                                                     $ 4,752,866     $ 4,651,620

Cost of sales                                                   2,504,650       2,203,933
------------------------------------------------------------------------------------------
GROSS PROFIT                                                    2,248,216       2,447,687
------------------------------------------------------------------------------------------
Operating expenses                                              2,147,480       2,966,105
Other expense, net (including interest expense of $124,502
  and $484,186 in 2001 and 2000)                                   67,514         453,024
------------------------------------------------------------------------------------------
TOTAL EXPENSES                                                  2,214,994       3,419,129
------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                    33,222        (971,442)
Provision for income taxes                                          3,029           -
------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                             $    30,193     $  (971,442)
------------------------------------------------------------------------------------------

Income (loss) per common share - basic                        $      0.01     $     (0.69)
------------------------------------------------------------------------------------------
Income (loss) per common share - fully diluted                $      0.00     $     (0.69)
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - basic                                                 2,368,914       1,409,272
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - fully diluted                                        10,207,237       1,409,272
==========================================================================================`

See accompanying notes.

4

---

DERMA SCIENCES, INC.Consolidated Statement of Cash Flows (Unaudited)

`==========================================================================================
                                                                   Six months ended
                                                                        June 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)
OPERATING ACTIVITIES
  Net income (loss)                                           $    30,193     $  (971,442)
  Adjustments to reconcile net income (loss) to
   net cash used in operating activities:
     Depreciation and amortization                                101,919         122,544
     Non-cash financing costs                                      80,000         392,821
     Provision for bad debts and rebates                           33,034          60,000
     Provision for inventory obsolescence                          41,899           -
     Changes in operating assets and liabilities
         Accounts receivable                                      405,064         113,802
         Inventories                                             (275,290)        (10,612)
         Prepaid expenses and other current assets                (62,624)       (196,469)
         Accounts payable                                        (126,237)       (223,362)
         Accrued expenses and other current liabilities          (123,639)        (80,468)
------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities               104,319        (793,186)
------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
  Purchases of property and equipment                             (29,029)         (7,994)
------------------------------------------------------------------------------------------
Net cash used in investing activities                             (29,029)         (7,994)
------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
  Net change in bank line of credit                               (59,545)        300,000
  Proceeds from issuance of convertible securities                  -             150,000
------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities               (59,545)        450,000
------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               15,745        (351,180)

Cash and cash equivalents
  Beginning of period                                           1,064,165       1,221,691
------------------------------------------------------------------------------------------
  End of period                                                $1,079,910     $   870,151
------------------------------------------------------------------------------------------

Supplemental cash flow information
   Conversion of bonds payable to preferred stock                    -        $   625,000
   Common stock and warrants issued for debt extension        $   160,000           -
==========================================================================================`

See accompanying notes.

5

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

## 1.     Organization and
Summary of Significant Accounting Policies

Derma Sciences,
Inc. and its subsidiary (the Company) is a full line provider of
advanced wound care, wound closure-fasteners and skin care products. The Company
markets its products principally through independent distributors servicing the
long-term care, home health and acute care markets in the United States and
select international markets.

Restatements

Subsequent
to the filing of its Annual Report on Form 10-KSB for the year ended December
31, 2000 with the Securities and Exchange Commission, and its Quarterly Report
on Form 10-QSB for the quarter ended March 31, 2001, the Company became aware
that certain beneficial conversion features and consideration associated with
the issuance of Series C Convertible Bonds and Series D Convertible Bonds were
not correctly accounted for during the years ended December 31, 2000 and 1999.
The Company determined that additional interest expense should have been
recorded related to the beneficial conversion features and consideration given
in 2000 and 1999.

The
Company has restated its financial statements for the years ended December 31,
2000 and 1999, and for interim periods, as appropriate. The impact of the
restatement in 2000 was to increase interest expense (recorded in other expense,
net) by $1,143,866. Net loss increased to $2,581,337 from $1,437,471 and net
loss per share increased $0.66 per share to $1.48 from $0.82. The restatement
also results in unamortized bond discount of $732,387 at December 31, 1999 and
an increase in additional paid-in capital at December 31, 2000 and 1999 of
$1,736,479 and $1,325,000, respectively.

The following
is a summary of the effects of the restatement for the three and six months
ended June 30, 2000:

`Three Months Ended June 30, 2000     Six Months Ended June 30, 2000
                      --------------------------------     ------------------------------
                        As Reported      As Restated        As Reported      As Restated
                        -----------      -----------        -----------      -----------

Other expense, net       $  32,280         $148,814           $  60,203         $453,024
                          --------          -------            --------          -------
Net loss                 ($250,201)       ($366,735)          ($578,621)       ($971,442)
                           -------          -------             -------          -------
Loss per common share
  basic and diluted         ($0.18)          ($0.26)            ($0.41)           ($0.69)
                              ----             ----               ----              ----`

Basis of
Presentation

Certain amounts
in the prior years' financial statements have been reclassified to conform to
the current year presentation.

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 and six month periods ended June 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 2000, included in Form
10-KSB/A-1 filed with the Securities and Exchange Commission.

6

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

Summary of
Significant Accounting Policies

Principles
of Consolidation  The consolidated financial statements include the
accounts of Derma Sciences, Inc. and its wholly owned subsidiary Sunshine
Products, Inc. All significant intercompany accounts and transactions have been
eliminated.

Use
of Estimates - In conformity with accounting principles generally accepted
in the United States, the preparation of financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are
based on knowledge of current events and actions which may be undertaken in the
future, actual results may ultimately differ from these estimates.

Cash and Cash
Equivalents - The Company considers cash and cash equivalents as amounts on
hand, on deposit in financial institutions and highly liquid investments
purchased with an original maturity of three months or less.

Net
Income and Loss per Share Net income per common share  basic is
calculated based on the weighted average number of shares of common stock
outstanding during each period. Net income per common share  fully diluted
is calculated based upon the weighted average number of shares of common stock
outstanding during each period plus the number of shares of common stock
issuable upon the conversion of all shares of preferred stock and the exercise
of all warrants and vested options. Net loss per common share is calculated
based upon the weighted average number of shares of common stock outstanding
during each period. No conversions of preferred stock or exercises of warrants
and options are included in the calculation of net loss per common share because
such conversions and exercises would be anti-dilutive.

Inventories
- Inventories consist primarily of raw materials, packaging materials and
finished goods valued at the lower of cost or market. Cost is determined on the
basis of the first-in, first-out method.

Property
and Equipment - Property and equipment are stated at cost and are
depreciated principally by the straight-line method over the estimated useful
lives of the assets ranging from three to ten years.

Goodwill,
Patents and Trademarks  Goodwill, patents and trademarks are stated on
the basis of cost and are amortized over 12 to 17 years on a straight-line
basis.

The
majority of goodwill and other intangible assets represents goodwill obtained in
the acquisition of Sunshine Products, Inc. in 1998. The Company does not believe
that the goodwill is impaired. However, an impairment charge would be recognized
if the Company expected that the present value of future earnings from Sunshine
Products, Inc. did not exceed the unamortized goodwill.

Revenue
Recognition - The Company operates in three segments, wound care, wound
closure-fasteners and skin care. Sales are recorded when product is shipped and
title passes to customers. Gross Sales are adjusted for cash discounts, Medicaid
rebates and trade rebates to derive net sales. Freight costs to ship product to
customers are recorded as a component of cost of sales.

7

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

## 2.     Accounts
Receivable

Accounts
Receivable comprise the following:

`June 30,          December 31,
                                                     2001                2000
                                                  ----------         ------------

        Trade accounts receivable                 1,416,478           $1,725,001
        Less: Allowance for doubtful accounts
               and trade rebates                   (335,000)            (310,000)
                                                   ---------            ---------
           Net trade receivables                  1,081,478            1,415,001
        Other receivables                            42,057              146,632
                                                  ---------           ----------

           Total receivables                      1,123,535           $1,561,633
                                                  =========            =========`

## 3.     Inventories

Inventories
comprise the following:

`June 30,          December 31,
                                                     2001                2000
                                                  ----------         ------------

        Finished goods                            $1,193,012         $   919,872
        Packaging materials                          193,396             309,245
        Raw materials                                304,353             201,253
                                                  ----------          ----------
           Gross inventory                         1,690,761           1,430,370
        Less:  Reserve for obsolescence             (175,000)           (148,000)
                                                  -----------        ------------

             Net inventory                        $1,515,761          $1,282,370
                                                  ==========           =========`

## 4.     Property and
Equipment

Property and
equipment comprise the following:

`June 30,          December 31,
                                                     2001                2000
                                                  ----------         ------------

        Machinery and equipment                      349,864           $ 320,836
        Furniture and fixtures                       668,336             668,336
                                                     -------             -------
             Gross property and equipment          1,018,200             989,172
        Less:  Accumulated depreciation             (825,225)           (785,143)
                                                    ---------           ---------

             Net property and equipment              192,975           $ 204,029
                                                  ==========            ========`

## 5.     Goodwill, Patents and
Trademarks

Goodwill, patent
and trademarks comprise the following:

`June 30,          December 31,
                                                     2001                2000
                                                  ----------         ------------

        Goodwill                                  $1,497,364          $1,497,364
        Patents and trademarks                       451,417             451,417
                                                  ----------          ----------
             Gross goodwill, patents and
                      trademarks                   1,948,781           1,948,781
        Less:  Accumulated amortization             (618,122)           (556,286)
                                                  -----------         -----------

             Net goodwill, patents and
                    trademarks                    $1,330,659          $1,392,495
                                                   =========           =========`

8

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

## 6.     Bank Line of
Credit

The
Company has a $1,000,000 bank line of credit facility with $580,455 and $640,000
outstanding at June 30, 2001 and December 31, 2000, respectively. The maturity
date of the line is October 31, 2001. The line of credit agreement requires
monthly interest payments at prime minus 1%, or 5.75%, at June 30, 2001. Cash
deposited with the bank of $1,000,000 secures the line of credit.

Unrestricted
cash of $499,455 and $424,165 was available for working capital at June 30, 2001
and December 31, 2000, respectively.

## 7.     Convertible
Bonds

Convertible
bonds comprise the following:

`June 30,          December 31,
                                               2001                2000
                                             --------          ------------

        Series C Bonds                     $  25,000           $  25,000
        Series D Bonds                       450,000             450,000
                                             -------             -------

             Gross convertible bonds         475,000             475,000
             Less bond discount               80,000                 -
                                              ------            --------

             Net convertible bonds          $395,000            $475,000
                                            ========            ========`

On
August 16, 1999, the Company completed a private placement of its Series C
Convertible Bonds (Series C Bonds) in which an aggregate of $875,000
was raised. The Series C Bonds pay interest only, at New York prime, until
maturity.

Each
Series C Unit consists of one share of Series C Preferred Stock convertible into
one share of Common Stock and one warrant to purchase one share of Common Stock
at $1.10 per share. In March 2000, bondholders owning $475,000 in aggregate
principal amount of the Series C Bonds converted the principal of their Series C
Bonds into Series C Units at the rate of $1.10 per Unit. In March, 2000, the
bondholders extended the maturity of the Series C Bonds from the original
maturity date of August 15, 2000 until January 7, 2001.

In
July 2000, bondholders owning $375,000 in aggregate principal amount of the
Series C Bonds converted the principal of their Series C Bonds into
modified Series E Units at the rate $0.75 per Unit. Each
modified Series E Unit consists of one share of Series C Preferred
Stock and one and one tenth warrants to purchase one share of Common Stock at
$0.85 per share. Investors who converted their bonds in March 2000 have had
their conversions adjusted so as to receive conversion terms similar to those of
the July 2000 conversion.

In
December 1999, the Company received $450,000 of a total of $600,000 in
subscriptions for its Series D Convertible Bonds (Series D Bonds).
Payments of $50,000 and $100,000 representing the balance of these subscriptions
were received in January and February, 2000, respectively. The Series D Bonds
pay interest only, at New York prime, until maturity.

Each
Series D Unit consists of one share of Series D Preferred Stock convertible into
one share of Common Stock and one warrant to purchase one share of common stock
at $1.01 per share. In March 2000, bondholders owning $150,000 in aggregate
principal amount of the Series D Bonds converted the principal of their Series D
Bonds into Series D Units at the rate of $1.0125 per Unit. In March 2000, the
bondholders extended the maturity of the Series D Bonds from the original
maturity date of December 31, 2000 until January 7, 2001. Investors who
converted their bonds in March 2000 have had their conversions adjusted so as to
receive conversion terms similar to those of the July 2000 conversion of Series
C Bonds.

9

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

The total
expense recognized for the beneficial conversion features and other
consideration given in connection with the original issuance and subsequent
reset of the conversion terms of the Series C and Series D convertible bonds in
2000 and 1999 was $1,143,866 and $592,613, respectively.

As
of January 5, 2001, bondholders owning an aggregate of $475,000 of the
Companys Series C and Series D Convertible Bonds, constituting all of the
Companys convertible bonds, extended the maturity date of their bonds from
January 7, 2001 to January 7, 2002. In consideration for this maturity
postponement, the Company has agreed to accord the bondholders the following:
(1) 57,000 shares of the Companys Common Stock with registration rights,
(2) reduction in the per unit conversion rate of the Series C and
Series D Convertible Bonds remaining outstanding from $0.75 to $0.50, (3)
increase in the ratio of preferred stock to warrants comprising the units from
one share of preferred stock and one warrant to one share of preferred stock and
one and one tenth warrants, and (4) reduction of the exercise price of the
warrants from $0.85 per share to $0.57 per share. The $160,000 value of the
foregoing has been recorded as bond discount that is being amortized to interest
expense over the one-year bond maturity extension at the rate of $40,000 per
quarter during 2001. The warrants described in items (3) and (4) have been
redesignated as the Companys Series F Warrants.

## 8.     Shareholders
Equity

Increase in
Authorized Common Stock

On
May 26, 1999 the Company, upon recommendation of its Board of Directors and
approval of its shareholders, amended its articles of incorporation to increase
authorized Common Stock from 15,000,000 to 30,000,000 shares. The par value of
the Common Stock remains at $.01 per share.

Preferred
Stock

The
Companys shareholders, at a special meeting of shareholders held on
January 7, 1998, authorized creation of 1,750,000 shares of preferred stock. The
Companys directors then designated 350,000 shares of preferred stock as
Series A Convertible Preferred Stock (Series A Preferred). Upon
authorization of the Series A Preferred, the $1,400,000 of outstanding Series A
Convertible Bonds were automatically converted into 350,000 Series A Units,
effective as of December 31, 1997. The Series A Preferred bears no
dividend, maintains a liquidation preference of $4.00 per share, votes as a
class on matters affecting the Series A Preferred and maintains voting rights
identical to the Common Stock on all other matters.

The
Companys shareholders, at a special meeting of shareholders held on
September 9, 1998, authorized creation of an additional 10,000,000 shares of
preferred stock. The Companys directors then designated 666,680 shares of
the 10,000,000 shares of newly authorized preferred stock as Series B
Convertible Preferred Stock (Series B Preferred). Upon authorization
of the Series B Preferred, $4,000,000 of outstanding Series B Convertible Bonds
were automatically converted into 666,880 Series B Units. The Series B Preferred
bears no dividend, maintains a liquidation preference of $6.00 per share, votes
as a class on matters affecting the Series B Preferred and maintains voting
rights identical to the Common Stock on all other matters.

The
Companys directors, on February 10, 2000, designated 795,457 shares of the
Companys non-designated preferred stock as Series C Convertible Preferred
Stock (Series C Preferred). The directors, on July 17, 2000,
designated an additional 437,878 shares of non-designated preferred stock as
Series C Preferred. The Series C Preferred is a component of the Companys
Series C Units described above under Convertible Bonds  Series C. The
Series C Preferred bears no dividend, maintains a liquidation preference of
$1.10 per share, votes as a class on matters affecting the Series C Preferred
and maintains voting rights identical to the Common Stock on all other matters.

10

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

The
Companys directors, on February 10, 2000, designated 592,597 shares of the
Companys non-designated preferred stock as Series D Convertible Preferred
Stock (Series D Preferred). The Series D Preferred is a component of
the Companys Series D Units described above under Convertible Bonds 
Series D. The Series D Preferred bears no dividend, maintains a liquidation
preference of $1.0125 per share, votes as a class on matters affecting the
Series D Preferred and maintains voting rights identical to the Common Stock on
all other matters.

Series E
Financing

On
August 11, 2000, the Company completed a private placement of its Series E Units
in which an aggregate of $500,000 was raised. The Series E Units each consist of
one share of Common Stock and one and one tenth Series E Warrants to purchase
one share of Common Sock at $0.85 per share (Series E Warrants). The
warrants will expire on July 18, 2005. The Company has agreed to file a
registration statement with the Securities and Exchange Commission relative to
the Common Stock component of the Units and the Common Stock issuable upon
exercise of the Series E Warrants. An additional 733,336 Series E Warrants were
issued in connection with the Series E Common Stock private placement.

Stock
Purchase Warrants

At June 30,
2001, the Company had 4,371,683 warrants outstanding and/or reserved for
issuance to purchase the Companys common stock as outlined below:

`Series       Number of Warrants      Exercise Price    Expiration Date
        ------       ------------------      --------------    ---------------

           A                 450,002              $4.50        November 15, 2001
           B                 666,672              $6.75        June 15, 2002
           E               2,200,009              $0.85        July 18, 2005
           F               1,045,000              $0.57        July 18, 2005
           Other              10,000             $15.63        August 2, 2001`

Other Equity
Transactions

In
March 2000, 83,334 shares of Series B Preferred Stock were converted into 83,334
shares of Common Stock. In January 2001, 57,000 shares of Common Stock were
issued as consideration for extending the maturity date of the Convertible
Bonds. In February 2001, a total of 229,169 shares of Series B, C and D
Preferred Stock were converted into 229,169 shares of Common Stock.

## 9.     Income Taxes

At December 31,
2000, the Company has net operating loss carryforwards of approximately
$7,100,000 for federal income tax purposes that begin to expire in years 2012
through 2020. For state income tax purposes, the Company has net operating loss
carryforwards of $7,100,000 that expire in years 2004 through 2010. During 1998
the Company had a change in control as defined by the Internal Revenue Code
Section 382. Consequently, certain limitations may apply to the timing and
amount of the utilization of such net operating loss carryforwards.

## 10.     Operating
Segments

The Company
consists of three operating segments, wound care, wound closure-fasteners and
skin care. Products in the wound care segment consist of dressings, ointments
and sprays designed to treat chronic wounds. Wound closure-fasteners products
include wound closure strips, a variety of catheter fasteners and net dressings.
The skin care segment consists of antibacterial skin cleansers, hair and body
soaps, lotions and moisturizers designed to enable customers to implement and
maintain successful skin care/hygiene programs.

Products
in all three operating segments are marketed to long-term care facilities,
hospitals, physicians, clinics, home health care agencies and other healthcare
institutions. The manufacture of wound care and wound closure-fastener products
is primarily outsourced. Skin care products are manufactured in-house.
Internally, the

11

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DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements (Unaudited)

---

segments are managed at the gross profit level. The aggregation
or allocation of other costs by segment is not practical.

Segment
sales and gross profit for the six months ended June 30, 2001 and 2000 are as
follows:

`Six Months Ended June 30, 2001
                                    ------------------------------

                             Wound Closure-                                  Total
                Wound Care     Fasteners     Skin Care     Other Costs      Company
                ----------    -----------    ----------    -----------    ----------

Sales           $1,411,439    $1,605,952     $1,735,475           ---     $4,752,866
                 ---------     ---------      ---------           ---      ---------

Gross profit     1,088,272       798,369        361,575           ---      2,248,216
Total expenses        ---           ---            ---     ($2,214,994)   (2,214,994)
Income taxes          ---           ---            ---          (3,029)       (3,029)
                                                                           ---------

Net income                                                                $   30,193
                                                                           =========


                                    Six Months Ended June 30, 2000
                                    -------------------------------

                             Wound Closure-                                  Total
                Wound Care     Fasteners     Skin Care     Other Costs      Company
                ----------    -----------    ----------    -----------    ----------


Sales           $1,292,392    $1,484,411     $1,874,817            ---   $ 4,651,620
                 ---------     ---------      ---------           -----    ---------

Gross profit       989,419       878,716        579,552            ---     2,447,687
Total expenses        ---           ---            ---      ($3,419,129)  (3,419,129)
Income taxes          ---           ---            ---             ---          ---
                                                                           ---------

Net loss                                                                ($   971,442)
                                                                          ==========`

With
the exception of goodwill associated with the acquisition of Sunshine Products,
Inc. (attributable to the skin care operations segment), the Companys
property, equipment and intangible assets support each of the Companys
operating segments in approximately equal measure. Accordingly, the Company does
not classify its assets by operating segment.

International
sales for the six months ended June 30 were $322,500 in 2001 and $239,500 in
2000. Wound closure-fastener sales represent the majority of international
sales.

12

---

## DERMA SCIENCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

## QUARTER ENDED JUNE 30, 2001 COMPARED TO QUARTER
ENDED JUNE 30, 2000.

## Results of Operations

Net
Sales increased $3,271 to $2,381,808 in the second quarter 2001 from $2,378,537
in the second quarter 2000. Gross profit margins declined to 48.7% in the second
quarter 2001 from 53.0% in the second quarter 2000. Operating expenses decreased
$363,002, or 24.6%, in the second quarter 2001 to $1,115,501 from $1,478,503 in
the second quarter 2000. Other expenses, net decreased $128,397 in the second
quarter 2001 to $20,417 from $148,814 in the second quarter 2000. Net income of
$21,004 was generated in the second quarter of 2001 versus a loss of $366,735 in
the second quarter 2000.

## Sales Overview

The
Companys sales are derived from its wound care, wound closure-fasteners
and skin care product lines. Wound care sales consist mainly of Dermagran
ointment and spray and hydrophilic wound dressings. Wound closure-fasteners
sales consist primarily of wound closure strips and catheter fasteners. Skin
care sales consist of body washes, shampoos, incontinent care products, skin
conditioners, disinfectants and deodorizers.

Gross Sales are
adjusted for trade rebates, cash discounts and Medicaid rebates to derive net
sales. Gross to net sales adjustments comprise the following:

`Quarter Ended June 30,
                                      ----------------------
                                     2001                2000
                                     ----                ----

Gross Sales                      $2,674,250          $2,709,209

Trade rebates                      (222,345)           (265,327)
Cash discounts                      (51,347)            (45,045)
Medicaid rebates                    (18,750)            (20,300)
                                    --------            --------

Net Sales                        $2,381,808          $2,378,537
                                 ==========          ==========`

Gross sales are
down slightly quarter to quarter, reflecting stronger wound care and wound
closure-fastener sales offset by lower skin care sales. Rebates are down
principally due to a reduction in rebate intensive skin care sales associated
with the loss of the Beverly supply contract in the second quarter, 2001.

The
following table presents net sales by product line expressed in dollars and
percentage change:

`Quarter Ended June 30,
                                  ----------------------
                                  2001              2000              Variance
                                  ----              ----              --------
Product Line

Wound care                    $  735,653       $  646,880     $   88,773      13.7%
Wound closure-fasteners          839,627          751,256         88,371      11.8%
Skin care                        806,528          980,401       (173,873)    (17.7%)
                               ---------        ---------      ----------

Total                         $2,381,808       $2,378,537     $    3,271       0.1%
                              ==========       ==========     ==========`

Net
Sales were essentially flat for the second quarter, 2001, increasing $3,271 over
the prior year. The wound care and wound closure-fastener lines exhibited strong
growth while the skin care line was down

13

---

significantly. Wound care sales
increased $88,773, or 13.7%, due to the continued success of the Companys
clinical education programs. Wound closure-fastener sales increased $88,371, or
11.8%, due to stronger Percu-Stay sales. Skin care sales decreased $173,873, or
17.7%, due principally to expiration of the Beverly supply agreement discussed
above.

## Net Sales, Cost of Sales and Gross
Profit

The Company's
net sales, cost of sales, gross profit and gross profit margins for the second
quarter of 2001 and 2000 are outlined in the table below:

`Quarter Ended June 30,
                                ----------------------
                          2001                     2000                  Variance
                 -------------------      --------------------     -------------------

Net sales        $2,381,808   100.0%     $2,378,537    100.0%      $    3,271     0.1%
Cost of sales     1,222,871    51.3%      1,117,955     47.0%      (  104,916)   (9.4%)
                  ---------    -----      ---------     -----      -----------

Gross profit     $1,158,937    48.7%     $1,260,582     53.0%       ($101,645)   (8.1%)
                 ==========    =====     ==========     =====       ==========`

Gross
Profit decreased $101,645, or 8.1% to $1,158,937 in the second quarter 2001 from
$1,260,582 in the second quarter 2000. Gross profit margins decreased to 48.7%
in the second quarter 2001 from 53.0% in the second quarter 2000. Ongoing price
erosion in a competitive marketplace and year-on-year product cost increases
were contributing factors. The reclassification of certain skin care line
operating expenses to cost of sales in 2001 also contributed. In July 2000, the
Company granted a third party the exclusive right to market the Percu-Stay line
of catheter fasteners to hospitals. The impact of this agreement was increased
unit sales volume, albeit at lower prices (versus direct Company sales). While
positively impacting profitability, the distribution agreement has adversely
impacted the wound care-fastener line and the Companys overall gross
profit margin.

## Operating Expenses

Operating
expenses decreased $363,002, or 24.6%, to $1,115,501 in the second quarter 2001
from $1,476,503 in the second quarter 2000. A summary of selling, marketing and
general administrative expenses for the second quarter 2001 and 2000 are
outlined in the table below.

`Quarter Ended June 30,
                             ----------------------
                               2001           2000                 Variance
                               ----           ----          ----------------------

Selling                    $  363,949     $  659,975        ($296,026)     (44.9%)
Marketing                     131,166        212,638        (  81,472)     (38.3%)
General Administrative        620,386        605,890           14,496        2.4%
                           ----------     ----------        ----------

         Total             $1,115,501     $1,478,503        ($363,002)     (24.6%)
                           ==========     ==========        ==========`

Restructuring
of the sales and marketing operations, together with implementation of
company-wide cost reduction initiatives beginning in the second quarter 2000,
are primarily responsible for the decrease. The increase in general
administrative expense is due to re-establishment of the headquarters
administrative staff.

## Other Expenses

Other
expense decreased $128,397 to $20,417 in the second quarter 2001 from $148,814
in the second quarter 2000. The decrease is attributable to lower interest
expense of $105,699 and higher miscellaneous income of $22,698. The lower
interest expense reflects the absence in 2001 of $116,534 of debt refinancing
expense incurred in the second quarter 2000 associated with the beneficial
conversion and other consideration granted upon issuance of the Series C and D
convertible bonds, coupled with lower overall outstanding 2001 note payable and
convertible bond balances at lower overall interest rates. These reductions were
partially offset by $40,000 of

14

---

incremental interest associated with amortizing the
consideration granted in 2001 to extend the maturity date of the convertible
bonds. Included in other miscellaneous income is a one-time $12,500 Medicaid
adjustment together with recurring profit sharing and royalty income.

## Provision for Income Taxes

A provision for
federal and state income taxes of $2,015 was established in the second quarter
2001. The provision is at less than statutory rates given available net
operating losses.

## Net Income

The
Company generated net income of $21,004, or $0.00 per share (basic), for the
quarter ended June 30, 2001 compared to a net loss of $366,735, or $0.26 per
share (basic), for the quarter ended June 30, 2000.

## SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX
MONTHS ENDED JUNE 30, 2000.

## Results of Operations

Net Sales
increased $101,246, or 2.2%, to $4,752,866 in the six months ended June 2001
from $4,651,620 in the six months ended June 2000. Gross profit margins declined
to 47.3% in the six months ended June 2001 from 52.6% in the six months ended
June 2000. Operating expenses decreased $818,625, or 27.6%, in the six months
ended June 2001 to $2,147,480 from $2,966,105 in the six months ended June 2000.
Other expense decreased $385,510 in the six months ended June 2001 to $67,514
from $453,024 in the six months ended June 2000. Net income of $30,193 was
generated in the six months ended June 2001 versus a net loss of $971,442 in the
six months ended June 2000.

## Sales Overview

Gross Sales are
adjusted for trade rebates, cash discounts and Medicaid rebates to derive net
sales. Gross to net sales adjustments comprise the following:

`Six Months Ended June 30,
                                    -------------------------
                                     2001                2000
                                     ----                ----

Gross Sales                      $5,357,897          $5,281,350

Trade rebates                      (462,256)           (497,390)
Cash discounts                     (105,275)            (89,093)
Medicaid rebates                    (37,500)            (43,247)
                                    --------            --------

Net Sales                        $4,752,866          $4,651,620
                                 ==========          ==========`

Gross
Sales increased in 2001 versus 2000 reflecting consistently stronger wound care
and wound closure-fastener sales offset by lower skin care sales beginning in
the second quarter associated with the loss of the Beverly supply agreement.
Rebates are down slightly due to the loss of the aforementioned rebate intensive
Beverly skin care sales. Cash discounts are up due to more customers taking
advantage of the terms. While Medicaid sales are improving, rebates are down
period to period due to lower sales.

15

---

The
following table presents net sales by product line expressed in dollars and
percentage change:

`Six Months Ended June 30,
                                 -------------------------
                                  2001              2000              Variance
                                  ----              ----              --------
Product Line

Wound care                     $1,411,439       $1,292,392       $119,047    9.2%
Wound closure-fasteners         1,605,952        1,484,411        121,541    8.2%
Skin care                       1,735,475        1,874,817       (139,342)  (7.4%)
                                ---------        ---------       ---------

Total                          $4,752,866       $4,651,620       $101,246    2.2%
                               ==========       ==========       ========`

Net
Sales increased $101,246, or 2.2%, in the first six months of 2001 versus 2000.
Wound care sales increased $119,047, or 9.2%, due principally to accelerating
momentum created by the Companys clinical education program. Wound
closure-fastener sales driven by Percu-Stay was up $121,541, or 8.2%. Excluding
Percu-Stay sales, wound closure-fastener sales are up slightly over the prior
year. Skin care sales are down $139,342, or 7.4%, versus the prior year. The
decrease which began in the second quarter with a $173,873 shortfall, is
principally associated with the loss of the Beverly supply agreement effective
May 31, 2001. To a lesser extent, skin care sales have been adversely impacted
by supply interruptions experienced late last year that were not fully corrected
until the first quarter of 2001.

## Net Sales, Cost of Sales and Gross
Profit

The Company's net
sales, cost of sales, gross profit and gross profit margins for the six months
ended 2001 and 2000 are outlined in the table below:

`Six Months Ended June 30,
                              --------------------------
                            2001                      2000                   Variance
                   -------------------    ----------------------       -------------------

Net sales         $4,752,866    100.0%     $4,651,620     100.0%        $101,246      2.2%
Cost of sales      2,504,650     52.7%      2,203,933      47.4%        (300,717)   (13.6%)
                   ----------    -----      ---------      -----        ---------

Gross profit      $2,248,216     47.3%     $2,447,687      52.6%       ($199,471)    (8.1%)
                  ==========     =====     ==========      =====       ==========`

Gross profit
decreased $199,471, or 8.1%, to $2,248,216 in the first six months of 2001 from
$2,447,687 in the first six months of 2000. Gross profit margins decreased to
47.3% in the first six months of 2001 from 52.6% in the first six months of
2000. Ongoing price erosion in a competitive marketplace and year-on-year
product cost increases were contributing factors. The reclassification of
certain skin care line operating expenses to cost of sales in 2001 also
contributed. In July 2000, the company granted a third party the exclusive right
to market the Percu-Stay line of catheter fasteners to hospitals. The impact of
this agreement was increased unit sales volume, albeit at lower prices (versus
direct Company sales). While positively impacting profitability, the
distribution agreement has adversely impacted the wound care-fastener line and
the companys overall gross profit margin.

16

---

## Operating Expenses

Operating
expenses decreased $818,625, or 27.6%, to $2,147,480 in the first six months of
2001 from $2,966,105 in the first six months of 2000. A summary of selling,
marketing and general administrative expenses for the first six months of 2001
and 2000 are outlined in the table below.

`Six Months Ended June 30,
                              -------------------------
                                2001              2000                Variance
                                ----              ----         --------------------

Selling                   $   744,594         $1,446,797      ($702,203)    (48.5%)
Marketing                     194,960            398,582       (203,622)    (51.1%)
General Administrative      1,207,926          1,120,726         87,200       7.8%
                            ---------          ---------      ----------

         Total             $2,147,480         $2,966,105      ($818,625)    (27.6%)
                           ==========         ==========      ==========`

Restructuring
of the sales and marketing operations, together with implementation of
company-wide cost reduction initiatives beginning in the second quarter 2000,
are primarily responsible for the decrease. The increase in general
administrative expense is principally due to re-establishment of the
headquarters administrative staff.

## Other Expenses

Other
expenses decreased $385,510 to $67,514 in the first six months of 2001 from
$453,024 in the first six months of 2000. The decrease reflects lower interest
expense of $360,887 together with incremental miscellaneous income of $24,623.
The lower interest expense reflects the absence in 2001 of $392,821 of debt
financing expense incurred in 2000 associated with the beneficial conversion and
other consideration granted upon issuance of the Series C and D convertible
bonds, coupled with lower overall outstanding 2001 note payable and convertible
bond balances at lower interest rates. These reductions were partially offset by
$80,000 of interest associated with amortizing the consideration granted in 2001
to extend the maturity date of the convertible bonds. Miscellaneous income
includes a one-time $12,500 Medicaid adjustment together with recurring profit
sharing and royalty income.

## Provision for Income Taxes

A
provision for federal and state income taxes of $3,029 has been established in
the first six months of 2001 coincident with the Companys return to
profitability. The provision is at less than corresponding statutory rates given
available net operating losses.

## Net Income

The
Company generated net income of $30,193, or $0.01 per share (basic), for the
first six months of 2001 compared to a net loss of $971,442, or $0.69 per share
(basic), for the first six months of 2000.

## Liquidity and Capital Resources

Operating
results for the second quarter and six months ended June 2001 versus the
corresponding periods last year are positive. Sales are up, operating expenses
are down, cash flow is positive and the Company has achieved two consecutive
quarters of profitability.

Second
quarter 2001 sales are essentially even with the first quarter of 2001. Wound
care sales exhibited good growth quarter to quarter. Wound closure-fastener
sales were up due to strong Percu-Stay sales. Skin care sales were down 15%
quarter to quarter due principally to the loss of Beverly sales. Gross margin
dollars and percentage improved in the second quarter versus the first quarter
based upon a favorable sales mix. Higher margined wound care sales growth, and
the decrease in lower margined skin care sales are responsible. Operating
expenses increased 8% in the second quarter over the first quarter. This
increase is primarily due to increases in

17

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marketing expenses in the second
quarter 2001 versus 2000. General administrative expenses were up in the second
quarter 2000 due to seasonal annual meeting expenses coupled with higher
regulatory costs and professional service expenses. Other expense was lower in
the second quarter, benefiting from several miscellaneous income items and lower
overall interest rates.

At
June 30, 2001 and December 31, 2000, the Company had unrestricted cash and cash
equivalents on hand of $499,455 and $424,165, respectively. Cash of $104,319 was
provided by operations in the first six months of 2001 versus $793,186 of cash
used to fund operating activities in the first six months of 2000. The
Companys return to profitability and a significant improvement in the
accounts receivable aging are principally responsible for the cash flow
improvement. Excluding a reclassification of $395,000 of convertible bonds from
long term to current, working capital improved $185,084, or 10%, to $2,050,166
at June 30, 2001 versus $1,865,082 at December 31, 2000.

In
July, 2001 the Company determined that its financial statements for the years
2000 and 1999 had to be restated to recognize certain beneficial conversion and
consideration associated with the Series C and Series D convertible bonds. The
profit and loss impact of the restatement for the six months ended June 30, 2000
was a charge to interest expense of $392,821. Given that this is a non-cash
charge, the restatement is not expected to have an adverse impact on the
Companys liquidity.

In
February 2001, the Company was notified by Beverly Enterprises, Inc., a large
nursing home chain, that it had declined to exercise its option to renew its
exclusive sales contract for the purchase of the Companys skin care line
of products. The term of the contract was from June 1, 1999 through May 31,
2001. Sales attributable to the Beverly contract were approximately $1,250,000
in 2000 and represented approximately 13% of the Companys 2000 sales. Due
to aggressive pricing and non-recurring start up costs, net profits derived from
the Beverly contract have been minimal. While non-renewal of the contract will
adversely impact sales beginning in the second quarter of 2001, no near term
adverse impact on profitability is expected.

As of January 5,
2001, bondholders owning an aggregate of $475,000 of the Companys Series C
and Series D convertible bonds extended the maturity date of the bonds one year
to January 7, 2002 in return for non-cash consideration valued at $160,000. This
$160,000 of debt refinancing costs was recorded as bond discount and is being
amortized to interest expense over the one year maturity extension. Through June
30, 2001, $80,000 of bond discount has been amortized to interest expense. Prior
to the bonds current maturity date, the Company expects to either retire
the bonds, secure their conversion to equity, or secure a long-term extension of
the bonds maturity date.

The
Common Stock of the company is traded on the OTC Bulletin Board under the symbol
DSCI.OB. The Common Stock is also traded on the Boston and Pacific
Stock Exchanges under the symbol DMS. The Company has paid no cash
dividends in respect of its Common Stock and does not intend to pay cash
dividends in the near future.

## Forward Looking Statements

Statements
that are not historical facts, including statements about the Companys
confidence, strategies, expectations about new or existing products,
technologies, 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 risk, impact of competitive products and prices, product development,
commercialization or technological delays or difficulties, and trade, legal,
social, financial and economic risks.

18

---

# Part II - Other Information

## Item 1.   Legal
Proceedings

None

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

(a) 
Exhibits.  All exhibits required by Item 601 of Regulation S-B and
required hereunder, as filed with the Securities and Exchange Commission in Form
10-KSB/A-1 on August 10, 2001, are incorporated herein by reference.

(b) 
Reports on Form 8-K.  Form 8-K was filed June 1, 2001 relative to the
execution of executive employment agreements with the registrant's president and
chief executive officer and vice president and chief financial officer.

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: August 14, 2001 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Vice President and Chief Financial
     Officer

19

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