---

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
     
     March 31, 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: March 31, 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 - March 31, 2001 and
     December 31, 2000                                        | 2 
|        |                                                                                                   |   
|        | Statements of Operations - Three
     months ended March 31, 2001and March 31, 2000               | 3 
|        |                                                                                                   |   
|        | Statements of Cash Flows - Three months
     ended March 31, 2001and March 31, 2000               | 4 
|        |                                                                                                   |   
|        | Notes to Consolidated Financial
     Statements                                                   | 5 
|        |                                                                                                   |   
|Item 2. | Management's Discussion and Analysis of
     Financial Condition
       and Results of Operations | 11
|        |                                                                                                   |   

Part II - Other Information

|Item 1. | Legal Proceedings                | 14
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 14
|        |                                  |   

1

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DERMA SCIENCES, INC.Consolidated Balance Sheets

`====================================================================================================
                                                                      March 31,     December 31,
ASSETS                                                                  2001           2000
----------------------------------------------------------------------------------------------------

Current Assets
Cash and cash equivalents, including restricted cash of
  $589,229 in 2001 and $640,000 in 2000                              $ 1,094,442     $ 1,064,165
Accounts receivable, net                                               1,209,185       1,561,633
Inventories, net                                                       1,351,792       1,282,370
Prepaid expenses and other current assets                                163,871          75,916
----------------------------------------------------------------------------------------------------
Total current assets                                                   3,819,290       3,984,084

Property and equipment, net                                              204,828         204,029
Deferred financing costs                                                 120,000           -
Goodwill and other intangibles, net                                    1,361,577       1,392,495
----------------------------------------------------------------------------------------------------
Total Assets                                                         $ 5,505,695     $ 5,580,608
----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------
Current Liabilities
Bank line of credit                                                      589,229     $   640,000
Accounts payable                                                         909,632         977,080
Accrued expenses and other current liabilities                           374,039         501,922
Convertible bonds                                                        475,000           -
----------------------------------------------------------------------------------------------------
Total current liabilities                                              2,347,900       2,119,002
----------------------------------------------------------------------------------------------------
Long-term liabilities
  Convertible bonds                                                         -            475,000
----------------------------------------------------------------------------------------------------
Total Liabilities                                                      2,347,900       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                                            12,291,800      12,130,370
Accumulated deficit                                                   (9,177,676)     (9,186,865)
----------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                             3,157,795       2,986,606
----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                           $ 5,505,695     $ 5,580,608
====================================================================================================`

See accompanying notes.

2

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DERMA SCIENCES, INC.Consolidated Statement of Operations

`==========================================================================================================
                                                                                  Three months ended
                                                                                       March 31,
                                                                                2001             2000
----------------------------------------------------------------------------------------------------------
Net sales                                                                   $ 2,371,058     $ 2,273,083

Cost of sales                                                                 1,281,779       1,085,978
----------------------------------------------------------------------------------------------------------
Gross Profit                                                                  1,089,279       1,187,105
----------------------------------------------------------------------------------------------------------
Operating expenses                                                            1,031,979       1,487,602
Other expense, net                                                               48,111          27,923
----------------------------------------------------------------------------------------------------------
Total Expenses                                                                1,080,090       1,515,525
----------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                                   9,189        (328,420)
Provision for income taxes                                                        -               -
----------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                           $     9,189     $  (328,420)
----------------------------------------------------------------------------------------------------------

Income (loss) per common share - basic                                      $      0.00     $     (0.23)
----------------------------------------------------------------------------------------------------------
Income (loss) per common share - fully diluted                              $      0.00     $     (0.23)
----------------------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common share - basic               2,330,719       1,409,272
----------------------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common share - fully diluted      10,172,237       1,409,272
==========================================================================================================`

See accompanying notes.

3

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DERMA SCIENCES, INC.Consolidated Statement of Cash Flows

`====================================================================================================
                                                                             Three months ended
                                                                                   March 31,
                                                                            2001              2000
----------------------------------------------------------------------------------------------------
Operating Activities
  Net income (loss)                                                   $    9,189      $ (328,420)
  Adjustments to reconcile net income (loss) to
    net cash used in operating activities:
     Depreciation and amortization                                        90,270          61,180
     Provision for bad debts and rebates                                  25,496          27,000
     Provision for inventory obsolescence                                 20,609           -
     Changes in operating assets and liabilities
         Accounts receivable                                             326,953          16,357
         Inventories                                                     (90,031)       (183,074)
         Prepaid expenses and other current assets                       (87,955)        (76,620)
         Deferred financing costs                                       (160,000)          -
         Accounts payable                                                (65,449)         42,097
         Accrued expenses and other current liabilities                 (127,883)        (53,843)
----------------------------------------------------------------------------------------------------
Net cash used in operating activities                                    (58,801)       (495,323)
----------------------------------------------------------------------------------------------------
Investing Activities
  Purchases of property and equipment                                    (20,151)         (8,290)
----------------------------------------------------------------------------------------------------
Net cash used in investing activities                                    (20,151)         (8,290)
----------------------------------------------------------------------------------------------------
Financing Activities
  Net change in bank line of credit                                      (50,771)        260,000
  Proceeds from issuance of convertible securities                         -             150,000
  Equity issued in payment of debt refinancing                           160,000          -
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                109,229        410,000
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                      30,277        (93,613)

Cash and cash equivalents
  Beginning of period                                                  1,064,165       1,221,691
----------------------------------------------------------------------------------------------------
  End of period                                                       $1,094,442      $1,128,078
----------------------------------------------------------------------------------------------------

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.

4

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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, would 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.

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 month period ended March 31, 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 filed with
the Securities and Exchange Commission.

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.

5

---

Goodwill
and Other Intangible Assets - Goodwill and other intangible assets 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.

## 2.     Accounts
Receivable

Accounts
receivable comprise the following:

`March 31,         December 31,
                                                      2001               2000
                                                  -----------      ---------------

        Trade accounts receivable                 $1,538,177           $1,725,001
        Less:  Allowance for doubtful accounts
                    and trade rebates               (348,979)            (310,000)
                                                   ----------          -----------
           Net trade receivables                   1,189,198            1,415,001
        Other receivables                             19,987              146,632
                                                  -----------          -----------

           Total receivables                      $1,209,185           $1,561,633
                                                  ===========          ===========`

## 3.     Inventories

Inventories
comprise the following:

`March 31,        December 31,
                                                       2001              2000
                                                   -----------      --------------

        Finished goods                             $  984,537         $   919,872
        Packaging materials                           176,338             309,245
        Raw materials                                 350,917             201,253
                                                   -----------         -----------
           Gross inventory                          1,511,792           1,430,370
        Less:  Reserve for obsolescence              (160,000)           (148,000)
                                                  ------------        ------------

             Net inventory                         $1,351,792          $1,282,370
                                                   ===========         ===========`

## 4.     Property and
Equipment

Property and
equipment comprise the following:

`March 31,        December 31,
                                                       2001              2000
                                                   -----------      --------------

        Machinery and equipment                    $  340,987           $ 320,836
        Furniture and fixtures                        668,336             668,336
                                                   -----------          ----------
             Gross property and equipment           1,009,323             989,172
        Less:  Accumulated depreciation              (804,495)           (785,143)
                                                   -----------          ----------

             Net property and equipment            $  204,828           $ 204,029
                                                   ===========          ==========`

6

---

## 5.     Goodwill and Other
Intangibles

Goodwill and
other intangibles comprise the following:

`March 31,        December 31,
                                                           2001              2000
                                                       -----------      --------------

        Goodwill                                       $1,497,364          $1,497,364
        Patents and trademarks                            451,417             451,417
                                                       -----------         -----------
             Gross goodwill and other intangibles       1,948,781           1,948,781
        Less:  Accumulated amortization                  (587,204)           (556,286)
                                                      ------------         -----------

             Net goodwill and other intangibles        $1,361,577          $1,392,495
                                                       ===========         ===========`

## 6.     Bank Line of
Credit

The
Company has a $1,000,000 bank line of credit facility with $589,229 and $640,000
outstanding at March 31, 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 7.0% at March 31, 2001. Cash
deposited with the bank of $1,000,000 secures the line of credit.

Unrestricted
cash of $505,213 and $424,165 was available for working capital at March 31,
2001 and December 31, 2000, respectively.

## 7.     Convertible
Bonds

Convertible
bonds comprise the following:

`March 31,          December 31,
                                                       2001                2000
                                                    ---------           ---------

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

             Total convertible bonds                 $475,000            $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

7

---

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.

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 deferred financing costs which will be amortized 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 

8

---

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.

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 March 31,
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

Given the
Company's available net operating loss carryforwards, no provision for income
taxes has been made in the first quarter of 2001.

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.

9

---

## 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, nasal tube fasteners, 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 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 three months ended March 31, 2001 and 2000 are as
follows:

`Three Months Ended March 31, 2001
                                   ---------------------------------

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

Sales             $675,786       $766,325      $928,947           ---    $ 2,371,058
                   -------        -------       -------           ---      ---------

Gross profit       529,426        394,313       165,540           ---      1,089,279
Other costs           ---            ---           ---     ($1,080,090)   (1,080,090)
                                                                          -----------

Net income                                                               $     9,189
                                                                         ============



                                   Three Months Ended March 31, 2001
                                   ---------------------------------

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

Sales             $645,512       $733,155      $894,416           ---    $ 2,273,083
                   -------        -------       -------           ---      ---------

Gross profit       506,704        442,126       238,275           ---      1,187,105
Other costs           ---            ---           ---     ($1,515,525)   (1,515,525)
                                                                          -----------

Net loss                                                                ($   328,420)
                                                                        =============`

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.

First quarter
international sales were $115,000 in 2001 and $85,000 in 2000. Wound
closure-fastener sales represent the majority of international sales.

10

---

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

QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED MARCH
31, 2000.

Results of Operations

Net Sales
increased $97,975, or 4.3%, to $2,371,058 in the first quarter 2001 from
$2,273,083 in the first quarter 2000. Gross profit margins declined to 45.9% in
the first quarter 2001 from 52.2% in the first quarter 2000. Operating expenses
decreased $455,623, or 30.6%, in the first quarter 2001 to $1,031,979 from
$1,487,602 in the first quarter 2000. Other expense increased $20,188 in the
first quarter of 2001 to $48,111 from $27,923 in the first quarter 2000. Net
income of $9,189 was generated in the first quarter of 2001 versus a net loss of
$328,420 in the first 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 March 31,
                                     ------------------------
                                     2001                2000
                                     ----                ----

Gross Sales                      $2,683,647          $2,572,141

Trade rebates                      (239,911)           (232,063)
Cash discounts                      (53,928)            (44,048)
Medicaid rebates                    (18,750)            (22,947)
                                    --------            --------

Net Sales                        $2,371,058          $2,273,083
                                 ==========          ==========`

No significant
change in trade rebate activity was realized in the first quarter 2001 versus
2000. Cash discounts increased slightly due to more customers taking advantage
of discount terms. Medicaid rebates declined due to lower sales and declining
prices.

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

`Quarter Ended March 31,
                                     -----------------------
     Product Line                    2001               2000               Variance
                                     ----               ----               --------

Wound care                      $   675,786        $   645,512        $30,274         4.7%
Wound closure-fasteners             766,325            733,155         33,170         4.5%
Skin Care                           928,947            894,416         34,531         3.9%
                                 ----------         ----------         ------

Total                            $2,371,058         $2,273,083        $97,975         4.3%
                                 ==========         ==========        =======`

Net Sales
increased $97,975, or 4.3%, in the first quarter 2001 versus 2000. All three
lines experienced sales increases. Wound Care sales increased $30,274, or 4.7%,
due principally to momentum created by the

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Companys clinical educational program initiated in the
quarter. Wound closure-fasteners sales increased $33,170, or 4.5%, on the basis
of stronger Percu-Stay sales. Skin care sales increased $34,531, or 3.9%, based
on stronger body wash and shampoo sales.

Net Sales,
Cost of Sales and Gross Profit

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

`Quarter Ended March 31,
                              -----------------------
                           2001                     2000                    Variance
                  --------------------     --------------------      ----------------------

Net sales         $2,371,058    100.0%     $2,273,083    100.0%       $  97,975       4.3%
Cost of sales      1,281,779     54.1%      1,085,978     47.8%      (  195,801)    (18.0%)
                    ---------    -----      ---------     -----      -----------

Gross profit      $1,089,279     45.9%     $1,187,105     52.2%      ($  97,826)     (8.2%)
                  ==========     =====     ==========     =====      ===========`

Gross profit
decreased $97,826, or 8.2%, to $1,089,279 in the first quarter 2001 from
$1,187,105 in the first quarter 2000. Gross profit margins decreased to 45.9% in
the first quarter 2001 from 52.2% in the first quarter 2000. Ongoing price
erosion in a competitive market place 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 Companys
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 $455,623, or 30.6%, to $1,031,979 in the first quarter 2001
from $1,487,602 in the first quarter 2000. A summary of selling, marketing and
general administrative expenses for the first quarter 2001 and 2000 are outlined
in the table below.

`Quarter Ended March 31,
                                        ------------------------
                                        2001                2000                Variance
                                        ----                ----       -------------------------

Selling                           $   380,645        $   786,822        ($406,177)       (51.6%)
Marketing                              63,794            185,944        ( 122,150)       (65.7%)
General Administrative                587,540            514,836           72,704         14.1%
                                   ----------         ----------        ---------

         Total                     $1,031,979         $1,487,602        ($455,623)       (30.6%)
                                   ==========         ==========        ==========`

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 reclassification of certain skin
care line operating expenses to cost of sales in 2001 and lower than planned
first quarter 2001 spending, also contributed. The increase in general
administrative expense is due to re-establishment of the headquarters accounting
and finance staff.

Other
Expense

Other
expense increased $20,188 to $48,111 in the first quarter 2001 from $27,923 in
the first quarter 2000. Other expense consists primarily of interest income on
the investment account balance together with interest expense associated with
the bank line of credit note payable and the convertible bonds. Other expense
increased in the first quarter 2001 versus the first quarter 2000 due to $40,000
of incremental interest expense associated with

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amortizing the consideration granted to extend the maturity date
of the convertible bonds partially offset by lower note payable interest in the
first quarter of 2001 associated with a lower average note payable outstanding
balance.

Net Income
(Loss)

The
Company generated net income of $9,189, or $0.00 per share (basic), for the
quarter ended March 31, 2001 compared to a net loss of $328,420, or $0.23 per
share (basic), for the quarter ended March 31, 2000.

Liquidity and
Capital Resources

During
2000, the Company implemented steps to improve operating results and cash flow.
Consistent with this plan, operating results for the first quarter 2001 versus
the first quarter 2000 are positive. Sales are up, operating expenses are down,
cash flow is positive and the Company returned to profitability.

At
March 31, 2001 and 2000, the Company had unrestricted cash and cash equivalents
on hand of $505,213 and $218,078, respectively. Cash of $58,801 was used in
operating activities in the first quarter 2001 versus $495,323 of cash used in
operating activities in the first quarter 2000. Working capital improved $58,126
in the first quarter 2001 to $1,471,390 from $1,413,264 in the first quarter
2000.

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
effect of the foregoing consideration was to increase the number of Series C
Units and Series D Units obtainable upon conversion of the Series C and Series D
Convertible Bonds from 33,334 to 50,000 and from 600,000 to 900,000,
respectively. In addition, the overall number of warrants issued upon conversion
or payment of the bonds increased from 633,334 to 1,045,000.

In
connection with this transaction, the Company has recorded $160,000 of deferred
financing costs. The financing costs are being amortized to interest expense
over the one-year bond maturity extension. In the first quarter of 2001, $40,000
of interest expense was recorded.

In
February 2001, shareholders converted a total of 229,169 shares of Series B, C,
and D Preferred Stock into 229,169 shares of Common Stock.

During
the quarter ended March 31, 2000, the Company received $150,000 to complete its
Series D Convertible Bond subscription. Subsequently, $625,000 of Convertible
Bonds were converted into 580,333 shares of Preferred Stock and warrants to
purchase 580,333 shares of Common Stock. In addition, 83,334 shares of Series B
Preferred Stock were converted into 83,334 shares of Common Stock.

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 contact for the purchase of the Companys skin care line of
products. The term of the contract runs 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.

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.

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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.

# 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
on March 30, 2001, are incorporated herein by reference.

(b) Reports
on Form 8-K.Forms 8-K were filed on March 19, 2001 relative to postponement
of the maturities of the Series C and Series D Convertible Bonds, and on March
27, 2001 relative to the termination of the distribution agreement with Beverly
Enterprises, Inc.

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 15, 2001 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial Officer

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