---

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
     
     September 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: September 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 - September 30, 2001
     and December 31, 2000                                    | 2 
|        |                                                                                                   |   
|        | Statements of Operations - Three
     months ended September 30, 2001and September 30,
     2000  | 3 
|        |                                                                                                   |   
|        | Statements of Operations - Nine months
     ended September 30, 2001and September 30, 2000        | 4 
|        |                                                                                                   |   
|        | Statements of Cash Flows - Nine months
     ended September 30, 2001and September 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)

`===========================================================================================
                                                              September 30,    December 31,
ASSETS                                                             2001            2000
-------------------------------------------------------------------------------------------
                                                                                (Restated)
Current Assets
  Cash and cash equivalents                                   $    556,395    $    424,165
  Restricted cash                                                  580,455         640,000
  Accounts receivable, net                                       1,011,681       1,561,633
  Inventories, net                                               1,165,032       1,282,370
  Prepaid expenses and other current assets                        118,605          75,916
-------------------------------------------------------------------------------------------
Total current assets                                             3,432,168       3,984,084

Property and equipment, net                                        183,638         204,029
Goodwill, patents and trademarks                                 1,299,741       1,392,495
-------------------------------------------------------------------------------------------
Total Assets                                                  $  4,915,547    $  5,580,608
-------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------
Current Liabilities
  Bank line of credit                                         $    580,455    $    640,000
  Accounts payable                                                 303,393         977,080
  Accrued expenses and other current liabilities                   389,006         501,922
  Convertible bonds, net of bond discount                          435,000
-------------------------------------------------------------------------------------------
Total current liabilities                                        1,707,854       2,119,002
-------------------------------------------------------------------------------------------
Long-term liabilities
  Convertible bonds                                                  -             475,000
-------------------------------------------------------------------------------------------
Total Liabilities                                                1,707,854       2,594,002
-------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares 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                                      13,987,882      13,866,849
Accumulated deficit                                            (10,823,860)    (10,923,344)
-------------------------------------------------------------------------------------------
Total Shareholders' Equity                                       3,207,693       2,986,606
-------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                    $  4,915,547    $  5,580,608
===========================================================================================`

See accompanying notes.

2

---

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

`==========================================================================================
                                                                   Three months ended
                                                                      September 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)
NET SALES                                                     $ 2,090,486     $ 2,358,399

Cost of sales                                                   1,004,616       1,198,799
------------------------------------------------------------------------------------------
GROSS PROFIT                                                    1,085,870       1,159,600
------------------------------------------------------------------------------------------
Operating expenses                                                982,545       1,389,206
Other expense, net (including interest expense of $56,289
  and $668,243 in 2001 and 2000)                                   25,063         650,083
------------------------------------------------------------------------------------------
TOTAL EXPENSES                                                  1,007,608       2,039,289
------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                    78,262        (879,689)
Provision for income taxes                                          8,971           -
------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                             $    69,291     $  (879,689)

------------------------------------------------------------------------------------------
Income (loss) per common share - basic                        $      0.03     $     (0.42)
------------------------------------------------------------------------------------------
Income (loss) per common share - fully diluted                $      0.02     $     (0.42)
--------------------------------------------------------------------------- ----------------
Shares used in computing income (loss) per common
  share - basic                                                 2,407,109       2,075,940
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - fully diluted                                         4,445,805       2,075,940
==========================================================================================`

See accompanying notes.

3

---

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

`==========================================================================================
                                                                   Nine months ended
                                                                      September 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)

NET SALES                                                     $ 6,843,352     $ 7,010,019

Cost of sales                                                   3,509,266       3,402,732
------------------------------------------------------------------------------------------
GROSS PROFIT                                                    3,334,086       3,607,287
------------------------------------------------------------------------------------------
Operating expenses                                              3,130,025       4,355,311
Other expense, net (including interest expense of $180,791
  and $1,152,429 in 2001 and 2000)                                 92,577       1,103,107
------------------------------------------------------------------------------------------
TOTAL EXPENSES                                                  3,222,602       5,458,418
------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                   111,484      (1,851,131)
Provision for income taxes                                         12,000           -
------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                             $    99,484     $(1,851,131)
------------------------------------------------------------------------------------------

Income (loss) per common share - basic                        $      0.04     $     (1.15)
------------------------------------------------------------------------------------------
Income (loss) per common share - fully diluted                $      0.02     $     (1.15)
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - basic                                                 2,381,646       1,612,976
------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common
  share - fully diluted                                         4,398,341       1,612,976
==========================================================================================`

See accompanying notes.

4

---

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

`==========================================================================================
                                                                   Nine months ended
                                                                      September 30,
                                                                  2001            2000
------------------------------------------------------------------------------------------
                                                                               (Restated)
OPERATING ACTIVITIES
  Net income (loss)                                           $ 99,484        $(1,851,131)
  Adjustments to reconcile net income (loss) to
    net cash used in operating activities:
      Depreciation and amortization                            150,032            214,683
      Non-cash financing costs                                 120,000          1,031,367
      Provision for bad debts and rebates                       76,326            100,000
      Provision for inventory obsolescence                      57,308              -
      Changes in operating assets and liabilities
        Restricted cash                                         59,545             10,000
        Accounts receivable                                    473,626            173,699
        Inventories                                             60,030            133,356
        Prepaid expenses and other current assets              (42,689)          (197,767)
        Accounts payable                                      (673,687)          (326,690)
        Accrued expenses and other current liabilities        (112,916)           170,708
------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities             267,059          (541,775)
------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
  Purchases of property and equipment                          (36,887)           (12,764)
------------------------------------------------------------------------------------------
Net cash used in investing activities                          (36,887)           (12,764)
------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
  Net change in bank line of credit                            (59,545)           (10,000)
  Proceeds from issuance of convertible securities               -                150,000
  Proceeds from the issuance of stock, net of issuance costs   (38,397)           381,396
------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities            (97,942)           521,396
------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           132,230            (33,143)

Cash and cash equivalents
  Beginning of period                                          424,165            571,691
------------------------------------------------------------------------------------------
  End of period                                               $556,395        $   538,548
------------------------------------------------------------------------------------------

Supplemental cash flow information
  Conversion of bonds payable to preferred stock                 -            $ 1,000,000
  Conversion of accounts payable to common stock                 -            $    45,000
  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 nine months
ended September 30, 2000:

`Three Months Ended               Nine Months Ended
                             September 30, 2000               September 30, 2000
                         ---------------------------      ----------------------------
                         As Reported     As Restated      As Reported      As Restated
                         -----------     -----------      -----------      -----------

Other expense, net       $  11,538         $650,083        $  71,741        $1,103,107
                          --------          -------         --------         ---------
Net loss                 ($241,144)       ($879,689)       ($819,765)      ($1,851,131)
                           -------          -------          -------         ---------
Loss per common share
  basic and diluted         ($0.12)          ($0.42)         ($0.51)            ($1.15)
                              ----             ----            ----               ----`

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 nine month periods ended September 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 not greater than three months.

Net
Income and Loss per Share Net income (loss) per common share 
basic is computed by dividing net income (loss) by the weighted average number
of common shares outstanding for the period. Net income (loss) per common share
 fully diluted reflects the potential dilution of earnings by including
other common stock equivalents, including stock options, warrants, convertible
preferred stock and convertible bonds in the weighted average number of common
shares outstanding for a period, if 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.

In June 2001,
the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets,effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no longer
be amortized, but will be subject to an annual impairment test in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.

The Company
will apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. During 2002, the Company will perform
the first required impairment test of goodwill as of January 1, 2002 and has not
yet determined what effect this test will have on the earnings and financial
position of the Company.

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:

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

        Trade accounts receivable                  $1,374,080         $1,725,001
        Less:  Allowance for doubtful accounts
               and trade rebates                     (380,000)          (310,000)
                                                     ---------          ---------
           Net trade receivables                      994,080          1,415,001
        Other receivables                              17,601            146,632
                                                  -----------         ----------

           Total receivables                       $1,011,681         $1,561,633
                                                    =========          =========`

## 3.     Inventories

Inventories
comprise the following:

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

        Finished goods                              $  789,604       $   919,872
        Packaging materials                            198,678           309,245
        Raw materials                                  366,750           201,253
                                                    ----------        ----------
           Gross inventory                           1,355,032         1,430,370
        Less:  Reserve for obsolescence               (190,000)         (148,000)
                                                   ------------      ------------

             Net inventory                          $1,165,032        $1,282,370
                                                    ==========         =========`

## 4.     Property and
Equipment

Property and
equipment comprise the following:

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

        Machinery and equipment                    $   357,723         $ 320,836
        Furniture and fixtures                         668,336           668,336
                                                       -------           -------
             Gross property and equipment            1,026,059           989,172
        Less:  Accumulated depreciation               (842,421)         (785,143)
                                                      ---------         ---------

             Net property and equipment            $   183,638         $ 204,029
                                                    ==========          ========`

## 5.     Goodwill, Patents and
Trademarks

Goodwill,
patents and trademarks comprise the following:

`September 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               (649,040)         (556,286)
                                                    -----------       -----------

             Net goodwill, patents and trademarks   $1,299,741        $1,392,495
                                                     =========         =========`

8

---

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

---

The unamortized
portion of goodwill was $1,137,467 and $1,216,967 at September 30, 2001 and
December 31, 2000, respectively.

## 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 September 30, 2001 and December 31, 2000, respectively. The line of credit
agreement requires monthly interest payments at prime minus 1%, or 5.75%, at
September 30, 2001. Cash deposited with the bank of $1,000,000 secures the line
of credit.

Restricted
cash of $580,455 and $640,000 collateralized the outstanding line of credit
balance at September 30, 2001 and December 31, 2000, respectively.

## 7.     Convertible
Bonds

Convertible
bonds comprise the following:

`September 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                  40,000               -
                                                 ------            -------

             Net convertible bonds             $435,000           $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

9

---

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

---

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.

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. The warrants described in items (3) and (4) have been
redesignated as the Companys Series F Warrants.

## 8.     Shareholders
Equity

Preferred
Stock

There are
272,503 shares of Series A Convertible Preferred Stock (Series A
Preferred) outstanding. The Series A Preferred is convertible into Common
Stock on a one-for-one basis, 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.

There are
554,171 shares of Series B Convertible Preferred Stock (Series B
Preferred) outstanding. The Series B Preferred is convertible into Common
Stock on a one-for-one basis, 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.

There are
1,000,001 shares of Series C Convertible Preferred Stock (Series C
Preferred) outstanding. The Companys directors, on February 10,
2000, designated 795,457 shares of the Companys non-designated preferred
stock as 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 is convertible into Common Stock on a one-for-one basis, 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.

There are
133,334 shares of Series D Convertible Preferred Stock (Series D
Preferred) outstanding. The Companys directors, on February 10,
2000, designated 592,597 shares of the Companys non-designated preferred
stock as 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 is convertible into Common Stock on a
one-for-one basis, 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.

10

---

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

---

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. An additional 733,336 Series E Warrants
were issued in connection with the Series E Common Stock private placement.

Stock
Purchase Warrants

At
September 30, 2001, the Company had 4,361,683 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 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

The Company has
established a provision of $12,000 for estimated federal and state income taxes
due based upon operating income through September 30, 2001. The provision
differs from statutory federal and state rates due primarily to the use of
available net operating loss carryforwards.

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

11

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

---

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

`Nine Months Ended September 30, 2001
                                ------------------------------------

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

Sales           $2,241,948    $2,196,836     $2,404,568           ---     $ 6,843,352
                ----------     ---------      ---------         -----       ---------

Gross profit     1,727,218     1,097,781        509,087           ---       3,334,086
Total expenses       ---           ---            ---      ($3,222,602)    (3,222,602)
Income taxes         ---           ---            ---          (12,000)       (12,000)
                                                                           -----------
Net income                                                                 $   99,484
                                                                            =========


                                Nine Months Ended September 30, 2001
                                ------------------------------------

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

Sales           $1,863,309    $2,296,443     $2,850,267           ---     $ 7,010,019
                 ---------     ---------      ---------         -----       ---------

Gross profit     1,379,165     1,333,708        894,414             ---     3,607,287
Total expenses       ---           ---            ---       ($5,458,418)   (5,458,418)
Income taxes         ---           ---            ---               ---         ---
                                                                            ---------
Net loss                                                                 ($ 1,851,131)
                                                                           ==========`

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 nine months ended September 30 were $460,200 in 2001 and $353,600
in 2000. Wound closure-fastener sales represent the majority of international
sales.

12

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## DERMA SCIENCES, INC.

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

QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 2000

## Results of Operations

Net
Sales decreased $267,913, or 11.4%, to $2,090,486 in the third quarter 2001 from
$2,358,399 in the third quarter 2000. Gross profit margins increased to 51.9% in
the third quarter 2001 from 49.2% in the third quarter 2000. Operating expenses
decreased $406,661, or 29.3%, in the third quarter 2001 to $982,545 from
$1,389,206 in the third quarter 2000. Other expenses, net decreased $625,020 in
the third quarter 2001 to $25,063 from $650,083 in the third quarter 2000. Net
income of $69,291 was generated in the third quarter of 2001 versus a loss of
$879,689 in the third 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 September 30,
                                            ---------------------------
                                            2001                   2000
                                            ----                   ----

             Gross Sales                     $2,300,940        $2,701,368

             Trade rebates                     (147,827)         (273,743)
             Cash discounts                     (43,877)          (49,126)
             Medicaid rebates                   (18,750)          (20,100)
                                            ------------      ------------

             Net Sales                       $2,090,486        $2,358,399
                                             ==========        ==========`

Gross sales
were down $400,428, or 14.8%, quarter to quarter reflecting lower skin care
sales associated principally with the loss of the Beverly Contract and lower
wound closure- fastener sales related to lower Percu-Stay sales, partially
offset by stronger wound care sales. Trade rebates were down due principally to
the reduction in rebate intensive Beverly skin care sales.

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

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

     Wound care                   $  824,529      $  570,917      $ 253,612      44.4%
     Wound closure-fasteners         591,129         812,032       (220,903)    (27.2%)
     Skin care                       674,828         975,450       (300,622)    (30.8%)
                                  ----------      ----------       ---------

     Total                        $2,090,486      $2,358,399      $(267,913)    (11.4%)
                                  ==========      ==========      ==========`

13

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Net sales were
down $267,913, or 11.4%, to $2,090,486 in the third quarter 2001 versus
$2,358,399 in the third quarter 2000. Skin care sales decreased $300,622, or
30.8%, due principally to the loss of the Beverly supply agreement effective May
31, 2001. Wound closure-fastener sales decreased $220,903, or 27.2%, due
principally to lower Percu-Stay sales that, in turn, were the results of a large
customers reduction of excess inventory. Wound care sales increased
$253,612, or 44.4%, due to the continued success of the companys clinical
education programs and focused sales efforts.

## Net Sales, Cost of Sales and Gross
Profit

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

`Quarter Ended September 30,
                                ---------------------------
                          2001                     2000                  Variance
                 -------------------     --------------------      -------------------
Net sales        $2,090,486   100.0%     $2,358,399    100.0%      ($267,913)  (11.4%)
Cost of sales     1,004,616    48.1%      1,198,799     50.8%        194,183   (16.2%)
                  ---------    -----      ---------     -----        -------

Gross profit     $1,085,870    51.9%     $1,159,600     49.2%      ($ 73,730)   (6.4%)
                 ==========    =====     ==========     =====      ==========`

Gross Profit
decreased $73,730, or 6.4%, to $1,085,870 in the third quarter 2001 from
$1,159,600 in the third quarter 2000, reflecting the decrease in sales partially
offset by improving margins. The higher third quarter 2001 gross profit margin
of 51.9% reflects a favorable mix of increased higher margined wound care sales
coupled with reduced sales of lower margined Percu-Stay fasteners and Beverly
skin care products. Price erosion in a competitive marketplace, product cost
increases, the reclassification of certain skin care line operating expenses to
cost of sales and the adverse impact of lower overall skin care volumes due to
the loss of the Beverly contract adversely impacted third quarter 2001 margins.

## Operating Expenses

Operating
expenses decreased $406,661, or 29.3%, to $982,545 in the third quarter 2001
from $1,389,206 in the third quarter 2000. A summary of selling, marketing and
general administrative expenses for the third quarter 2001 and 2000 are outlined
in the table below.

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

Selling                     $323,452         $  478,382     ($154,930)    (32.4%)
Marketing                     93,178            140,904       (47,726)    (33.9%)
General Administrative       565,915            769,920      (204,005)    (26.5%)
                            --------         ----------     ----------

         Total              $982,545         $1,389,206     ($406,661)    (29.3%)
                            ========         ==========     ==========`

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 quarter to quarter decrease in operating
expenses.

## Other Expense, net

Other expense,
net decreased $625,020 to $25,063 in the third quarter 2001 from $650,083 in the
third quarter 2000. The decrease is attributable to a reduction in interest
expense of $611,954 and higher miscellaneous income of $13,066. The lower
interest expense reflects the absence in 2001 of $638,545 of debt refinancing
expense incurred in the third quarter 2000 associated with the Companys
Series C and D convertible bonds, lower

14

---

outstanding 2001 note payable and convertible bond balances and
lower overall interest rates. These reductions were partially offset by $40,000
of incremental interest associated with amortizing the consideration granted in
2001 to extend the maturity date of the outstanding Series C and D convertible
bonds. Included in other miscellaneous income is a one-time $18,800 Medicaid
adjustment together with recurring profit sharing and royalty income.

## Provision for Income Taxes

A provision for
federal and state income taxes of $8,971 was provided for in the third quarter
2001. The provision is at less than statutory rates given available net
operating losses.

## Net Income

The Company
generated net income of $69,291, or $0.03 per share (basic), for the quarter
ended September 30, 2001 compared to a net loss of $879,689, or $0.42 per share
(basic), for the quarter ended September 30, 2000.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2000.

## Results of Operations

Net Sales
decreased $166,667, or 2.4%, to $6,843,352 in the nine months ended September
2001 from $7,010,019 in the nine months ended September 2000. Gross profit
margins declined to 48.7% in the nine months ended September 2001 from 51.5% in
the nine months ended September 2000. Operating expenses decreased $1,225,286,
or 28.1%, in the nine months ended September 2001 to $3,130,025 from $4,355,311
in the nine months ended September 2000. Other expense, net decreased $1,010,530
in the nine months ended September 2001 to $92,577 from $1,103,107 in the nine
months ended September 2000. Net income of $99,484 was generated in the nine
months ended September 2001 versus a net loss of $1,851,131 in the nine months
ended September 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:

`Nine Months Ended September 30,
                                         -------------------------------
                                          2001                     2000
                                          ----                     ----

              Gross Sales              $7,658,838                $7,982,720

              Trade rebates              (610,084)                 (771,134)
              Cash discounts             (149,152)                 (138,220)
              Medicaid rebates            (56,250)                  (63,347)
                                       -----------               -----------

              Net Sales                $6,843,352                $7,010,019
                                       ==========                ==========`

Gross sales
were down $323,882, or 4.1%, year-to-date reflecting lower skin care sales
associated principally with the loss of the Beverly contract and lower third
quarter wound closure-fastener sales related to the above mentioned Percu-Stay
excess inventory reductions. Consistently strengthening quarterly wound care
sales served to partially mitigate these declines. Trade rebates are down due
principally to the reduction in rebate intensive Beverly skin care sales. Cash
discounts are up due to more customers taking advantage of 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:

`Nine Months Ended September 30,
                               -------------------------------
Product Line                     2001                  2000             Variance
                                 ----                  ----      ---------------------

Wound care                     $2,241,948         $1,863,309      $378,639    20.3%
Wound closure-fasteners         2,196,836          2,296,443       (99,607)   (4.3%)
Skin care                       2,404,568          2,850,267      (445,699)  (15.6%)
                               ----------         ----------     ----------

                       Total   $6,843,352         $7,010,019     ($166,667)   (2.4%)
                               ==========         ==========     ==========`

Net sales were
down $166,667, or 2.4%, in the first nine months of 2001 versus 2000. Wound care
sales increased $378,639, or 20.3%, due to accelerating momentum created by the
Companys clinical education program and focused sales efforts. Wound
closure-fastener sales were down $99,607, or 4.3%, driven by a significant
reduction in third quarter Percu-Stay sales. Excluding Percu-Stay sales, wound
closure-fastener sales were essentially flat versus the previous year. Skin care
sales were down $445,699, or 15.6%, versus the previous year. The decrease,
which began in the second quarter, is principally due to the loss of the Beverly
supply agreement effective May 31, 2001. To a lesser extent, skin care sales
were adversely impacted by supply interruptions experienced late last year that
continued into 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 nine months ended 2001 and 2000 are outlined in the table below:

`Nine Months Ended September 30,
                            -------------------------------
                            2001                   2000                Variance
                   -------------------    -------------------    ------------------

Net sales          $6,843,352   100.0%    $7,010,019   100.0%    ($166,667)   (2.4%)
Cost of sales       3,509,266    51.3%     3,402,732    48.5%     (106,534)   (3.1%)
                   -----------   -----     ---------    -----    ----------

Gross profit       $3,334,086    48.7%     $3,607,287   51.5%    ($273,201)   (7.6%)
                   ==========    =====     ==========   =====    ==========`

Gross profit
decreased $273,201, or 7.6%, to $3,334,086 in the first nine months of 2001 from
$3,607,287 in the first nine months of 2000 reflecting lower sales and gross
profit margins. Gross profit margins decreased to 48.7% in the first nine months
of 2001 from 51.5% in the first nine months of 2000. Price erosion in a
competitive market place, year-on-year product cost increases and the
reclassification of certain skin care line operating expenses to cost of sales
in 2001 contributed to the margin decrease. Further, 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 at lower per unit prices. While positively impacting profitability,
the distribution agreement has adversely impacted the volume of wound
care-fastener sales and the Companys overall gross profit margin.

While down
versus the prior year, gross profit margins have improved steadily each quarter
in 2001 reflecting increasing sales of higher margined wound care products
coupled with decreasing sales of lower margined wound closure-fastener
(Percu-Stay) and skin care (Beverly contract) products versus the prior year.

## Operating Expenses

Operating
expenses decreased $1,225,286, or 28.1%, to $3,130,025 in the first nine months
of 2001 from $4,355,311 in the first nine months of 2000. A summary of selling,
marketing and general administrative expenses for the nine months of 2001 and
2000 are outlined in the table below.

16

---

`Nine Months Ended September 30,
                             -------------------------------
                                2001             2000               Variance
                                ----             ----        ---------------------

Selling                     $1,068,046       $1,925,179      ($  857,133)  (44.5%)
Marketing                      288,139          539,487         (251,348)  (46.6%)
General Administrative       1,773,840        1,890,645         (116,805)   (6.2%)
                             ---------        ---------      ------------

         Total              $3,130,025       $4,355,311      ($1,225,286)  (28.1%)
                            ==========       ==========      ============`

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 decrease in general
administrative expense has been somewhat mitigated by the re-establishment of
the headquarters administrative staff.

## Other Expense, net

Other expenses,
net decreased $1,010,530 to $92,577 in the first nine months of 2001 from
$1,103,107 in the first nine months of 2000. The decrease reflects a reduction
in interest expense of $971,638 together with incremental miscellaneous income
of $38,892. The lower interest expense reflects the absence in 2001 of
$1,031,366 of debt refinancing expense incurred in 2000 associated with the
Companys Series C and D convertible bonds, lower outstanding 2001 note
payable and convertible bond balances and lower interest rates. These reductions
were partially offset by $120,000 of interest associated with amortizing the
consideration granted in 2001 to extend the maturity date of the outstanding
Series C and D convertible bonds. Miscellaneous income includes one-time $31,300
Medicaid adjustments together with recurring profit sharing and royalty income.

## Provision for Income Taxes

A provision for
federal and state income taxes of $12,000 has been established in the first nine
months of 2001 coincident with the Companys return to profitability. The
provision is at less than corresponding statutory rates given the Companys
available net operating losses.

## Net Income

The
Company generated net income of $99,484, or $0.04 per share (basic), for the
first nine months of 2001 compared to a net loss of $1,851,131, or $1.15 per
share (basic), for the first nine months of 2000.

## Liquidity and Capital Resources

Operating
results for the third quarter and nine months ended September 2001 versus the
corresponding periods last year are positive. Sales are in line with
expectations, operating expenses are down, cash flow is positive and the Company
has achieved three consecutive quarters of profitability.

Third quarter
sales were down versus the second quarter of 2001 but in line with expectations.
Wound care sales continue to exhibit strong growth, increasing 12% quarter to
quarter. Excluding Percu-Stay, wound closure-fasteners sales were down 10% due
to market softness in September and backorders. Percu-Stay sales were down
significantly as a large customer worked off excess inventory. Skin care sales
were down 16% quarter to quarter reflecting the loss of Beverly sales commencing
in June 2001. Excluding Beverly sales, skin care sales were consistent month to
month during the third quarter. While gross margin dollars were down reflecting
lower sales, gross margin percentages continued to improve in the third quarter
versus the second quarter based upon a favorable sales mix. Higher margined
wound care sales coupled with a decrease in lower margined wound
closure-fastener and skin care sales are responsible. Operating expenses
decreased 12% in the third quarter versus the second quarter due to ongoing cost
reduction initiatives, several open positions during the quarter and the timing
of certain

17

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expenses. All expense categories contributed. Other expense, net
was slightly higher in the third quarter due to lower miscellaneous income
items.

At September
30, 2001 and December 31, 2000, the Company had unrestricted cash and cash
equivalents on hand of $556,395 and $424,165, respectively. Cash of $267,059 was
provided by operations in the first nine months of 2001 versus $541,775 of cash
used to fund operating activities in the first nine 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 $435,000 of convertible bonds from
long term to current, working capital improved $294,232, or 16%, to $2,159,314
at September 30, 2001 versus $1,865,082 at December 31, 2000.

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 September 30, 2001, $120,000 of bond discount has been amortized to
interest expense. Prior to the bonds current maturity date of January 7,
2002, the Company expects to retire, convert 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

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# 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. No current reports on Form 8-K were filed by the registrant
during the three month period ending September 30, 2001.

Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.

|                         |  | DERMA SCIENCES, INC.                                                                                            
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------
|                         |  |                                                                                                                 
|                         |  |                                                                                                                 
|                         |  |                                                                                                                 
|Dated: November 12, 2001 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Vice President and Chief Financial
     Officer

19

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