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                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                 --------------


                                   FORM 10-QSB


                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


                   For Quarter Ended            June 30, 1998
                   Commission File Number       1-31070


                              DERMA SCIENCES, INC.
        (Exact name of small business issuer as specified in its Charter)

       Pennsylvania                                           23-2328753
(State or other jurisdiction                                 (IRS employer
    of Incorporation)                                    identification number)


                         214 Carnegie Center, Suite 100
                               Princeton, NJ 08540
                                 (609) 514-4744
                    (Address including zip code and telephone
                     number, of principal executive offices)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

                       Yes [X]               No [_]

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

Date:  June 30, 1998              Class:  Common Stock, par value $.01 per share
                                  Shares Outstanding:  4,570,456


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<PAGE>
                                              

                              DERMA SCIENCES, INC.

                                   FORM 10-QSB

                                      INDEX

Description                                                                 Page

Part I - Financial Information

     Item 1.  Condensed Financial Statements

          Balance Sheet - June 30, 1998 ...................................    2

          Statements of Operations - Three months ended June 30, 1998
             and June 30, 1997 ............................................    3

         Statements of Operations - Six months ended June 30, 1998
             and June 30, 1997 ............................................    4

          Statements of Cash Flows - Six months ended June 30, 1998
             and June 30, 1997 ............................................    5

          Notes to Condensed Financial Statements .........................    6

     Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations ....................................    7

Part II - Other Information

     Item 1.  Legal Proceedings ...........................................   14

     Item 2.  Changes in Securities and Use of Proceeds ...................   14

     Item 6.  Exhibits and Reports on Form 8-K ............................   14


<PAGE>



                              DERMA SCIENCES, INC.
                                  BALANCE SHEET
                                  June 30, 1998
                                   (Unaudited)

                                     ASSETS

CURRENT ASSETS
   Cash and cash equivalents .....................................  $ 1,627,402
   Accounts receivable, net ......................................      712,499
   Securities subscription receivable ............................    3,515,000
   Inventory .....................................................      587,772
   Prepaid expenses and other current assets .....................      323,886
                                                                    ------------
      Total Current Assets .......................................    6,766,559

PROPERTY AND EQUIPMENT, NET ......................................      122,557

OTHER ASSETS,NET .................................................      403,686
                                                                    ------------

     Total Assets ................................................  $ 7,292,802
                                                                    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Bank line of credit ...........................................  $   689,000
   Accounts payable ..............................................      562,175
   Accrued expenses and other current liabilities ................      670,207
                                                                    ------------
      Total Current Liabilities ..................................    1,921,382
                                                                    ------------


SHAREHOLDERS' EQUITY
   Common stock, $.01 par value, authorized 15,000,000 shares,
      issued and outstanding 4,570,456 shares ....................       45,705
   Convertible preferred stock, $.01 par value, authorized
      5,083,333 shares, issued and outstanding 5,070,833 .........       50,708
   Additional paid-in capital ....................................   10,072,683
   Accumulated deficit ...........................................   (4,797,676)
                                                                    ------------
      Total Shareholders' Equity .................................    5,371,420
                                                                    ------------

           Total Liabilities and Shareholders' Equity ............  $ 7,292,802
                                                                    ============

See accompanying notes.

                                       2

<PAGE>


                              DERMA SCIENCES, INC.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                            Three Months Ended
                                                  June 30,
                                         --------------------------
                                             1998           1997
                                         ------------   ------------
 
NET SALES ............................   $ 1,917,163    $   796,246

COST OF SALES ........................       196,739        225,852
                                         ------------   ------------

GROSS PROFIT .........................     1,720,424        570,394
                                         ------------   ------------

OPERATING EXPENSES
   Product development ...............       205,486         33,521
   Selling, general and administrative     1,474,405      1,645,710
                                         ------------   ------------
       Total Operating Expenses ......     1,679,891      1,679,231
                                         ------------   ------------

INCOME (LOSS) FROM OPERATIONS ........        40,533     (1,108,837)
                                         ------------   ------------

OTHER  INCOME (EXPENSE)
   Interest income ...................        18,113          1,728
   Interest expense ..................       (15,613)       (10,926)
   Litigation settlement .............      (819,353)             0
                                         ------------   ------------
       Total Other Income (Expense) ..      (816,853)        (9,198)
                                         ------------   ------------

LOSS BEFORE INCOME TAXES .............      (776,320)    (1,118,035)
   Income taxes ......................             0              0
                                         ------------   ------------

NET LOSS .............................   ($  776,320)   ($1,118,035)
                                         ============   ============

NET LOSS PER COMMON SHARE -
   BASIC AND DILUTED .................   ($     0.17)   ($     0.27)
                                         ============   ============

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING ................     4,572,740      4,067,632
                                         ============   ============

See accompanying notes.

                                       3

<PAGE>

                              DERMA SCIENCES, INC.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                               Six Months Ended
                                                   June 30,
                                         ---------------------------
    
                                             1998            1997
                                         ------------   ------------
 
NET SALES ............................   $ 3,666,709    $ 1,547,979

COST OF SALES ........................       440,601        409,707
                                         ------------   ------------

GROSS PROFIT .........................     3,226,108      1,138,272
                                         ------------   ------------

OPERATING EXPENSES
   Product development ...............       385,613        230,109
   Selling, general and administrative     2,750,134      2,396,549
                                         ------------   ------------
       Total Operating Expenses ......     3,135,747      2,626,658
                                         ------------   ------------

INCOME (LOSS) FROM OPERATIONS ........        90,361     (1,488,386)
                                         ------------   ------------

OTHER  INCOME (EXPENSE)
   Interest income ...................        42,487         31,412
   Interest expense ..................       (30,318)       (27,418)
   Litigation settlement .............      (819,353)             0
                                         ------------   ------------
       Total Other Income (Expense) ..      (807,184)         3,994
                                         ------------   ------------

LOSS BEFORE INCOME TAXES .............      (716,823)    (1,484,392)
   Income taxes ......................             0              0
                                         ------------   ------------

NET LOSS .............................   ($  716,823)   ($1,484,392)
                                         ============   ============

NET  LOSS PER COMMON SHARE -
   BASIC AND DILUTED .................   ($     0.16)   ($     0.36)
                                         ============   ============

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING ................     4,570,186      4,067,632
                                         ============   ============

See accompanying notes.

                                       4

<PAGE>


                              DERMA SCIENCES, INC.
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                           June 30,
                                                                 ---------------------------
                                                                     1998           1997
                                                                 ------------   ------------
OPERATING ACTIVITIES
<S>                                                              <C>            <C>         
   Net Loss ..................................................   ($  716,823)   ($1,484,392)
   Adjustments to Reconcile Net Loss to Net Cash
     Used in Operating Activities
       Depreciation and amortization .........................       108,690         98,464
       Medicaid rebate adjustment ............................      (300,000)             0
       Provision for bad debts ...............................             0        166,477
       Changes in operating assets and liabilities:
         Accounts receivable .................................      (225,092)       354,525
         Inventory ...........................................       186,900         58,562
         Prepaid expenses and other current assets ...........       (89,352)       (25,413)
         Other assets ........................................        52,996        (52,517)
         Accounts payable ....................................      (208,578)      (113,834)
         Accrued expenses and other current liabilities ......        71,326       (102,753)
                                                                 ------------   ------------
           Net Cash Used in Operating Activities .............    (1,119,933)    (1,100,881)
                                                                 ------------   ------------

INVESTING ACTIVITIES
       Decrease in short-term investments ....................             0      1,049,242
       Purchases of property and equipment, net ..............        (5,925)       (74,176)
                                                                 ------------   ------------
           Net Cash Provided by (Used in) Investing Activities        (5,925)       975,066
                                                                 ------------   ------------

FINANCING ACTIVITIES
       Net change in bank line of credit .....................       139,367        (11,000)
       Proceeds from issuance of convertible
          securities, net of issuance costs ..................       440,000              0
       Collection of officers' notes receivable ..............             0        221,569
                                                                 ------------   ------------
           Net Cash Provided by Financing Activities .........       579,367        210,569
                                                                 ------------   ------------

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS ........................................      (546,491)        84,754

CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD .................................................     2,173,893         60,208
                                                                 ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................   $ 1,627,402    $   144,962
                                                                 ============   ============
</TABLE>

See accompanying notes.

                                       5
<PAGE>

                              DERMA SCIENCES, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 - THE COMPANY

Derma Sciences,  Inc. (the "Company") is engaged in the  development,  marketing
and sale of  proprietary  sprays,  ointments and dressings for the management of
certain chronic non-healing skin ulcerations such as pressure and venous ulcers,
surgical  incisions  and burns.  The Company  markets its  products  principally
through independent  distributors,  mainly to healthcare agencies throughout the
United  States.  In addition,  the Company's  products are available in selected
markets throughout the world through strategic alliances with local companies.

NOTE 2 - BASIS OF PRESENTATION

The accompanying  unaudited condensed financial statements have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information  and  with the  instructions  to Form  10-QSB  and  Item  310(b)  of
Regulation  S-B.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been included.  Operating  results for the six-month period ended June 30, 1998,
are not necessarily  indicative of the results that may be expected for the year
ending  December  31,  1998.  For further  information,  refer to the  financial
statements and footnotes thereto for the year ended December 31, 1997,  included
in Form 10-KSB filed with the Securities and Exchange Commission.

NOTE 3 - INCOME TAXES

The Company  accounts for income taxes under the  liability  method.  Under this
method,  deferred tax assets and liabilities are determined based on differences
between  financial  reporting  and tax bases of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.

As of December 31, 1997 the Company had a net  operating  loss  carryforward  of
approximately  $3,240,000  expiring  in years  2011 and  2016.  Accordingly,  no
provision  for income  taxes has been  included  in the  accompanying  financial
statements.




                                       6
<PAGE>

                              DERMA SCIENCES, INC.

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


QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997

RESULTS OF OPERATIONS

Net Sales and Gross Profit

Net sales  for the  second  quarter,  1998  increased  $1,120,917,  or 141%,  to
$1,917,163 from $796,246 in the second quarter,  1997. The increase in net sales
is  attributable  primarily  to  the  restructuring  of  the  Company's  product
distribution  system,  including the  institution of a direct sales force during
1997 and price  increases  during the third quarter of 1997 and first quarter of
1998.

The  Company  introduced  new  product  lines  during the first  quarter of 1998
consisting  of  Alginate  Dressings  (NutraStat  and  DermaStat),   Hydrocolloid
Dressings (NutraCol and DermaCol) and Film Dressings  (DermaFilm and DermaSite).
New product  sales were not a material  revenue  producing  factor in the second
quarter of 1998.

Medicaid  rebates incurred by the Company are reflected as a reduction to sales.
The quarter  ended June 30, 1998  included  Medicaid  rebate  adjustments  which
resulted in a net increase to sales of $85,000.

Cost of sales, expressed as a percentage of net sales, decreased from 28% in the
second  quarter,  1997 to 10% in the second  quarter,  1998.  This  decrease  is
attributable  primarily  to the  increase  in net  sales  resulting  from  price
increases and the adjustment of Medicaid rebates as discussed  above.  Aggregate
cost of sales decreased $29,113, or 13%, to $196,739 in the second quarter, 1998
from $225,852 in the second  quarter,  1997.  The decrease in aggregate  cost of
sales is  attributable  to the  increase in net sales in certain  product  lines
which have a relatively high gross margin.

Gross profit,  expressed as a percentage of net sales, increased from 72% in the
second quarter, 1997 to 90% in the second quarter,  1998. Aggregate gross profit
increased  $1,150,030,  or 202%, to $1,720,424 in the second quarter,  1998 from
$570,394  in  the  second  quarter,  1997.  The  increase  in the  gross  profit
percentage  is   attributable   to  the  price  increases  and  Medicaid  rebate
adjustments as discussed  above.  The increase in the aggregate  gross profit is
attributable to the sales increases, discussed above.

Operating Expenses

Operating expenses increased  nominally,  from $1,679,231 in the second quarter,
1997 to $1,679,891 in the second quarter, 1998. This increase represents the net

                                       7
<PAGE>

effect of a decrease  in  selling,  general  and  administrative  expense and an
increase in product development expense discussed below.

Product development  expense for the second quarter,  1998 increased $171,965 to
$205,486 from $33,521 in the second quarter, 1997. This increase is attributable
to  licensing  fees  incurred on new product  lines  discussed  above,  expenses
incurred  related to  clinical  studies  and  increases  to  salaries,  employee
benefits and rent expense.

Selling,  general  and  administrative  expense  for the  second  quarter,  1998
decreased  $171,305,  or 10%, to  $1,474,405  in the second  quarter,  1998 from
$1,645,710 in the second quarter, 1997.  The primary factors contributing to the
change in selling,  general and  administrative  expense for the second quarter,
1998 compared to the second quarter, 1997 are explained below.

Aggregate  wages and  benefits  expense  increased  $166,793 to $772,475 for the
second quarter, 1998 from $605,682 for the second quarter, 1997. These increases
are  attributable to compensation  incident to the hiring of marketing and sales
personnel.

During 1997, the Company restructured the method of compensating its wholesalers
and distributors replacing sales commissions to master distributors with various
product pricing and sales growth  incentives.  Incentive  expense for the second
quarter,  1998  expressed as a percentage of sales  increased to 22% from 11% in
the second quarter,  1997.  Aggregate  incentive expense  increased  $332,557 to
$418,409 for the second quarter, 1998 from $85,852 for the second quarter, 1997.

Aggregate bad debt expense  decreased  $140,582 during the second quarter,  1998
compared to the second quarter, 1997.

Recruiting  fees  of  $83,000  were  incurred  in the  second  quarter,  1997 in
connection with the hiring of marketing and sales personnel. No comparable costs
were incurred in the second quarter, 1998.

Income (Loss)  from Operations

The Company generated income from operations for the second quarter, 1998 in the
amount of $40,533  compared  to a loss from  operations  of  $1,108,837  for the
second  quarter,  1997.  This  income from  operations  is  attributable  to the
increase in net sales discussed above under "Net Sales and Gross Profit."

Litigation Settlement

On June 8, 1998 the Company and ABS LifeSciences,  Inc. ("ABS"), a subsidiary of
Integra Life Sciences, Inc., agreed to a settlement of their  respective  claims
and counter claims asserted in the civil action ABS LifeSciences,  Inc. v. Derma

                                       8
<PAGE>

Sciences, Inc. (the "Action").  The settlement provided that the Company pay ABS
a total of $550,000 and return all unsold Chronicure  inventory.  The settlement
further  provides for the dismissal of all claims and counter claims asserted in
the action. The settlement resulted in a charge to operations of $819,353 in the
quarter ended June 30, 1998.

Net Loss

The Company generated a net loss of $776,320, or $0.17 per share, for the second
quarter,  1998  compared to a loss of  $1,118,035,  or $0.27 per share,  for the
second quarter,  1997. The net loss for the second quarter, 1998 is attributable
to the factors  discussed  above under "Income  (Loss) from  Operations" and the
"Litigation Settlement" charge to operations of $819,353.

Other Events

On May 12, 1998, the Company  announced the execution of a nonbinding  letter of
intent  to  acquire  Genetic   Laboratories  Wound  Care,  Inc.  ("GLWC").   The
acquisition would be accomplished by the merger of a newly formed,  wholly owned
subsidiary  of the  Company  into  GLWC.  GLWC  markets  proprietary  wound care
products; primarily wound closure strips, specialty fastners, and net dressings.
Sales are made  primarily to medical supply  distributors  throughout the United
States and in foreign  countries,  mainly Europe,  utilizing  independent  sales
representatives.  GLWC  shareholders  would  receive 0.7 shares of the Company's
common stock for each share GLWC common stock owned.  The Boards of Directors of
the Company and GLWC approved the  acquisition on June 26, 1998. The acquisition
is  conditioned  upon  approval  of the  acquisition  by  majority  vote  of the
shareholders of the Company and GLWC;  such meetings are presently  scheduled to
be held on September 9, 1998.

On July 14, 1998, the Company  announced the execution of a nonbinding letter of
intent to acquire Sunshine Products, Inc. ("Sunshine") whereby Sunshine would be
acquired by a wholly  owned  subsidiary  of the Company.  Sunshine  shareholders
would receive $1.2 million in cash for its issued and outstanding capital stock.
Sunshine,  a private  closely-held  corporation,  is a  manufacturer  of general
purpose and specialized skincare products for hospitals, nursing homes and other
institutional facilities.  Closing of the acquisition is subject to execution of
a definitive  purchase contract,  completion of due diligence,  approvals of the
boards of  directors  and  shareholders  of both  companies  and  certain  other
conditions.

Further,  on July 14,  1998 the  Company  announced  that it closed its  private
placement  of  Convertible  Securities  effective  June  30,  1998 in  which  an
aggregate of $4 million was raised.  Terms of the  Securities  require that upon
approval of the  Company's  shareholders  of a new class of Series B Convertible
Preferred Shares ("Preferred Stock"), the Securities will automatically  convert
into units  ("Unit(s)"),  as hereafter  defined,  at the rate of $1.20 per Unit.
Each Unit will  consist of one share of  Preferred  Stock  convertible  into one
share of Common  Stock and one warrant  ("Warrant(s)")  to purchase one share of
Common Stock  exercisable at $1.35 per share. As of June 30, 1998,  $440,000 had
been received net of issuance costs, the remaining $3,515,000,  reflected on the
Company's Balance Sheet as a securities subscription receivable, was received in
July 1998.


                                       9
<PAGE>

                              DERMA SCIENCES, INC.

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


SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

RESULTS OF OPERATIONS

Net Sales and Gross Profit

Net sales for the six months ended June 30, 1998 increased $2,118,730,  or 137%,
to  $3,666,709  from  $1,547,979  in the six  months  ended June 30,  1997.  The
increase in net sales is  attributable  primarily  to the  restructuring  of the
Company's  product  distribution  system,  including the institution of a direct
sales force during 1997 and price increases during the third quarter of 1997 and
first quarter of 1998.

The  Company  introduced  new  product  lines  during the first  quarter of 1998
consisting  of  Alginate  Dressings  (NutraStat  and  DermaStat),   Hydrocolloid
Dressings (NutraCol and DermaCol) and Film Dressings  (DermaFilm and DermaSite).
New product sales were not a material revenue producing factor in the six months
ended June 30, 1998.

Medicaid  rebates incurred by the Company are reflected as a reduction to sales.
The six months ended June 30, 1998 included  Medicaid rebate  adjustments  which
resulted in a net increase to sales of $170,000.

Cost of sales, expressed as a percentage of net sales, decreased from 26% in the
six months  ended June 30,  1997 to 12% in the six months  ended June 30,  1998.
This decrease is  attributable  primarily to the increase in net sales resulting
from price increases and the adjustment of Medicaid  rebates as discussed above.
Aggregate cost of sales increased  $30,894,  to $440,601 in the six months ended
June 30, 1998 from $409,707 in the six months ended June 30, 1997.  The increase
in  aggregate  cost of  sales  is  attributable  to the  increase  in net  sales
discussed above.

Gross profit,  expressed as a percentage of net sales, increased from 74% in the
six months  ended June 30,  1997 to 88% in the six months  ended June 30,  1998.
Aggregate gross profit increased  $2,087,836,  or 183%, to $3,226,108 in the six
months  ended June 30,  1998 from  $1,138,272  in the six months  ended June 30,
1997. The increase in the gross profit  percentage is  attributable to the price
increases and Medicaid rebate  adjustments as discussed  above.  The increase in
the aggregate  gross profit is attributable  to the sales  increases,  discussed
above.

                                       10
<PAGE>


Operating Expenses

Operating expenses increased $509,089, or 19%, from $2,626,658 in the six months
ended June 30, 1997 to  $3,135,747  in the six months ended June 30, 1998.  This
increase is  attributable to the increases in both product  development  expense
and selling, general and administrative expense discussed below.

Product  development  expense for the six months  ended June 30, 1998  increased
$155,504,  or 68%, to $385,613  from  $230,109 in the six months  ended June 30,
1997.  This increase is  attributable  to licensing fees incurred on new product
lines  discussed  above,  expenses  incurred  related to  clinical  studies  and
increases to salaries, employee benefits and rent expense.

Selling,  general and  administrative  expense for the six months ended June 30,
1998 increased $353,585,  or 15%, to $2,750,134 in the six months ended June 30,
1998 from  $2,396,549  in the six months  ended  June 30,  1997.  The  aggregate
increase is primarily attributable to costs associated with the institution of a
direct  sales  force  including  increases  in  wages,   benefits,   travel  and
entertainment expenses and product pricing and sales growth incentives offset by
a decrease in bad debt expense and recruiting fees.

Aggregate wages and benefits expense  increased  $82,983 to $688,665 for the six
months ended June 30, 1998 from $605,682 for the six months ended June 30, 1997.
These  increases  are  attributable  to  compensation  incident to the hiring of
marketing and sales personnel.

Aggregate travel and entertainment expense increased $79,771 to $293,376 for the
six months  ended June 30, 1998 from  $213,605 for the six months ended June 30,
1997. These increases are primarily  attributable to the institution of a direct
sales force as discussed above.

During 1997, the Company restructured the method of compensating its wholesalers
and distributors replacing sales commissions to master distributors with various
product  pricing  and sales  growth  incentives.  Incentive  expense for the six
months ended June 30, 1998  expressed as a percentage of sales  increased to 21%
from 13% in the six months  ended June 30,  1997.  Aggregate  incentive  expense
increased  $553,877  to  $749,056  for the six months  ended June 30,  1998 from
$195,179 for the six months ended June 30, 1997.

Aggregate bad debt expense  decreased  $166,477 during the six months ended June
30 , 1998 compared to the six months ended June 30, 1997.

Recruiting  fees of $83,000 were  incurred in the six months ended June 30, 1997
in connection  with the hiring of marketing and sales  personnel.  No comparable
costs were incurred in the six months ended June 30, 1998.



                                       11
<PAGE>


Income (Loss) from Operations

The Company  generated  income from operations for the six months ended June 30,
1998 in the amount of $90,361  compared to a loss from  operations of $1,488,386
for the six  months  ended  June  30,  1997.  This  income  from  operations  is
attributable  to the increase in net sales  discussed above under "Net Sales and
Gross Profit."

Litigation Settlement

Please refer to "Quarter  Ended June 30, 1998 Compared to Quarter Ended June 30,
1997."

Net Loss

The Company  generated a net loss of $716,823,  or $0.16 per share,  for the six
months ended June 30, 1998 compared to a loss of $1,484,392, or $0.36 per share,
for the six months  ended June 30,  1997.  The net loss for the six months ended
June 30, 1998 is attributable to the factors discussed above under "Income (Loss
) from  Operations"  and the  "Litigation  Settlement"  charge to  operations of
$819,353.

Other Events

Please refer to "Quarter  Ended June 30, 1998 Compared to Quarter Ended June 30,
1997."


                                       12
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and short-term investments at June 30, 1998
increased  $644,511,  or 66%, to $1,627,402  from $982,891 at June 30, 1997. The
Company's  working  capital at June 30, 1998 increased  $4,006,058 to $4,845,177
from  $839,119  at June 30,  1997.  The  increase  is  primarily  due to private
financings  discussed below. The Company utilized its short-term  investments in
operations  during  1997  to  fund  the  Company's  losses  and  to  reduce  the
outstanding balance on the bank line of credit by $100,000.

In  November,  1997 the  Company  issued  convertible  securities  and  received
$1,571,211  net of issuance  costs.  Please  refer to Form  10-KSB  filed by the
Company on March 31, 1998 and "Part II - Other  Information,  Item 2. Changes in
Securities and Use of Proceeds."

The Company  issued  convertible  securities in June 1998 which  resulted in the
Company  receiving  $440,000 net of issuance costs. At June 30, 1998 the Company
had a securities  subscription  receivable of $3,515,000,  which was received in
July 1998.

The Company has a bank line-of-credit, secured by accounts receivable, inventory
and the Company's United States patent and trademarks, whose balance at June 30,
1998 was $689,000. This line-of-credit is renewable (payable in full) August 31,
1998. The Company  believes that it will be able either to secure renewal of its
current  credit  line or  secure  credit  upon  comparable  terms  with  another
financial institution.

Statements  that  are not  historical  facts,  including  statements  about  the
Company's  confidence and  strategies,  and  expectations  about new or existing
products, technologies and opportunities,  market demand or acceptance of new or
existing  products  are  forward-looking   statements  that  involve  risks  and
uncertainties.  These  uncertainties  include,  but are not limited to,  product
demand and market acceptance risks,  impact of competitive  products and prices,
product development,  commercialization or technological delays or difficulties,
and trade, legal, social, financial and economic risks.


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<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Information  required by Item 103 of Regulation S-B and required  hereunder,  as
filed with the Securities and Exchange Commission on Form 10-KSB and on Form 8-K
on March 31, 1998 and on June 10, 1998, respectively,  is incorporated herein by
reference.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On May 13, 1994, the Company  consummated an initial public  offering of 900,000
shares  of its  $.01 par  value  common  stock  and  received  net  proceeds  of
$3,221,273.  On  November  19,  1997  the  Company  closed  on  an  offering  of
convertible  securities and received net proceeds of  $1,571,211.  In June 1998,
the Company  closed on an offering of  convertible  securities  and received net
proceeds of $440,000 with a securities  subscription receivable of $3,515,000 as
of June 30,  1998.  The  proceeds  have  been used for the  following  purposes:
repayment of indebtedness ($470,000), working capital ($2,341,573), professional
services relative to a merger ($300,000) and acquisition of Morgan Paris,  Inc.,
a former master distributor of the Company  ($285,000),  payments related to the
litigation settlement ($325,000). The remainder of the proceeds, $1,510,911, are
invested in short-term investment grade commercial paper and Money Market funds.
For more information relative to the use of the initial public offering proceeds
please refer to the  Company's  Form SR as filed with the U. S.  Securities  and
Exchange Commission on August 21, 1997.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(A)     EXHIBITS. With the exception of the following,  all exhibits required by
        Item 601 of  Regulation  S-B and required  hereunder,  as filed with the
        Securities and Exchange  Commission on Form 10-KSB on March 31, 1998 are
        incorporated herein by reference.

        Item                        Description
        ----        ------------------------------------------
        10.01       Stock Option Agreement between the Company and Timothy J.
                    Patrick dated April 3, 1998
        10.02       Stock Option Agreement between the Company and Srini
                    Conjeevaram dated April 3, 1998
        27          Financial Data Schedule (filed electronically with the U. S.
                    Securities and Exchange Commission only)

(B)     REPORTS ON FORM 8-K. On April 16,  1998,  May 13, 1998 and June 10, 1998
        the  Company  filed  current   reports  on  Form  8-K  relative  to  the
        appointment  of  Srini  Conjeevaram  to  the  Board  of  Directors,  the
        execution of the letter of intent to acquire Genetic  Laboratories Wound
        Care, Inc. and the litigation  settlement with ABS  LifeSciences,  Inc.,
        respectively.



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



                                                DERMA SCIENCES, INC.



Dated:  August 14, 1998                         By:  /s/ Stephen T. Wills
                                                   ------------------------
                                                   Stephen T. Wills, CPA, MST
                                                   Chief Financial Officer


















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