---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934   For Quarter Ended
     
     March 31, 2003Commission File Number
     
     1-31070    Derma Sciences, Inc.(Exact name of small business issuer as specified in its charter)   Pennsylvania
     23-2328753(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)  214 Carnegie Center, Suite 100Princeton, New Jersey
08540(609) 514-4744(Address including zip code and
telephonenumber, of principal executive offices)


Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
   Yes [X]   No [  ]

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

|Date: March 31, 2003 | Class: Common Stock, par value $.01 per share
|-------------------- | ---------------------------------------------
|                     | Shares Outstanding: 4,631,276                

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

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

Part I - Financial Information

|        |                                                                                                  |   
|------- | ------------------------------------------------------------------------------------------------ | --
|Item 1. | Consolidated Financial Statements                                                                |   
|        |                                                                                                  |   
|        | Consolidated Balance Sheets - March 31, 2003 and December 31, 2002                               | 3 
|        |                                                                                                  |   
|        | Consolidated Statements of Operations - Three months ended March 31, 2003and
     March 31, 2002 | 4 
|        |                                                                                                  |   
|        | Consolidated Statements of Cash Flows -
     Three months ended March 31, 2003and March 31, 2002 | 5 
|        |                                                                                                  |   
|        | Notes to Consolidated Financial
     Statements                                                  | 6 
|        |                                                                                                  |   
|Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations       | 15
|        |                                                                                                  |   
|Item 3. | Controls and Procedures                                                                          | 21

Part II - Other Information

|Item 1. | Legal Proceedings                | 22
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 22
|        |                                  |   

Forward Looking Statements

This document includes certain "forward-looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from these expectations due to changes in political, economic, business,
competitive, market and regulatory factors.

1

---

Part I - Financial Information

Item 1.  FINANCIAL STATEMENTS

2

---

DERMA SCIENCES, INC.Consolidated Balance Sheets

`--------------------------------------------------------------------------------------------------
                                                                       March 31,      December 31,
                                                                          2003            2002
                                                                      (Unaudited)
ASSETS
--------------------------------------------------------------------------------------------------

Current Assets
  Cash and cash equivalents                                        $     471,426    $   1,496,357
  Accounts receivable, net                                             2,091,430        1,975,993
  Inventories                                                          3,017,866        2,875,755
  Prepaid expenses and other current assets                              445,485          281,066
--------------------------------------------------------------------------------------------------
Total current assets                                                   6,026,207        6,629,171
Property and equipment, net                                            1,034,317          987,891
Goodwill                                                               1,110,967        1,110,967
Patents and trademarks, net                                              136,152          140,378
Other assets, net                                                        158,366          220,177
--------------------------------------------------------------------------------------------------
Total Assets                                                       $   8,466,009    $   9,088,584
--------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
Current Liabilities
  Line of credit                                                   $   1,221,092    $   1,962,627
  Current maturities of long-term debt                                   160,512          173,493
  Accounts payable                                                       873,242          692,259
  Accrued expenses and other current liabilities                         266,325          445,791
--------------------------------------------------------------------------------------------------
Total current liabilities                                              2,521,171        3,274,170
--------------------------------------------------------------------------------------------------
Long-term debt                                                           867,284          845,455
--------------------------------------------------------------------------------------------------
Total Liabilities                                                      3,388,455        4,119,625
--------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares authorized;
  issued and outstanding: 4,631,276 shares                                46,313           46,313
Convertible preferred stock, $.01 par value; 11,750,000 shares
  authorized; issued and outstanding: 2,526,242 shares (liquidation
  preference of $4,460,237)                                               25,262           25,262
Additional paid-in capital                                            15,583,056       15,588,698
Accumulated other comprehensive income (loss)                             84,431          (21,736)
Accumulated deficit                                                  (10,661,508)     (10,669,578)
--------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                             5,077,554        4,968,959
--------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                         $   8,466,009    $   9,088,584
==================================================================================================`

See accompanying notes.

3

---

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

`-------------------------------------------------------------------------------------------
                                                                Three months ended
                                                                       March 31,
                                                                 2003            2002
----------------------------------------------------------------------------------------
Net sales                                                   $ 4,216,239     $ 2,140,457

Cost of sales                                                 2,689,229         975,920
----------------------------------------------------------------------------------------
Gross Profit                                                  1,527,010       1,164,537
----------------------------------------------------------------------------------------
Operating expenses                                            1,455,097         985,521
Interest expense, net                                           113,439         124,375
Other income, net                                               (49,596)         (9,574)
----------------------------------------------------------------------------------------
Total Expenses                                                1,518,940       1,100,322
----------------------------------------------------------------------------------------
Income before provision for income taxes                          8,070          64,215
Provision for income taxes                                        -               -
----------------------------------------------------------------------------------------
Net Income                                                  $     8,070     $    64,215
----------------------------------------------------------------------------------------
Income per common share - basic                             $      0.00     $      0.03
----------------------------------------------------------------------------------------
Income per common share - diluted                           $      0.00     $      0.01
----------------------------------------------------------------------------------------
Shares used in computing income per common share - basic      4,631,276       2,407,109
----------------------------------------------------------------------------------------
Shares used in computing income per common share - diluted    7,174,116       5,843,397
========================================================================================`

See accompanying notes.

4

---

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

`--------------------------------------------------------------------------------------------------------
                                                                               Three months ended
                                                                                   March 31,
                                                                              2003            2002
----------------------------------------------------------------------------------------------------
Operating Activities
    Net income                                                          $     8,070       $  64,215
    Adjustments to reconcile net income to
      net cash (used in) provided by operating activities:
       Depreciation                                                          37,206          16,615
       Amortization                                                          74,072           4,394
       Deferred financing costs                                               7,500         127,700
       Provision for bad debts and rebates                                    5,176           5,000
       Provision for inventory obsolescence                                  12,000           9,000
       Loss on disposal of fixed assets                                       2,132           -
       Changes in operating assets and liabilities
           Restricted cash                                                    -            (565,000)
           Accounts receivable                                              (31,709)        (36,566)
           Inventories                                                      (41,184)        210,769
           Prepaid expenses and other current assets                       (129,439)       (221,228)
           Other assets                                                      (6,893)          -
           Accounts payable                                                 165,185         (66,934)
           Accrued expenses and other current liabilities                  (192,548)        538,813
----------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                         (90,432)         86,778
----------------------------------------------------------------------------------------------------
Investing Activities
    Purchases of property and equipment                                     (26,572)        (33,980)
----------------------------------------------------------------------------------------------------
Net cash used in investing activities                                       (26,572)        (33,980)
----------------------------------------------------------------------------------------------------
Financing Activities
    Net change in bank line of credit                                      (817,548)          -
    Deferred financing costs                                                (19,757)          -
    Long-term debt repayments                                               (65,929)          -
    Stock issuance costs                                                     (5,642)          -
----------------------------------------------------------------------------------------------------
Net cash (used in) financing activities                                    (908,876)          -
----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                         949           -
----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                     (1,024,931)         52,798

Cash and cash equivalents
  Beginning of period                                                     1,496,357         524,783
----------------------------------------------------------------------------------------------------
  End of period                                                        $    471,426       $ 577,581
----------------------------------------------------------------------------------------------------

Supplemental cash flow information
  Conversion of bonds payable and accrued interest to preferred stock  $       -           $595,200
  Common stock and warrants issued for debt conversion/extension       $       -           $120,200
  Bond conversion reset provision charge to paid-in capital            $       -            $45,000
====================================================================================================`

See accompanying notes.

5

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

1. Organization and
Summary of Significant Accounting Policies

Derma
Sciences, Inc. and its subsidiaries (the Company) are full line providers of
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, Canada and other select international
markets. The Companys principal manufacturing and distribution facilities are
located in St. Louis, Missouri and Toronto, Canada. The Company also has a manufacturing
facility in Nantong, China.

Basis
of Presentation

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

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2003, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2002, included in Form 10-KSB filed with the Securities and
Exchange Commission.

Summary
of Significant Accounting Policies:

Principles
of Consolidation  The consolidated financial statements include the accounts of
Derma Sciences, Inc. and its wholly owned subsidiaries. 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.

Foreign
Currency Translation  Assets and liabilities are translated using the exchange rates
in effect at the balance sheet date, while income and expenses are translated using
average rates. Translation adjustments are reported as a component of shareholders
equity in accumulated other comprehensive income (loss).

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

Allowance
for Doubtful Accounts  The Company provides an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to make required payments. The
allowance is determined by analyzing historical data and trends. Past due or delinquency
status is based on contractual terms. Charges for doubtful accounts are recorded in
operating expenses.

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

6

---

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. Leasehold improvements are depreciated over the lesser of
their useful lives or the remaining lease term.

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

Goodwill
 On January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets. SFAS
No. 142 requires that goodwill is deemed to have an indefinite life and is no longer to be
amortized but is subject to an annual impairment test.

Stock
Based Compensation  The Company grants stock options to employees with an exercise
price equal to the fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Option No. 25, Accounting for Stock
Issued to Employees, and, accordingly recognizes no compensation expense for the
stock option grants.

Pro
forma information regarding net income (loss) and earnings (loss) per share is required by
SFAS No. 123, which also requires that the information be determined as if the Company has
accounted for its stock options granted under the fair value method of that Statement. For
purposes of pro forma disclosures, the estimated fair value of stock options is amortized
to expense over the options vesting period. Therefore, future pro forma compensation
expense may be greater as additional options are granted. The Companys pro forma
information follows:

`Quarter Ended March 31,
                                                          -----------------------
                                                           2003              2002
                                                         ---------         ---------
         Net income - as reported                        $  8,070          $ 64,215
         Pro forma compensation expense                   (81,247)          (20,794)
                                                         ---------         ---------
         Pro forma net (loss) income                     $(73,177)         $ 43,421
                                                         =========         =========
         Income (loss) per common share - basic
             As reported                                   $0.00             $0.03
             Pro forma                                    $(0.02)            $0.02

         Income (loss) per common share - diluted
             As reported                                   $0.00             $0.01
             Pro forma                                    $(0.02)            $0.01`

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. Freight costs billed to and reimbursed by customers are
recorded as a component of revenue.

Advertising
and Promotion Costs  Advertising and promotion costs are expensed in the period
incurred.

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

7

---

2. Dumex Medical Inc.
Acquisition

On
August 26, 2002, the Company acquired substantially all the assets of Dumex Medical Inc.,
a leading manufacturer and distributor of wound care and related medical devices to the
Canadian market. The acquisition was effected by the Companys wholly owned Canadian
subsidiary, Dumex Medical Canada Inc. The results of operations of Dumex Medical Canada
Inc. have been included in the Companys consolidated financial statements since the
acquisition date.

3. Accounts Receivable

Accounts
receivable include the following:

`March 31,        December 31,
                                                            2003              2002
                                                            ----              ----

        Trade accounts receivable                        $2,202,092        $1,943,674
        Less:  Allowance for doubtful accounts              (35,000)          (40,000)
               Allowance for trade rebates                  (96,000)          (96,000)
                                                         -----------       -----------
           Net trade receivables                          2,071,092         1,807,674
        Other receivables                                    20,338           168,319
                                                         -----------       -----------

           Total receivables                             $2,091,430        $1,975,993
                                                         ===========       ===========`

4. Inventories

Inventories
include the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Finished goods                                   $2,168,458        $2,111,546
        Work in process                                     109,612            91,788
        Packaging materials                                 350,015           287,903
        Raw materials                                       389,781           384,518
                                                         -----------       -----------

             Total inventory                             $3,017,866        $2,875,755
                                                         ===========       ===========`

5. Property and Equipment

Property
and equipment include the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Machinery and equipment                          $1,121,950        $1,043,383
        Furniture and fixtures                              169,730           165,858
        Leasehold improvements                               43,759            40,714
                                                         -----------       -----------
             Gross property and equipment                 1,335,439         1,249,955

        Less:  Accumulated depreciation                    (301,122)         (262,064)
                                                         -----------       -----------

             Net property and equipment                  $1,034,317        $  987,891
                                                         ===========       ===========`

8

---

6. Goodwill

Goodwill of
$1,110,967 relates to the 1998 acquisition of Sunshine Products, Inc. Effective January 1,
2002, in accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill and conducted the first of the required annual tests of goodwill impairment. An
impairment charge would be recognized if the fair value of Sunshine Products, Inc.s
goodwill is less than its carrying value. The results of the initial and subsequent tests
which the Company completed in the fourth quarter, 2002 indicate that the goodwill
carrying value is not impaired.

7. Patents and Trademarks

Patents
and trademarks include the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Patents and trademarks                           $  444,067         $ 444,067
        Less:   Accumulated amortization                   (307,915)         (303,689)
                                                         -----------       -----------

             Net patents and trademarks                  $  136,152         $ 140,378
                                                         ===========       ===========`

8. Other Assets

Other
assets include the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Deferred financing costs                         $   82,367        $  162,314
        Deposits                                             53,305            57,863
        Other                                                22,694             -
                                                         -----------       -----------

             Total other assets                          $  158,366        $  220,177
                                                         ===========       ===========`

Other relates
to legal and consulting expenses associated with a proposed acquisition. These deferred
costs will be expensed if the transaction is not completed.

9. Short Term Borrowings

Short
term borrowings include the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Canadian line of credit                           1,221,092        $  962,627
        U.S. line of credit                                     -           1,000,000
                                                         -----------       -----------

             Total short term borrowings                 $1,221,092        $1,962,627
                                                         ===========       ===========`

Canadian
Line of Credit

Effective
August 26, 2002, in connection with the acquisition of Dumex Medical Inc., the Company
entered into a sixteen month revolving credit facility agreement (the Dumex
Agreement) for a maximum principal amount of $1,700,000 with a Canadian bank. At
March 31, 2003 and December 31, 2002, advances of $1,221,092 and $962,627, respectively,
have been drawn against the facility.

9

---

The
Companys wholly owned Canadian subsidiary, Dumex Medical Canada Inc., may request
advances under the Dumex Agreement up to the value of seventy-five percent (75%) of its
eligible receivables (as defined) and fifty percent (50%) of eligible inventory (as
defined) up to a maximum of $645,000. Interest on outstanding advances is payable monthly
at the prime rate (as defined) plus 1.0%, or 5.75% for advances outstanding at March 31,
2003. Outstanding advances are secured by all tangible and intangible assets of Dumex
Medical Canada Inc. In addition, the Canadian bank has a second lien security interest in
the assets of the Companys U.S. operations. The Company has also guaranteed payment
of amounts due under the Dumex Agreement.

Over
the term of the Dumex Agreement, the Company has agreed to comply with a number of
financial covenants governing minimum working capital, current ratios, tangible net worth,
interest coverage, total indebtedness to tangible net worth and total indebtedness to
adjusted pre-tax earnings. These covenants are measured at the end of each month.
Additional covenants governing permitted indebtedness, liens, payments of dividends and
protection of collateral are included in the Dumex Agreement. In the event of a margin
deficiency (as defined) or covenant violation, the Company is required to advance up to an
additional $340,000 of working capital to Dumex Medical Canada Inc. in order to correct
the deficiency. This additional working capital may be repaid to the Company 45 days after
the margin deficiency or covenant violation has been cured upon the condition that such
repayment not result in a margin deficiency, covenant violation or any other event of
default.

U.S.
Line of Credit

In
March, 2003 the Company entered into a new one year line of credit agreement (subject to
annual renewal) with a U.S. lender (the Agreement) for a maximum principal
amount of $2,000,000. No funds have been drawn against the line to date. Estimated maximum
potential advances under the Agreement on the date of signing were $1,250,000, less any
outstanding standby letters of credit. Advances will be utilized to fund strategic
initiatives and for general working capital purposes. The Company terminated its prior
U.S. line of credit on February 28, 2003 by repaying the $1,000,000 outstanding
indebtedness and paying a $50,000 early termination fee. In addition, the Company charged
$66,342 to interest expense for deferred financing costs associated with the prior U.S.
line of credit.

The
Company may request advances under the Agreement up to the value of 80% of eligible U.S.
receivables (as defined) and 50% of eligible U.S. inventory (as defined), excluding
work-in-process inventory. Interest on outstanding advances is payable monthly in arrears
at the one month LIBOR rate (as published in The Wall Street Journal), plus
3.0%, or 4.3% on the date of signing. In addition, the Company will pay an annual line fee
of $20,000. This line fee and any one-time lender or legal costs associated with securing
the line of credit will be deferred and amortized to interest expense over the line term
of one year.

Outstanding
advances are secured by all tangible and intangible assets of the Companys U.S.
operations. Over the term of the Agreement, the Company has agreed to maintain its fixed
charge ratio (as defined) at not less than 1.25:1.0 as measured quarterly on a twelve
month trailing basis. Additional covenants governing permitted indebtedness, changes in
entity status, purchase of securities and protection of collateral are included in the
Agreement.

As
security for indebtedness of the Companys subsidiary, Dumex Medical Canada Inc., the
Company has accorded a Canadian bank its guarantee of payment together with a second lien
security interest in the Companys assets located in the U.S. In connection with the
Agreement and in return for a standby letter of credit in the amount of $200,000 against
the new line of credit, the Canadian bank has agreed not to exercise its rights under its
second lien security interest and guarantee against the Companys U.S. assets without
the U.S. lenders approval. The standby letter of credit serves to reduce the
Companys potential borrowing capacity under the Agreement by $200,000.

10

---

10. Convertible Bonds

Effective
January 7, 2002, bondholders of all the Companys issued and outstanding series C and
D convertible bonds converted the entirety of the $475,000 principal and $120,200 accrued
interest into units at a rate of one unit for each $0.50 of principal and interest
converted. Each unit consists of one share of series C or series D preferred stock and one
and one tenth warrants to purchase one share of common stock at a per share exercise price
of $0.57 (Series F Warrants). Each share of preferred stock is convertible
into common stock on a one-for-one basis. Principal and accrued interest under the bonds
totaling $595,200 were converted into 1,190,400 shares of convertible preferred stock and
1,309,441 series F warrants.

If
prior to July, 2003, the Company offers for sale its common stock at a price per share
below $0.50 or its warrants at a per share exercise price of less than $0.57, then the
Company has agreed to: (1) issue to the bondholders such additional shares of preferred
stock and warrants as, when added to the preferred stock and warrants previously issued,
equal the shares of preferred stock and warrants that would have been issued using the
lower common stock price as the conversion rate, and (2) lower the per share exercise
price of the Series F Warrants to the lower per share exercise price.

In
connection with the conversion, the Company recognized an imputed non-cash interest charge
of $165,200. A charge of $45,000 was taken to account for the value of the reset
concession granted to the bondholders. This charge is being amortized over the
eighteen-month term of the reset concession. A charge of $120,200 was taken immediately to
account for the conversion terms associated with the accrued interest.

11. Long-Term Debt

Long-term
debt includes the following:

`March 31,       December 31,
                                                            2003              2002
                                                            ----              ----

        Canadian term loan                               $1,022,619        $  987,576
        Capital lease obligations                             5,177            31,372
                                                         -----------       -----------

             Total debt                                  $1,027,796        $1,018,948
        Less:  current maturities                           160,512           173,493
                                                         -----------       -----------

             Long-term debt                              $  867,284        $  845,455
                                                         ===========       ===========`

Effective August
26, 2002, in connection with the acquisition of substantially all the assets of Dumex
Medical Inc., the Company entered into a five-year term loan agreement with a Canadian
Bank. The loan is repayable in monthly payments consisting of principal and interest
commencing October 1, 2002. Interest on the outstanding principal balance is payable
monthly at the banks prime rate (as defined) plus 1.25%, or 6.0% at March 31, 2003.
The term loan is secured by all tangible and intangible assets of Dumex Medical Canada
Inc. and subject to the same financial covenants applicable to the operating line of
credit (Note 9).

12. Shareholders
Equity

Preferred
Stock

There
are 150,003 shares of series A convertible preferred stock outstanding. The series A
preferred stock 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 stock and maintains voting rights identical to
the common stock on all other matters.

11

---

There
are 452,504 shares of series B convertible preferred stock outstanding. The series B
preferred stock 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 stock and maintains voting rights identical to
the common stock on all other matters.

There
are 719,055 shares of series C convertible preferred stock outstanding. The series C
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference averaging $0.71 per share, votes as a class
on matters affecting the series C preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 1,204,680 shares of series D convertible preferred stock outstanding. The series D
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference averaging $0.53 per share, votes as a class
on matters affecting the series D preferred stock and maintains voting rights identical to
the common stock on all other matters.

Stock
Purchase Warrants

At
March 31, 2003, the Company had warrants outstanding to purchase the Companys common
stock as outlined below:

`Series       Number of Warrants      Exercise Price    Expiration Date

              E               2,200,009               $0.85       July 18, 2005
              F               1,309,441               $0.57       January 6, 2007`

The
Companys 666,673 series B warrants with an exercise price of $6.75 per share expired
on June 15, 2002. In connection with the conversion of the Company series C and D
convertible bonds on January 7, 2002 described in Note 10, 1,309,441 series F warrants
were issued.

Other
Equity Transactions

The
Company initiated in January 2002 a private offering of 4,000,000 shares of its common
stock at a price of $0.50 per share. Offering proceeds are being used to fund strategic
initiatives and for general working capital purposes. Through March 31, 2003, 1,600,000
shares of common stock have been issued pursuant to the offering and offering proceeds of
$747,678, net of $52,322 in offering expenses, have been received.

In
May 2002, a total of 624,167 shares of series A, B and C preferred stock were converted
into 624,167 shares of common stock.

13. Comprehensive Income

The
Companys total comprehensive income was as follows:

`Quarter Ended March 31,
                                                              2003           2002
                                                           --------       --------
         Net income - as reported                          $  8,070       $ 64,215
         Other comprehensive income:
             Foreign currency translation adjustment        106,167           -
                                                           --------       --------

         Comprehensive income                              $114,237       $ 64,215
                                                           ========       ========`

12

---

14. Promissory Note

On
January 9, 2003 the Company loaned $50,000 to a supplier pursuant to a secured promissory
note. The stated maturity date of the note is December 31, 2003. The note may be prepaid
without penalty, bears interest at the annual rate of 5% and is secured by the tangible
and intangible property of the supplier. The funds advanced are to be used by the supplier
for general working capital purposes in the ordinary course of business. The promissory
note is included in prepaid and other current assets on the balance sheet of March 31,
2003.

15. Income taxes

No
provision for income taxes has been made in either the first quarter 2003 and 2002 given
the Companys available net operating loss carryforwards.

At
December 31, 2002, the Company has net operating loss carryforwards of approximately
$7,000,000 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
approximately $7,000,000 that expire in years 2004 through 2010. As of December 31, 2002,
the Company has foreign net operating loss carryforwards of approximately $182,000 which
begin to expire in 2009. Based on transactions occurring in periods prior to 2001, the
Company may have had a change in control as defined in Internal Revenue Code Section 382.
Consequently, certain limitations may apply to the timing and amount of the utilization of
the federal operating loss carryforwards.

16. 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 basic and advanced dressings,
ointments and sprays designed to treat wounds. Wound closure-fasteners products include
wound closure strips, nasal tube fasteners, a variety of catheter fasteners and net
dressings. The skin care segment consists of bath sponges, antibacterial skin cleansers,
hair and body soaps, lotions and moisturizers designed to enable customers to implement
and maintain successful skin care/hygiene programs. As of August 26, 2002, Dumex Medical
Canada Inc.s operating results have been included in the wound care segment.

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 advanced wound care and wound closure-fastener products is primarily
outsourced. Basic wound care and skin care products are manufactured in-house with the
exception of the bath sponge line. Internally, the segments are managed at the gross
profit level. The aggregation or allocation of other costs by segment is not practical.

Segment
sales and gross profit for the three months ended March 31, 2003 and 2002 are as follows:

`Three Months Ended March 31, 2003
                                ---------------------------------
                                    Wound Closure-                                           Total
                     Wound Care       Fasteners         Skin Care       Other Costs         Company
                     ----------       ---------         ---------       -----------         -------

Net sales            $2,810,985        $845,256          $559,998              -          $4,216,239
                     ----------        --------          --------       ------------      -----------

Gross profit            965,121         394,434           167,455              -           1,527,010
Total expenses             -               -                 -          $(1,518,940)      (1,518,940)
                                                                                          -----------

Net income                                                                                $    8,070
                                                                                          ===========

Net long-lived assets  $970,946           -            $1,274,758           $35,732       $2,281,436
                       ========        ========        ==========       ============      ===========`

13

---

`Three Months Ended March 31, 2003
                                ---------------------------------
                                    Wound Closure-                                           Total
                     Wound Care       Fasteners         Skin Care       Other Costs         Company
                     ----------       ---------         ---------       -----------         -------

Net sales              $751,377        $771,250          $617,830            -            $2,140,457
                     ----------        --------          --------       ------------      -----------

Gross profit            571,514         392,943           200,080            -             1,164,537
Total expenses             -               -                 -          $(1,100,322)      (1,100,322)
                                                                                          -----------

Net income                                                                                $   64,215
                                                                                          ===========

Net long-lived assets  $161,068           $459          $1,225,165          $64,815       $1,451,507
                       ========        ========        ==========       ============      ===========`

Long-lived
assets consist of property and equipment, patents and trademarks and goodwill. Wound care
long-lived assets consist principally of Dumex Medical Canada Inc. property and equipment
in the first quarter 2003 and patents and trademarks in the first quarter 2003 and 2002.
Wound closure and fastener products are for the most part outsourced, and accordingly, are
not appreciably supported internally by long-lived assets. Skin care long-lived assets
consist of goodwill associated with the acquisition of Sunshine Products, Inc. and
associated property and equipment.

International
sales (excluding Canada) were $217,925 and $162,000 in the first quarter of 2003 and 2002,
respectively. Wound closure-fastener sales represent the majority of international sales.

17. Subsequent Event

Subsequent
to March 31, 2003, the Company sold 820,000 additional shares of its common stock at a
price of $0.50 per share and received gross proceeds of $410,000, pursuant to the private
offering discussed in Note 12. The proceeds will be used for general working capital
purposes and to fund strategic initiatives.

14

---

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Quarter Ended March 31, 2003 Compared
to Quarter Ended March 31, 2002.

Results of Operations

Net
sales increased $2,075,782, or 97.0%, to $4,216,239 in the first quarter 2003 from
$2,140,457 in the first quarter 2002. Gross profit increased $362,473, or 31.1%, to
$1,527,010 in the first quarter 2003, from $1,164,537 in the first quarter 2002. Gross
profit margins decreased to 36.2% in the first quarter 2003 from 54.4% in the first
quarter 2002. Operating expenses increased $469,576, or 47.6%, in the first quarter 2003
to $1,455,097 from $985,521 in the first quarter 2002. Interest expense decreased $10,936
in the first quarter 2003 to $113,439 from $124,375 in the first quarter 2002. Other
income increased $40,022 in the first quarter 2003 to $49,596 from $9,574 in the first
quarter 2002. Net income of $8,070 and $64,215 was generated in the first quarters of 2003
and 2002, respectively.

The
following table highlights the impact on first quarter 2003 operating results of the
August 26, 2002 acquisition by the Companys subsidiary, Dumex Medical Canada, Inc.,
of substantially all of the assets of Dumex Medical Inc.

`Quarter Ended
                                              Quarter Ended March 31, 2003               March 31, 2002
                                              ----------------------------               --------------
                                    Consolidated          Dumex            Derma          (Derma Only)
                                    ------------          -----            -----          ------------

Net sales                            $4,216,239        $2,079,712       $2,136,527        $2,140,457
                                     -----------       -----------      -----------       -----------
Gross profit                          1,527,010           432,650        1,094,360         1,164,537
                                     -----------       -----------      -----------       -----------
Operating expenses                    1,455,097           454,264        1,000,833           985,521
Interest expense, net                   113,439            32,788           80,651           124,375
Other income, net                       (49,596)          (10,570)         (39,026)           (9,574)
                                     -----------       -----------      -----------       -----------
Total expenses                        1,518,940           476,482        1,042,458         1,100,322
Income (loss) before income taxes         8,070           (43,832)          51,902            64,215
Provision for taxes                        -                 -                -                 -
                                     -----------       -----------      -----------       -----------

Net income (loss)                    $    8,070        $  (43,832)      $   51,902        $   64,215
                                     ===========       ============     ===========       ===========`

Derma Business Overview

Excluding
the Dumex acquisition, first quarter 2003 net sales were essentially flat at $2,136,527
versus $2,140,457 in the first quarter 2002. The Derma business net sales were lower in
both the wound and skin care segments primarily due to lower sales volume and competitive
pricing pressure. The wound closure-fastener segment experienced a 9.6% increase in sales
due to stronger Percu Stay catheter fasteners sales, partially offset by lower sales of
other wound closure-fastener products.

The
Derma business gross profit in the first quarter of 2003 decreased $70,177, or 6.0%, to
$1,094,360 versus $1,164,537 in the first quarter 2002. This decrease is attributable to
decreases in profitability in the wound care line due to pricing pressures and the skin
care line due to lower volumes and competitive pricing pressures, partially offset by a
modest gross profit increase in the wound closure-fastener segment.

The
Derma business total expenses in the first quarter of 2003 decreased $57,864, or 5.3%, to
$1,042,458 from $1,100,322 in the first quarter of 2002. The first quarter of 2003 was
favorably impacted by receipt from the Internal Revenue Service of $32,553 and the
reversal of a $65,000 accrued liability relative to the settlement of a prior year civil
tax penalty and lower interest expense of $43,724, largely offset by a one-time $50,000
U.S. line of credit early termination fee and a $66,342 write-off of deferred financing
interest costs associated with the U.S. line of credit. Net income for the Derma business
in the first quarter 2003 decreased 19.2% to $51,902 from $64,215 in the first quarter
2002.

15

---

Dumex Business Overview

The
Dumex business acquired on August 26, 2002, generated first quarter 2003 net sales of
$2,079,712. Net sales were slightly lower than plan in local currency, but benefited
approximately 4% in translation due to a stronger than anticipated Canadian to U.S. dollar
exchange rate. All areas of the Dumex wound care business performed well in the first
quarter of 2003 versus plan.

Gross
profit of $432,650 and gross profit percentage of 20.8% in the first quarter met
expectations. Gross profit benefited from favorable material prices which were partially
offset by higher than anticipated freight and utility costs and unfavorable foreign
exchange.

First
quarter 2003 operating expenses of $454,264 were 11% higher than plan due primarily to
higher general and administrative costs for fringe benefits and accounting fees, along
with higher selling related expenses and unfavorable foreign exchange. The higher sales
and marketing expenses are consistent with the plan to expand resources in this area.

The
Dumex business had a first quarter net loss of $43,832 versus the plan to essentially
break-even. This unfavorability to plan was primarily due to the higher operating expenses
discussed above.

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,
hydrophilic wound dressings and the Dumex product line. Wound closure-fasteners sales
consist primarily of wound closure strips and catheter fasteners. Skin care sales consist
of bath sponges, body washes, shampoos, incontinent care products, skin conditioners,
disinfectants and deodorizers.

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

`Quarter Ended March 31,
                                     -----------------------
                                    2003                 2002
                                    ----                 ----
           Gross Sales           $4,454,232          $2,326,867

           Trade rebates           (190,081)           (124,372)
           Cash discounts           (34,605)            (43,413)
           Medicaid rebates         (13,307)            (18,625)
                                 -----------         -----------

           Net Sales             $4,216,239          $2,140,457
                                 ===========         ===========`

Gross
sales increased $2,127,365, or 91.4%, from the same quarter of the prior year due to
inclusion of Dumex sales for the entire first quarter of 2003, along with higher wound
closure-fastener sales, slightly offset by lower skin care sales. Gross to net sales
adjustments relate primarily to the Derma business and are not significantly impacted by
Dumex activity. Trade rebates were higher due to more aggressive pricing and a higher
percentage of bid related business. Cash discounts decreased on a quarter-to-quarter basis
principally due to a reduction in the Derma cash discount rate to general industry terms
for several customers, effective January 1, 2003.

16

---

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

`Quarter Ended March 31,
                                   -----------------------
    Product Line                    2003             2002                  Variance
                                    ----             ----                  --------

    Wound care                  $2,810,985       $  751,377         $2,059,608    274.1%
    Wound closure-fasteners        845,256          771,250             74,006      9.6%
    Skin care                      559,998          617,830            (57,832)    (9.4)%
                                ----------       ----------         -----------

    Total                       $4,216,239       $2,140,457         $2,075,782     97.0%
                                ==========       ==========         ===========`

Net
sales increased $2,075,782, or 97.0%, in the first quarter 2003 versus the first quarter
2002. Wound care net sales increased due to the acquisition of Dumex in August 2002.
Excluding Dumex net sales, quarter-to-quarter wound care net sales decreased $20,104, or
2.7%, largely due to competitive pricing pressures. Wound closure- fasteners sales
increased $74,006, or 9.6%, due principally to an increase in sales of Percu-Stay catheter
fasteners. Net sales of skin care products were down $57,832, or 9.4%, from the same
quarter of the prior year due to increased competition.

Net Sales, Cost of Sales
and Gross Profit

The
Companys net sales, cost of sales, gross profit and gross profit margins for the
first quarter of 2003 and 2002 are outlined in the table below:

`Quarter Ended March 31,
                               -----------------------
                           2003                       2002                   Variance
                           ----                       ----                   --------

Net sales         $4,216,239    100.0%      $2,140,457    100.0%      $2,075,782     97.0%
Cost of sales      2,689,229     63.8%         975,920     45.6%       1,713,309    175.6%
                  ----------    ------      ----------    ------      ----------

Gross profit      $1,527,010     36.2%      $1,164,537     54.4%      $  362,473     31.1%
                  ==========    ======      ==========    ======      ==========`

Gross
profit increased 31.1% in the first quarter of 2003 to $1,527,010 from $1,164,537 in the
first quarter of 2002 due to higher sales volume arising from the Dumex acquisition.
Excluding Dumex sales, the first quarter 2003 gross profit was lower than the first
quarter 2002 gross profit as a result of pricing pressures in the wound care business,
lower sales volumes in the skin care business and increased sales of lower margin
international sales in the wound care and wound closure-fasteners businesses.

The
first quarter 2003 and 2002 gross profit percentages were 36.2% and 54.4%, respectively.
The decrease in the 2003 first quarter to 2002 first quarter gross profit percentage is
primarily attributable to the inclusion of lower margin Dumex product sales and a decline
in the gross profit margin of the Derma business on a stand-alone basis of 3.2% from 54.4%
in 2002 to 51.2% in 2003. The Derma business gross profit margin decline was attributable
to pricing pressures in the wound care line and pricing and volume pressures in the skin
care line. The Dumex business on a stand-alone basis generated a 20.8% gross profit which
met first quarter 2003 expectations.

Operating Expenses

Operating
expenses increased $469,576, or 47.6%, to $1,455,097 in the first quarter of 2003 from
$985,521 in the first quarter of 2002. A summary of selling, marketing and general and
administrative expenses for the first quarter 2003 and 2002 are outlined in the table
below.

17

---

`Quarter Ended March 31,
                               -----------------------
                                 2003           2002                Variance
                                 ----           ----                --------

Selling                     $  403,090       $348,703         $ 54,387      15.6%
Marketing                       46,732         64,574          (17,842)    (27.6%)
General administrative       1,005,275        572,244          433,031      75.7%
                            ----------       --------         ---------

         Total              $1,455,097       $985,521         $469,576      47.6%
                            ==========       ========         ========`

Selling
expenses increased from the same quarter of the prior year due principally to incremental
Dumex selling expenses of $92,247, partially offset by a decrease in Derma business
selling expenses of $37,860. The decrease in Derma business selling expenses is
attributable to lower compensation and commissions as the sales department implements a
reorganization. Marketing expenses, which relate primarily to the Derma business,
decreased due primarily to a delay in promotional activities and sales literature
expenses. General and administrative expenses increased from the same quarter of the prior
year as a result of incremental Dumex expenses, along with the Derma business incurring
higher compensation, accounting, insurance, consulting and public relations expenses,
partially offset by lower bad debt and regulatory expenses.

Excluding
Dumex related operating expenses of $454,264 operating expenses increased $15,312, or
1.6%, to $1,000,833 versus $985,521 on a quarter-to-quarter basis.

Interest Expense, net

Interest
expense, net decreased $10,936 to $113,439 in the first quarter 2003 from $124,375 in the
first quarter 2002. The decrease is attributable to the non-recurrence of an imputed
non-cash interest charge of $122,700 associated with the conversion of the Companys
Series C and D bonds and accrued interest outstanding in January 2002, which was largely
offset by the February 28, 2003 termination of the Companys existing U.S. line of
credit facility resulting in the write-off of $66,342 of deferred financing costs, Dumex
interest expense of $32,835 related to its line of credit and long-term indebtedness, and
$19,662 of interest incurred on the U.S. line of credit prior to its termination.

Other Income

Other
income, net increased $40,022 to $49,596 in the first quarter of 2003 from $9,574 in the
first quarter of 2002. The increase is attributable to the settlement of an Internal
Revenue Service civil tax penalty resulting in the return of credits applied against the
penalty of $23,553 and the reversal of a $65,000 accrued liability allocated to the IRS
civil tax penalty and sale and/or conversion of previously reserved, discontinued and
slow-moving inventory of $31,200, partially offset by the payment of a $50,000 fee
associated with the early termination of the Companys U.S. line of credit on
February 28, 2003 and miscellaneous expenses of approximately $20,000.

Provision for Income Taxes

Given
available net operating loss carry forwards, no provision for income taxes has been made
in the first quarter of 2003 and 2002.

Net Income

The
Company generated net income of $8,070, or $0.00 per share (basic) and $0.00 per share
(diluted), in the first quarter 2003 compared to net income of $64,215, or $0.03 per share
(basic) and $0.01 per share (diluted), in the first quarter 2002.

18

---

Liquidity and Capital
Resources

Sales
in the first quarter of 2003 increased over the first quarter of 2002 due to the inclusion
of Dumex sales in 2003. Excluding Dumex sales, on a quarter-to-quarter basis, 2003 Derma
business sales were essentially flat. On a quarter-to-quarter basis, the gross profit
increased due to the inclusion of Dumex sales, but the gross profit percentage declined
due to the inclusion of lower margin Dumex products and competitive pressures in the Derma
business. Operating expenses continued to be closely monitored. Net income of $8,070 for
the first quarter of 2003 was consistent with plan expectations.

At
March 31, 2003, and December 31, 2002, the Company had cash and cash equivalents of
$471,426 and $1,496,357, respectively. For the first quarter ended March 31, 2003, there
was a $1,024,931 decrease in cash and cash equivalents, principally attributable to cash
used in financing and operating activities of $908,876 and $90,432, respectively. In the
first quarter, the Company terminated and repaid its $1,000,000 U.S. line of credit and
entered into a new, more cost effective U.S. line of credit. Cash used in operating
activities primarily related to the pre-payment of operating expenses that will be
amortized over the balance of 2003, a $50,000 interest bearing promissory note to a
supplier of one of the Companys products to be used for working capital purposes,
reversal of a $65,000 accrued liability no longer required due to resolution of an
Internal Revenue Service civil tax penalty and payment of a $64,000 obligation to the
former owner of Dumex Medical Inc. Cash provided from operating activities primarily
relates to the timing of accounts payable obligations and the write-off of deferred
financing costs associated with the terminated U.S. line of credit. Working capital
increased $150,035 at March 31, 2003 to $3,505,036 from $3,355,001 at December 31, 2002.

In
connection with the Dumex acquisition, the Company entered into a sixteen month $1,700,000
revolving credit facility expiring December 31, 2003 to fund day-to-day operations.
Maximum potential advances under the agreement at March 31, 2003 were $1,470,000. Advances
outstanding against the credit facility were $1,221,092 at March 31, 2003, leaving an
additional $248,908 available for borrowing.

In
March 2003 the Company entered into a new one year line of credit agreement (subject to
annual renewal) with a U.S. lender (the Agreement) for a maximum principal
amount of $2,000,000. No funds have been drawn against the line to date. Estimated maximum
potential advances under the Agreement on the date of signing were $1,250,000, less any
outstanding standby letters of credit. Advances will be utilized to fund strategic
initiatives and for general working capital purposes.

As
security for indebtedness of the Companys subsidiary, Dumex Medical Canada Inc., the
Company has accorded a Canadian bank its guarantee of payment together with a second lien
security interest in the Companys assets located in the U.S. In connection with the
Agreement and in return for a standby letter of credit in the amount of $200,000 against
the new line of credit, the Canadian bank has agreed not to exercise its rights under its
second lien security interest and guarantee against the Companys U.S. assets without
the U.S. lenders approval. The standby letter of credit serves to reduce the
Companys potential borrowing capacity under the Agreement by $200,000.

The
Company initiated in January 2002, a private offering of 4,000,000 shares of its common
stock at a price of $0.50 per share. Through March 31, 2003, the Company had sold
1,600,000 shares and received proceeds of $747,678, net of $52,322 in offering expenses.
As of May 12, 2003, an additional 820,000 shares were sold for which the Company received
gross proceeds of $410,000.

For
2003, the Company seeks to increase sales and profits by, among other initiatives,
launching sale of the Dumex product line in the U.S., driving organic growth of its core
product lines both in the U.S. and Canada and integrating the Dumex business more fully
into Derma. Steps are planned to minimize year-to-year product cost increases and improve
overall supply chain efficiency and cost effectiveness. Plans are also in place to invest
in upgrading sales and marketing resources. Operating expenses will continue to be
properly balanced with revenues.

19

---

Among
the potential sources of capital the Company expects to utilize to finance its growth
plans in 2003 are anticipated improved profitability, anticipated additional stock sale
proceeds and prudent utilization of available lines of credit.

Strategically,
the Companys plan is to stay focused on its base business while considering external
opportunities to leverage its core capabilities for growth.

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.

Critical Accounting
Policies

The
preparation of the financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the amounts in the financial statements and the accompanying notes. Actual results
could differ from those estimates. We believe the following accounting policies are the
most critical to the Company.

Revenue Recognition and
Allowance for Trade Rebates

Revenue
is recognized when product is shipped and title passes to the customer. Sales are adjusted
for cash discounts, Medicaid rebates and trade rebates to derive net sales. The Company
establishes an allowance for trade and Medicaid rebates based on past experience. If the
estimate of trade and Medicaid rebates is not sufficient to cover actual rebates,
additional allowances may be required.

Inventory

The
Company writes down the value of inventory by the estimate of the difference between the
cost of the inventory and its net realizable value. The estimate takes into account
projected sales of the inventory on hand and the age of the inventory in stock. If actual
future demand or market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. The provision for the write-down of
inventory is recorded in cost of sales.

Goodwill Impairment

At
March 31, 2003, the Companys skin care segment had $1,110,967 of goodwill. The
Company tests goodwill for impairment on a periodic basis. The process of evaluating the
potential impairment of goodwill is highly subjective and requires significant judgments
at many points during the analysis. In estimating the fair value of the skin care segment
with recognized goodwill, the Company makes estimates and judgments about the future cash
flows of this segment. The Companys cash flow forecasts are based on assumptions
that are consistent with the plans and estimates used to manage the underlying business.
In addition, the Company makes certain judgments about allocating shared assets to the
balance sheet for this segment. Changes in these estimates would cause the skin care
segment to be valued differently in the future.

20

---

Item 3.  CONTROLS AND PROCEDURES

The
Companys management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.

21

---

Part II - Other Information

Item 1. Legal Proceedings

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits. All exhibits required by Item 601 of Regulation S-B
and required hereunder, as filed with the Securities and Exchange Commission in Form 10-KSB on March 31, 2003, are incorporated
herein by reference.

| | Exhibit | Description                                                                                                                                 
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------
| |         |                                                                                                                                             
| | 99.1    | Certification of Principal Executive Officer pursuant to U.S.C. Section 1350 regarding Form 10-QSB
     for the quarter ended March 31, 2003
| |         |                                                                                                                                             
| | 99.2    | Certification of Principal Financial Officer pursuant to U.S.C. Section 1350 regarding Form 10-QSB
     for the quarter ended March 31, 2003

(b) Reports on Form 8-K.  Form 8-K was filed on
February 14, 2003 relative to the Registrant's termination of its credit facility with Capital Source Finance, LLC.

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

|                    |  | DERMA SCIENCES, INC.                                                                         
|------------------- |  | ---------------------------------------------------------------------------------------------
|                    |  |                                                                                              
|                    |  |                                                                                              
|                    |  |                                                                                              
|Dated: May 15, 2003 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

22

---

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002

I, Edward J. Quilty, certify that:

1.    
          I have reviewed this quarterly report on Form 10-QSB of Derma Sciences, Inc.;

2.    
          Based on my knowledge, this quarterly report does not contain any untrue
          statement of a material fact or omit to state a material fact necessary to make
          the statements made, in light of the circumstances under which such statements
          were made, not misleading with respect to the period covered by this quarterly
          report;

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this quarterly report;

4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)       
          designed such disclosure controls and procedures to ensure that material
          information relating to the registrant, including its consolidated subsidiaries,
          is made known to us by others within those entities, particularly during the
          period in which this quarterly report is being prepared;

b)       
          evaluated the effectiveness of the registrants disclosure controls and
          procedures as of a date within 90 days prior to the filing date of this
          quarterly report (the Evaluation Date); and

c)       
          presented in this quarterly report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of the
          Evaluation Date;

5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent functions):

a)       
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and

b)       
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and

6.    
          The registrants other certifying officers and I have indicated in this
          quarterly report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.

|Dated:  May 15, 2003 | /s/ Edward J. QuiltyEdward J. QuiltyChairman, President and Chief Executive
     Officer(Principal Executive Officer)
|-------------------- | ---------------------------------------------------------------------------------------------------------------------

23

---

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002

I, John E. Yetter, certify that:

1.    
          I have reviewed this quarterly report on Form 10-QSB of Derma Sciences, Inc.;

2.    
          Based on my knowledge, this quarterly report does not contain any untrue
          statement of a material fact or omit to state a material fact necessary to make
          the statements made, in light of the circumstances under which such statements
          were made, not misleading with respect to the period covered by this quarterly
          report;

3.    
          Based on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this quarterly report;

4.    
          The registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)       
          designed such disclosure controls and procedures to ensure that material
          information relating to the registrant, including its consolidated subsidiaries,
          is made known to us by others within those entities, particularly during the
          period in which this quarterly report is being prepared;

b)       
          evaluated the effectiveness of the registrants disclosure controls and
          procedures as of a date within 90 days prior to the filing date of this
          quarterly report (the Evaluation Date); and

c)       
          presented in this quarterly report our conclusions about the effectiveness of
          the disclosure controls and procedures based on our evaluation as of the
          Evaluation Date;

5.    
          The registrants other certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent functions):

a)       
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect the registrants ability to record, process,
          summarize and report financial data and have identified for the
          registrants auditors any material weaknesses in internal controls; and

b)       
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in the registrants internal controls; and

6.    
          The registrants other certifying officers and I have indicated in this
          quarterly report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.

|Dated:  May 15, 2003 | /s/ John E. YetterJohn E. YetterVice President and Chief Financial
     Officer(Principal Financial Officer)
|-------------------- | ------------------------------------------------------------------------------------------------------------

24