---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934   For Quarter Ended
     
     June 30, 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: June 30, 2003 | Class: Common Stock, par value $.01 per share
|------------------- | ---------------------------------------------
|                    | Shares Outstanding: 7,031,256                

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

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

Part I - Financial Information

|        |                                                                                                |   
|------- | ---------------------------------------------------------------------------------------------- | --
|Item 1. | Consolidated Financial Statements                                                              |   
|        |                                                                                                |   
|        | Consolidated Balance Sheets - June 30, 2003 and December 31, 2002                              | 3 
|        |                                                                                                |   
|        | Consolidated Statements of Operations - Three months ended June 30, 2003and
     June 30, 2002 | 4 
|        |                                                                                                |   
|        | Consolidated Statements of Operations - Six months ended June 30, 2003and
     June 30, 2002   | 5 
|        |                                                                                                |   
|        | Consolidated Statements of Cash Flows -
     Six months ended June 30, 2003and June 30, 2002   | 6 
|        |                                                                                                |   
|        | Notes to Consolidated Financial
     Statements                                                | 7 
|        |                                                                                                |   
|Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations     | 17
|        |                                                                                                |   
|Item 3. | Controls and Procedures                                                                        | 27

Part II - Other Information

|Item 1. | Legal Proceedings                | 28
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 28
|        |                                  |   

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

`----------------------------------------------------------------------------------------------------
                                                                        June 30,      December 31,
                                                                          2003            2002
                                                                       Unaudited)
ASSETS
----------------------------------------------------------------------------------------------------

Current Assets
  Cash and cash equivalents                                            1,478,487   $   1,496,357
  Accounts receivable, net                                             2,390,962       1,975,993
  Inventories                                                          3,367,138       2,875,755
  Prepaid expenses and other current assets                              425,564         281,066
----------------------------------------------------------------------------------------------------
Total current assets                                                   7,662,151       6,629,171
Property and equipment, net                                            1,097,969         987,891
Goodwill                                                               1,110,967       1,110,967
Patents and trademarks, net                                              131,956         140,378
Other assets, net                                                        141,469         220,177
----------------------------------------------------------------------------------------------------
Total Assets                                                        $ 10,144,512   $   9,088,584
----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------
Current Liabilities
  Line of credit                                                       1,516,999   $   1,962,627
  Current maturities of long-term debt                                   173,904         173,493
  Accounts payable                                                       804,237         692,259
  Accrued expenses and other current liabilities                         281,891         445,791
----------------------------------------------------------------------------------------------------
Total current liabilities                                              2,777,031       3,274,170
----------------------------------------------------------------------------------------------------
Long-term debt                                                           902,412         845,455
----------------------------------------------------------------------------------------------------
Total Liabilities                                                      3,679,443       4,119,625
----------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares authorized;
  issued and outstanding: 7,031,256 shares at June 30, 2003 and
  4,631,276 shares at December 31, 2002                                   70,313          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                                            16,723,861      15,588,698
Accumulated other comprehensive income (loss)                            225,774         (21,736)
Accumulated deficit                                                  (10,580,141)    (10,669,578)
----------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                             6,465,069       4,968,959
----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                          $ 10,144,512   $   9,088,584
====================================================================================================`

See accompanying notes.

3

---

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

`==========================================================================================
                                                                Three months ended
                                                                     June 30,
                                                             2003                2002
------------------------------------------------------------------------------------------
Net sales                                                   $ 4,636,189     $ 2,102,207

Cost of sales                                                 2,949,660         926,161
------------------------------------------------------------------------------------------
Gross Profit                                                  1,686,529       1,176,046
------------------------------------------------------------------------------------------
Operating expenses                                            1,545,895       1,071,692
Interest expense, net                                            57,047           6,723
Other (income)/expense, net                                       2,220          89,244
------------------------------------------------------------------------------------------
Total Expenses                                                1,605,162       1,167,659
------------------------------------------------------------------------------------------
Income before provision for income taxes                         81,367           8,387
Provision for income taxes                                        -               -
------------------------------------------------------------------------------------------
Net Income                                                  $    81,367     $     8,387
------------------------------------------------------------------------------------------
Income per common share - basic                             $      0.02     $      0.00
------------------------------------------------------------------------------------------
Income per common share - diluted                           $      0.01     $      0.00
------------------------------------------------------------------------------------------
Shares used in computing income per common share - basic      5,000,507       3,854,609
------------------------------------------------------------------------------------------
Shares used in computing income per common share - diluted   10,154,959       7,154,322
==========================================================================================`

See accompanying notes.

4

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

`==========================================================================================
                                                                 Six months ended
                                                                     June 30,
                                                             2003                2002
------------------------------------------------------------------------------------------
Net sales                                                   $ 8,852,428     $ 4,242,664

Cost of sales                                                 5,638,889       1,902,081
------------------------------------------------------------------------------------------
Gross Profit                                                  3,213,539       2,340,583
------------------------------------------------------------------------------------------
Operating expenses                                            3,000,992       2,057,213
Interest expense                                                170,486         131,098
Other (income)/expense, net                                     (47,376)         79,670
------------------------------------------------------------------------------------------
Total Expenses                                                3,124,102       2,267,981
------------------------------------------------------------------------------------------
Income before provision for income taxes                         89,437          72,602
Provision for income taxes                                        -               -
------------------------------------------------------------------------------------------
Net Income                                                  $    89,437     $    72,602
------------------------------------------------------------------------------------------
Income per common share - basic                             $      0.02     $      0.02
------------------------------------------------------------------------------------------
Income per common share - diluted                           $      0.01     $      0.01
------------------------------------------------------------------------------------------
Shares used in computing income per common share - basic      4,815,892       3,438,970
------------------------------------------------------------------------------------------
Shares used in computing income per common share - diluted    8,664,538       6,814,264
==========================================================================================`

See accompanying notes.

5

---

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

`=====================================================================================================
                                                                               Six months ended
                                                                                   June 30,
                                                                             2003            2002
-----------------------------------------------------------------------------------------------------
Operating Activities
    Net income                                                         $    89,437      $   72,602
    Adjustments to reconcile net income to
      net cash (used in) provided by operating activities:
       Depreciation                                                         75,553          35,311
       Amortization                                                         98,834          28,527
       Deferred financing costs                                             15,000         120,200
       Provision for doubtful accounts and trade rebates                     5,000          (3,186)
       Provision for inventory obsolescence                                 14,085          19,297
       Loss on disposal of property and equipment                            2,132           -
       Changes in operating assets and liabilities
           Restricted cash                                                   -             (60,000)
           Accounts receivable                                            (201,037)        (13,633)
           Inventories                                                    (232,356)         (8,270)
           Prepaid expenses and other current assets                      (111,451)       (126,071)
           Other assets                                                     22,341          (3,718)
           Accounts payable                                                 76,227         301,146
           Accrued expenses and other current liabilities                 (196,850)          7,258
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                       (343,085)        369,463
-----------------------------------------------------------------------------------------------------
Investing Activities
    Purchases of property and equipment                                    (55,823)        (46,481)
    Deferred acquisition costs                                               -            (132,602)
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities                                      (55,823)       (179,083)
-----------------------------------------------------------------------------------------------------
Financing Activities
    Net change in bank line of credit                                     (638,348)          -
    Deferred financing costs                                               (26,923)        (85,297)
    Long-term debt repayments                                             (108,153)          -
    Proceeds from issuance of stock, net of issuance costs               1,154,992         509,408
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                  381,568         424,111
-----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                       (530)          -
-----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                       (17,870)        614,491

Cash and cash equivalents
  Beginning of period                                                    1,496,357         524,783
-----------------------------------------------------------------------------------------------------
  End of period                                                        $ 1,478,487      $1,139,274
-----------------------------------------------------------------------------------------------------

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
  Stock subscriptions receivable                                       $     -             $55,000
=====================================================================================================`

See accompanying notes.

6

---

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
adjustments) considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 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.

7

---

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. In
accordance with SFAS No. 142, 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 Opinion 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:

`Three Months Ended June 30,      Six Months Ended June 30,
                                           ---------------------------      -------------------------
                                               2003          2002              2003          2002
                                              ------        ------            ------        ------

Net income - as reported                    $  81,367      $  8,387         $  89,437      $ 72,602
Pro forma compensation expense               (320,335)      (28,743)         (401,582)      (49,537)
                                              -------        ------           -------        ------

Pro forma net (loss) income                 $(238,968)     $(20,356)        $(312,145)     $ 23,065
                                              =======        ======           =======        ======

Income (loss) per common share - basic
    As reported                                $0.02         $0.00             $0.02         $0.02
    Pro forma                                 $(0.05)       $(0.01)           $(0.06)        $0.01

Income (loss) per common share - diluted
    As reported                                $0.01         $0.00             $0.01         $0.01
    Pro forma                                 $(0.05)       $(0.01)           $(0.06)        $0.00`

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 net sales.

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.

8

---

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:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Trade accounts receivable                                         $2,516,514           $1,943,674
        Less:  Allowance for doubtful accounts                               (25,000)             (40,000)
               Allowance for trade rebates                                  (116,000)             (96,000)
                                                                           ----------           ----------
           Net trade receivables                                           2,375,514            1,807,674
        Other receivables                                                     15,448              168,319
                                                                           ----------           ----------

           Total receivables                                              $2,390,962           $1,975,993
                                                                           ==========           ==========`

4. Inventories

Inventories
include the following:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Finished goods                                                     $2,477,088         $2,111,546
        Work in process                                                       130,342             91,788
        Packaging materials                                                   278,287            287,903
        Raw materials                                                         481,421            384,518
                                                                            ----------         ----------

             Total inventory                                               $3,367,138         $2,875,755
                                                                            ==========         ==========`

5. Property and Equipment

Property
and equipment include the following:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Machinery and equipment                                            $1,222,131         $1,043,383
        Furniture and fixtures                                                174,169            165,858
        Leasehold improvements                                                 47,666             40,714
                                                                            ----------         ----------
             Gross property and equipment                                   1,443,966          1,249,955

        Less:  Accumulated depreciation                                      (345,997)          (262,064)
                                                                            ----------         ----------

             Net property and equipment                                    $1,097,969        $   987,891
                                                                            ==========         ==========`

9

---

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:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Patents and trademarks                                              $ 444,067          $ 444,067
        Less:   Accumulated amortization                                     (312,111)          (303,689)
                                                                             ---------          ---------

             Net patents and trademarks                                     $ 131,956          $ 140,378
                                                                             =========          =========`

8. Other Assets

Other
assets include the following:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Deferred financing costs                                            $  84,642           $162,314
        Deposits                                                               56,827             57,863
                                                                             ---------          ---------

             Total other assets                                              $141,469           $220,177
                                                                             =========          =========`

9. Short Term Borrowings

Short term
borrowings include the following:

`June 30,          December 31,
                                                                             2003                2002
                                                                             ----                ----
        Canadian line of credit                                            $1,516,999        $   962,627
        U.S. line of credit                                                       -            1,000,000
                                                                            ----------         ----------

             Total short term borrowings                                   $1,516,999         $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 $1,855,000 with a Canadian bank.

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 its eligible inventory (as
defined) up to a maximum of $705,000. Interest on outstanding advances is payable monthly
at the Canadian prime rate (as defined) plus 1.0%, or 6.0% for advances outstanding at
June 30, 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.

10

---

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 $370,000 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 4.1% on June 30, 2003. 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. 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.

11

---

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 was 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:
                                                           June 30,          December 31,
                                                             2003               2002
                                                             ----               ----

        Canadian term loan                                $1,071,615         $  987,576
        Capital lease obligations                              4,701             31,372
                                                           ---------          ---------

             Total debt                                   $1,076,316         $1,018,948
        Less:  current maturities                            173,904            173,493
                                                           ---------          ---------

             Long-term debt                               $  902,412         $  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 6.25% at June
30, 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.

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.

12

---

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
June 30, 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 closed in June 2003 a private offering of 4,000,000 shares of its common stock at
a price of $0.50 per share initiated in January 2002. Offering proceeds are being used to
fund strategic initiatives and for general working capital purposes. From January 2002
through June 30, 2003, 4,000,000 shares of common stock were issued pursuant to the
offering and offering proceeds of $1,908,312, net of $91,688 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:

`Six Months Ended June 30,
                                                               2003              2002
                                                              ------            ------

         Net income - as reported                            $ 89,437           $72,602
         Other comprehensive income:
             Foreign currency translation adjustment          247,510              -
                                                              -------            ------

         Comprehensive income                                $336,947           $72,602
                                                              =======            ======`

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, together with accrued interest of $1,190, is included in prepaid expenses and other
current assets.

13

---

15. Income taxes

No
provision for income taxes has been made in the three or the six months ended June 30,
2003 or 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 and six months ended June 30, 2003 and 2002
are as follows:

`Three Months Ended June 30, 2003
                                     --------------------------------

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

Net sales              $3,395,393         $723,108      $517,688            -         $ 4,636,189
                        ---------          -------       -------      ----------       ----------

Gross profit            1,187,213          354,441       144,875            -           1,686,529
Total expenses               -               -              -        $(1,605,162)      (1,605,162)
                                                                                        ---------

Net income                                                                            $    81,367
                                                                                       ==========

Net long-lived assets  $1,008,985            -        $1,300,487         $31,420      $ 2,340,892
                        =========                      =========          ======       ==========`

14

---

`Three Months Ended June 30, 2002
                                     --------------------------------

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

Net sales              $  785,519         $660,642      $656,046            -         $ 2,102,207
                        ---------          -------       -------      ----------       ----------

Gross profit              616,345          324,193       235,508            -           1,176,046
Total expenses              -                -             -         $(1,167,659)      (1,167,659)
                                                                                        ---------

Net income                                                                            $     8,387
                                                                                       ==========

Net long-lived assets  $  156,155             $295    $1,229,690         $54,777      $ 1,440,917
                        =========                      =========          ======       ==========


                                      Six Months Ended June 30, 2003
                                      ------------------------------

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

Net sales              $6,206,378       $1,568,364    $1,077,686            -         $ 8,852,428
                        ---------          -------       -------      ----------       ----------

Gross profit            2,152,334          748,875       312,330            -           3,213,539
Total expenses               -               -              -        $(3,124,102)      (3,124,102)
                                                                                        ---------

Net income                                                                            $    89,437
                                                                                       ==========

Net long-lived assets  $1,008,985            -        $1,300,487         $31,420      $ 2,340,892
                        =========                      =========          ======       ==========



                                      Six Months Ended June 30, 2002
                                      ------------------------------

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

Net sales              $1,536,896       $1,431,892    $1,273,876            -         $ 4,242,664
                        ---------          -------       -------      ----------       ----------

Gross profit            1,187,859          717,136       435,588            -           2,340,583
Total expenses              -                -             -         $(2,267,981)      (2,267,981)
                                                                                        ---------

Net income                                                                             $   72,602
                                                                                       ==========

Net long-lived assets     $156,155            $295     $1,229,690        $54,777       $1,440,917
                        =========                      =========          ======       ==========`

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 six months ended June 30, 2003 and patents and trademarks in the first six
months of 2003 and 2002. Wound closure-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.

15

---

International
sales (excluding Canada) were $444,063 and $328,500 in 2003 and 2002, respectively. Wound
closure-fasteners sales represent the majority of international sales.

17. Subsequent Event

On
August 5, 2003, the Company purchased for cash all right, title and interest to Genesis
Ointment for $112,000 from Gericare Providers, Inc. Genesis Ointment is a vitamin enriched
moisture barrier and skin protectant that both competes with and complements the
Companys existing wound care product line. Sales of Genesis Ointment approximate
$150,000 to $200,000 per year.

The
asset purchase agreement further provides that Gericare Providers, Inc. not enter into any
business that competes in any way with Genesis Ointment or Derma Sciences Dermagran
line of wound care products for a period of five years from the date of the agreement.

16

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

QUARTER ENDED JUNE 30, 2003 COMPARED
TO QUARTER ENDED JUNE 30, 2002.

Results of Operations

Net
sales increased $2,533,982, or 120.5%, to $4,636,189 in the second quarter 2003 from
$2,102,207 in the second quarter 2002. Gross profit increased $510,483, or 43.4%, to
$1,686,529 in the second quarter 2003 from $1,176,046 in the second quarter 2002. Gross
profit margins decreased to 36.4% in the second quarter 2003 from 55.9% in the second
quarter 2002. Operating expenses increased $474,203, or 44.3%, in the second quarter 2003
to $1,545,895 from $1,071,692 in the second quarter 2002. Interest expense increased
$50,324 in the second quarter 2003 to $57,047 from $6,723 in the second quarter 2002.
Other expense decreased $87,024 in the second quarter 2003 to $2,220 from $89,244 in the
second quarter 2002. Net income of $81,367 and $8,387 was generated in the second quarters
of 2003 and 2002, respectively.

The
following table highlights the impact on second 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 June 30, 2003             June 30, 2002
                                                  ---------------------------             -------------
                                      Consolidated        Dumex              Derma        (Derma Only)
                                      ------------        -----              -----        ------------

Net sales                               $4,636,189      $2,650,985         $1,985,204       $2,102,207
                                         ---------       ---------          ---------        ---------
Gross profit                             1,686,529         636,094          1,050,435        1,176,046
                                         ---------       ---------          ---------        ---------
Operating expenses                       1,545,895         500,117          1,045,778        1,071,692
Interest expense, net                       57,047          42,432             14,615            6,723
Other expenses (income), net                 2,220         (14,479)            16,699           89,244
                                         ---------       ---------          ---------        ---------
Total expenses                           1,605,162         528,070          1,077,092        1,167,659
Income (loss) before income taxes           81,367         108,024            (26,657)           8,387
Provision for taxes                         -               -                  -                -
                                         ---------       ---------          ---------        ---------

Net income (loss)                       $   81,367      $  108,024        $   (26,657)     $     8,387
                                         =========       =========          =========        =========`

Derma Business Overview

Excluding
the Dumex acquisition, second quarter 2003 net sales decreased $117,003, or 5.6% to
$1,985,204 versus $2,102,207 in the second quarter 2002. Net sales were lower in the wound
and skin care lines primarily due to competitive pricing pressure. The wound
closure-fasteners line experienced a 9.5% increase in sales due to stronger suture strip
and catheter fastener sales.

Gross
profit in the second quarter of 2003 decreased $125,611, or 10.7%, to $1,050,435 versus
$1,176,046 in the second quarter 2002. This decrease is attributable to decreases in the
skin and wound care lines due to competitive pricing pressures, partially offset by an
increase in the wound closure-fasteners line gross profit due to higher sales volume.

Total
expenses in the second quarter 2003 decreased $90,567, or 7.8%, to $1,077,092 from
$1,167,659 in the second quarter of 2002. The decrease in expenses is primarily
attributable to the 2002 write off of $94,900 of acquisition costs associated with a
cancelled acquisition initiative. In the second quarter of 2003, the Derma business
generated a $26,657 loss versus net income of $8,387 in the second quarter of 2002.

17

---

Dumex Business Overview

The
Dumex business acquired on August 26, 2002, generated second quarter 2003 net sales of
$2,650,985. Net sales were slightly higher than plan in local currency and benefited
approximately 11% in translation due to a stronger Canadian to U.S. dollar exchange rate.
Canadian sales exceeded plan due to the sale of face masks, which are outside the core
Dumex business, in response to the Sudden Acute Respiratory Syndrome (SARS) epidemic and
the positive impact of renewed and expanded long-term supply contracts, partially offset
by lower than anticipated sales of traditional wound care products to hospitals due to the
SARS epidemic and lower than expected private label sales.

Gross
profit of $636,094 and a gross profit percentage of 24% met expectations. Gross profit
improved as a result of higher gross margins on masks in response to the SARS epidemic,
favorable exchange rates on U.S. dollar inventory related purchases, partially offset by
lower margins on the renewal of long-term supply contracts.

Operating
expenses of $500,117 were higher than plan due primarily to a stronger than anticipated
Canadian versus U.S. dollar, along with higher than anticipated employee benefit costs and
sample expense due to increased marketing efforts.

Dumex
returned to profitability in the second quarter of 2003 generating net income of $108,024.

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 June 30,
                                    ----------------------
                                   2003                 2002
                                   ----                 ----

Gross Sales                      $4,860,098          $2,354,183

Trade rebates                      (178,136)           (188,540)
Cash discounts                      (34,817)            (44,686)
Medicaid rebates                    (10,956)            (18,750)
                                    --------            --------

Net Sales                        $4,636,189          $2,102,207
                                  =========           =========`

Gross
sales increased $2,505,915, or 106.5%, from the same quarter of the prior year due to
inclusion of Dumex sales for the entire second quarter of 2003, along with higher wound
closure-fasteners sales, slightly offset by lower skin care and Derma related wound care
sales. Gross to net sales adjustments relate primarily to the Derma business and are not
significantly impacted by Dumex activity. Trade rebates were lower due to lower Derma skin
care sales in the second quarter 2003 versus 2002. 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. Medicaid rebates
declined as a result of lower Derma related wound care sales.

18

---

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

`Quarter Ended June 30,
                               ----------------------
Product Line                  2003              2002                 Variance
                              ----              ----                 --------

Wound care                 $3,395,393       $  785,519         $2,609,874    332.2%
Wound closure-fasteners       723,108          660,642             62,466      9.5%
Skin care                     517,688          656,046           (138,358)   (21.1)%
                            ---------        ---------          ---------

Total                      $4,636,189       $2,102,207         $2,533,982    120.5%
                            =========        =========          =========`

Net
sales increased $2,533,982, or 120.5%, in the second quarter 2003 versus the second
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
$117,003, or 5.6%, largely due to competitive pricing pressures. Wound closure-fasteners
sales increased $62,466, or 9.5%, due principally to an increase in suture strip and
catheter fastener sales. Net sales of skin care products were down $138,358, or 21.1%,
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
second quarter of 2003 and 2002 are outlined in the table below:

`Quarter Ended June 30,
                               ----------------------
                           2003                      2002                    Variance
                   --------------------     --------------------      ---------------------

Net sales          $4,636,189    100.0%     $2,102,207    100.0%      $2,533,982     120.5%
Cost of sales       2,949,660     63.6%        926,161     44.1%       2,023,499     218.5%
                    ---------                ---------                ----------

Gross profit       $1,686,529     36.4%     $1,176,046     55.9%      $  510,483      43.4%
                    =========               ==========                 =========`

Gross
profit increased 43.4% in the second quarter of 2003 to $1,686,529 from $1,176,046 in the
second quarter of 2002 due to higher sales volume arising from the Dumex acquisition.
Excluding Dumex sales, the second quarter 2003 gross profit was lower than the second
quarter 2002 gross profit as a result of pricing pressures in the wound and skin care
lines.

The
second quarter 2003 and 2002 gross profit percentages were 36.4% and 55.9%, respectively.
The decrease in the 2003 second quarter versus the 2002 second 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
3.0% from 55.9% in 2002 to 52.9% in 2003. The Derma business gross profit margin decline
was attributable to pricing pressures in the wound and skin care lines. The Dumex business
on a stand-alone basis generated a 24% gross profit which met second quarter 2003
expectations.

Operating Expenses

Operating
expenses increased $474,203, or 44.2%, to $1,545,895 in the second quarter of 2003 from
$1,071,692 in the second quarter of 2002. A summary of selling, marketing and general
administrative expenses for the second quarter 2003 and 2002 are outlined in the table
below.

19

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`Quarter Ended June 30,
                                 ----------------------
                                  2003             2002                Variance
                                  ----             ----         --------------------

Selling                      $  459,875     $   314,426         $145,449      46.3%
Marketing                        58,851         157,351          (98,500)    (62.6%)
General administrative        1,027,169         599,915          427,254      71.2%
                              ---------       ---------          -------

         Total               $1,545,895      $1,071,692         $474,203      44.2%
                              =========       =========          =======`

Selling
expenses increased from the same quarter of the prior year due principally to incremental
Dumex selling expenses of $117,058 and an increase in Derma selling expenses of $28,391.
The increase in Derma selling expenses is attributable to an upgrade and expansion of the
sales organization. Marketing expenses, which relate primarily to the Derma business,
decreased due to lower outside consulting expenses and promotional activities. General
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,
travel, insurance, public relations and accounting expense, partially offset by lower bad
debt, regulatory and depreciation expenses.

Excluding
Dumex related operating expenses of $500,117, operating expenses decreased $25,914, or
2.4%, to $1,045,778 versus $1,071,692 on a quarter-to-quarter basis.

Interest Expense, net

Interest
expense, net increased $50,324 to $57,047 in the second quarter 2003 from $6,723 in the
second quarter 2002. Interest expense, net in the second quarter of 2003 is principally
comprised of U.S. line of credit costs of $10,500 and Dumex interest expense related to
its line of credit and long-term indebtedness of $42,500, while the second quarter of 2002
primarily relates to amortization of deferred financing costs associated with the U.S.
line of credit of $4,750.

Other Expense, net

Other
expense, net decreased $87,024 to $2,220 in the second quarter of 2003 from $89,244 in the
second quarter of 2002. Other expense, net in the second quarter of 2003 is primarily
comprised of the write-off of a cancelled acquisition initiative of $22,500, temporary
storage and demurrage of containers of $21,900, exchange losses of $12,300, and one-time
ISO consulting expenses of $9,700, partially offset by the sale and/or conversion of
previously reserved, discontinued and slow moving inventory of $54,400. Other expense in
the second quarter of 2002 is principally related to the write-off of deferred costs
related to a cancelled acquisition initiative of $94,900.

Provision for Income Taxes

Given
available net operating loss carryforwards, no provision for income taxes has been made in
the second quarter 2003 and 2002.

Net Income

The
Company generated net income of $81,367, or $0.02 per share (basic) and $0.01 per share
(diluted), in the second quarter 2003 compared to net income of $8,387, or $0.00 per share
(basic) and $0.00 per share (diluted), in the second quarter 2002.

20

---

SIX MONTHS ENDED JUNE 30, 2003
COMPARED TO SIX MONTHS ENDED JUNE 30, 2002.

Results of Operations

Net
sales increased $4,609,764, or 108.7%, to $8,852,428 in the six months ended June 2003
from $4,242,664 in the six months ended June 2002. Gross profit increased $872,956, or
37.3%, to $3,213,539 from $2,340,583. Gross profit margins decreased to 36.3% from 55.2%.
Operating expenses increased $943,779, or 45.9%, from $2,057,213 to $3,000,992. Interest
expense, net increased $39,388 to $170,486 from $131,098. Other income, net increased
$127,046 to $47,376 income from $79,670 expense. Net income of $89,437 and $72,602 was
generated in the six months ended June 2003 and 2002, respectively.

The
following table highlights the impact on the first six months of 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.

`Six Months Ended
                                         Six Months Ended June 30, 2003          June 30, 2002
                                         ------------------------------        ---------------
                               Consolidated         Dumex           Derma        (Derma Only)
                               ------------         -----           -----        ------------

Net sales                        $8,852,428       $4,730,697      $4,121,731      $4,242,664
                                  ---------        ---------       ---------       ---------
Gross profit                      3,213,539        1,068,744       2,144,795       2,340,583
                                  ---------        ---------       ---------       ---------
Operating expenses                3,000,992          954,381       2,046,611       2,057,213
Interest expense, net               170,486           75,220          95,266         131,098
Other (income) expense, net         (47,376)         (25,049)        (22,327)         79,670
                                  ---------        ---------       ---------       ---------
Total expenses                    3,124,102        1,004,552       2,119,550       2,267,981
Income before income taxes           89,437           64,192          25,245          72,602
Provision for taxes                  -                -               -               -
                                  ---------        ---------       ---------       ---------

Net income                       $   89,437       $   64,192      $   25,245      $   72,602
                                  =========        =========       =========       =========`

Derma Business Overview

Excluding
the Dumex acquisition, the first six months of 2003 net sales decreased $120,933, or 2.9%,
to $4,121,731 versus $4,242,664 in the first six months of 2002. The Derma business net
sales were lower in both the wound and skin care lines primarily due to competitive
pricing pressure. The wound closure-fasteners line experienced a 9.5% increase in sales
due to stronger catheter fasteners sales.

The
Derma business gross profit in the first six months of 2003 decreased $195,788, or 8.4%,
to $2,144,795 in the first six months of 2003 from $2,340,583 in the first six months of
2002. The decrease is attributable to lower profitability in the wound and skin care lines
due to competitive pricing pressure, partially offset by a gross profit increase in the
wound closure fasteners line resulting from higher sales of catheter fasteners.

The
Derma business total expenses in the first six months of 2003 decreased $148,431, or 6.5%,
to $2,119,550 from $2,267,981 in the first six months of 2002. The first six months of
2003 were favorably impacted by the settlement of an Internal Revenue Service claim of
$88,000, lower acquisition related costs of $72,400, lower non-cash interest changes of
$120,200 associated with the conversion of the Companys Series C and D bonds and
accrued interest outstanding in January 2002, partially offset by interest costs, one-time
early termination fee and write-off of deferred financing costs associated with the
previous U.S. line of credit of $136,000. Net income in the first six months of 2003
decreased $47,357 to $25,245 from $72,602 in the first six months of 2002.

Dumex Business Overview

The
Dumex business for the first six months of 2003 generated net sales of $4,730,697. Net
sales were lower than plan in local currency, but benefited approximately 8% in
translation due to a stronger Canadian to U.S. dollar exchange rate. Canadian sales were
benefited by the sale of face masks, which are outside the core Dumex business, in
response to the SARS epidemic and the positive impact of the renewal, and in some cases
expansion, of long-term supply agreements, partially offset by lower than anticipated
sales of traditional wound care products to hospitals due to the SARS epidemic and lower
than expected private label sales.

21

---

For
the first six months of 2003, Dumex generated a gross profit of $1,068,744 and a gross
profit percentage of 24%. Gross profit benefited from the sale of higher margin face
masks, favorable exchange rates on U.S. dollar inventory related purchases, partially
offset by lower gross margins on new or expanded long-term supply contracts.

Operating
expenses of $954,381 exceeded plan principally due to the strengthening of the Canadian
dollar versus the U.S. dollar, along with higher than plan costs for utilities, employee
benefits and samples.

Net
income for the first six months of 2003 was $64,192.

Sales Overview

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

`Six Months Ended June 30,
                                   -------------------------
                                   2003                 2002
                                   ----                 ----

Gross Sales                      $9,314,330          $4,681,050

Trade rebates                      (368,217)           (312,912)
Cash discounts                      (69,422)            (88,099)
Medicaid rebates                    (24,263)            (37,375)
                                     ------              ------

Net Sales                        $8,852,428          $4,242,664
                                  =========           =========`

Gross
sales increased $4,633,280, or 99.0%, period to period principally reflecting the
inclusion of Dumex sales for the six months of 2003, along with higher wound
closure-fasteners sales, slightly offset by lower skin care and Derma related wound 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 contract price related business. Cash discounts
decreased on a period to period basis principally due to a reduction in the Derma cash
discount rate to general industry terms for several customers, effective January 1, 2003.
The Medicaid rebates decrease is attributable to lower Derma related wound care sales.

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

`Six Months Ended June 30,
                              ----------------------
                               2003           2002              Variance
                               ----           ----              --------
Product Line

Wound care                  $6,206,378    $1,536,896      $4,669,482     303.8%
Wound closure-fasteners      1,568,364     1,431,892         136,472       9.5%
Skin care                    1,077,686     1,273,876        (196,190)    (15.4%)
                             ---------     ---------        ---------

Total                       $8,852,428    $4,242,664      $4,609,764     108.7%
                            ==========    ==========      ==========`

Net
sales increased $4,609,764, or 108.7%, in the six months ended June 30, 2003 versus 2002.
Wound care sales increased due to the acquisition of Dumex in August 2002. Excluding Dumex
net sales, period to period wound care sales decreased $61,215, or 4.0%, largely due to
competitive pricing pressures. Wound closure-fasteners sales increased $136,472, or 9.5%,
due principally to an increase in sales of catheter fasteners. Net sales of skin care
products decreased $196,190, or 15.4%, due to lower sales volumes associated with a
competitive market place.

22

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Net Sales, Cost of Sales
and Gross Profit

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

`Six Months Ended June 30,
                                    -------------------------
                                 2003                     2002                  Variance
                                 ----                     ----                  --------

Net sales              $8,852,428    100.0%     $4,242,664    100.0%      $4,609,764     108.7%
Cost of sales           5,638,889     63.7%      1,902,081     44.8%       3,736,808     196.5%
                        ---------                ---------                 ---------

Gross profit           $3,213,539     36.3%     $2,340,583     55.2%      $  872,956      37.3%
                       ==========               ==========                ==========`

Gross
profit increased 37.3% in the first six months of 2003 to $3,213,539 from $2,340,583 in
the first six months of 2002 due to higher sales volume arising from the Dumex
acquisition. Excluding Dumex sales, the first six months of 2003 gross profit was lower
than the first six months of 2002 gross profit as a result of competitive pricing pressure
in the wound and skin care businesses.

The
first six months of 2003 and 2002 gross profit percentages were 36.3% and 55.2%,
respectively. The decrease in the 2003 six month 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 3.3% from 55.2% in
2002 to 51.9% in 2003. The Derma business gross profit decline was attributable to pricing
pressure in the wound and skin care lines. The Dumex business on a stand-alone basis
generated a 22.6% gross profit in line with expectations.

Operating Expenses

A
summary of selling, marketing and general administrative expenses for the first six months
of 2003 and 2002 are outlined in the table below:

`Six Months Ended June 30,
                               -------------------------
                                 2003           2002                 Variance
                                 ----           ----                 --------

Selling                     $  862,965      $  663,129         $199,836      30.1%
Marketing                      105,583         221,925         (116,342)    (52.4%)
General administrative       2,032,444       1,172,159          860,285      73.4%
                             ---------       ---------          -------

         Total              $3,000,992      $2,057,213         $943,779      45.9%
                            ==========      ==========         ========`

Selling
expenses increased from the same six months of the prior year due principally to
incremental Dumex selling expenses of $209,305, partially offset by a modest decline in
Derma business selling expenses of $9,469. Marketing expenses, which relate primarily to
the Derma business, decreased primarily due to lower promotional and outside consulting
expense. General administrative expenses increased as a result of incremental Dumex
expenses, along with the Derma business incurring higher compensation, accounting,
insurance, travel, consulting and public relations expenses, partially offset by lower
regulatory, bad debt and depreciation expense.

Excluding
Dumex related operating expenses of $954,381, operating expenses decreased $10,602, or
0.5%, to $2,046,611 versus $2,057,213 for the first six months of 2003 versus 2002.

Interest Expense, net

Interest
expense, net increased $39,388 to $170,486 in the first six months of 2003 from $131,098
in the first six months of 2002. Interest expense, net in the first six months of 2003 is
principally comprised of Dumex interest expense of $75,200 related to its line of credit
and long-term indebtedness, the February 28, 2003 termination of the Companys
previous U.S. line of credit facility resulting in the write-off of $66,342 of deferred
financing costs, $19,700 interest incurred on the U.S. line of credit prior to
termination, non-cash interest charges of $15,000 and $10,480 related to financing costs
associated with the new U.S. line of credit, partially offset by interest income of
$16,050. Prior year interest expense, net of $131,098, related principally to non-cash
interest charges of $137,700 associated with the conversion of the Companys Series C
and D bonds and accrued interest outstanding in January 2002.

23

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Other Income, net

Other
income, net increased $127,046 to $47,376 income in the first six months of 2003 from
$79,670 expense in 2002. Other income in 2003 is principally comprised of $88,000
resulting from the favorable settlement of an Internal Revenue Service claim, sale and/or
conversion of previously reserved, discontinued and slow-moving inventory of $87,100,
partially offset by the payment of a $50,000 fee associated with the early termination of
the Companys previous U.S. line of credit, exchange losses of $23,200, storage and
demurrage for containers of $25,000 and one-time ISO consulting and audit expenses of
$18,100. Other expense, net in the first six months of 2002 relates to cancelled
initiative costs of $94,900.

Provision for Income Taxes

No
provision for income taxes has been provided in the first six months of 2003 and 2002
given available net operating loss carry forwards.

Net Income

The
Company generated net income of $89,437, or $0.02 per share (basic) and $0.01 per share
(diluted), in the first six months of 2003 compared to net income of $72,602, or $0.02 per
share (basic) or $0.01 per share (diluted), in 2002.

Liquidity and Capital
Resources

Sales
in the first six months of 2003 increased significantly over the prior year due to the
inclusion of Dumex sales in 2003. Excluding Dumex, sales were down approximately 3%. Dumex
sales in Canada are growing modestly in line with expectations on a local currency basis
and have benefited from a stronger Canadian dollar. Dumex sales in the United States are
growing in response to focused sales and marketing efforts. Dumexs private label
business is off versus historical levels due to the loss of several customers. Derma sales
are softer than expected and down slightly versus the prior year due principally to lower
wound and skin care sales associated with a competitive marketplace. Gross profit is
higher in 2003 versus 2002 due to inclusion of the Dumex sales. Overall gross profit
margin percentages are lower in 2003 versus 2002 reflecting inclusion of the lower margin
Dumex business in 2003. On a stand-alone basis, Dumex gross margins have remained
relatively stable as the unfavorable impact of price erosion has been offset by lower
product costs and favorable exchange. Dermas gross margin percentage in 2003 versus
2002 is lower due to pricing pressures in the wound and skin care lines. Operating
expenses continue to be closely monitored and are in line with expected revenues. Net
income improved in the second quarter over the first, bolstered by the improving
performance of the Dumex Canadian operations.

At
June 30, 2003, and December 31, 2002, the Company had cash and cash equivalents of
$1,478,487 and $1,496,357, respectively. The slight decrease in cash is attributable to
cash used in operating activities of $343,085, cash used for the purchase of equipment of
$55,823 and cash provided by financing activities of $381,568. Cash used in operating
activities was driven by increases in accounts receivable and inventory in support of
existing and anticipated sales growth, prepayment of normal operating expenses, a $50,000
advance in the form of a promissory note to a supplier and the pay down of accrued
liabilities. Cash provided by financing activities relates to net proceeds of $1,154,992
from the sale of common stock and an increase in the draw down of Dumexs line of
credit of $361,652, offset by repayment of Dermas previous U.S. line of credit of
$1,000,000 in February 2003 and scheduled debt repayments. Working capital increased
$1,530,119 to $4,885,120 at June 30, 2003 from $3,355,001 at December 31, 2002.

24

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In
connection with the Dumex acquisition, the Company entered into a sixteen month $1,855,000
revolving credit facility expiring December 31, 2003 to fund day-to-day operations.
Maximum potential advances under the agreement at June 30, 2003 were $1,740,000. Advances
outstanding against the credit facility were $1,516,999 at June 30, 2003, leaving an
additional $223,001 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.

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.

Among
the potential sources of capital the Company expects to utilize to finance its growth
plans in 2003 are anticipated improved profitability 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.

25

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Goodwill Impairment

At
June 30, 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.

26

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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.

27

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Part II  Other
Information

Item 1. Legal Proceedings

None

Item 6. Exhibits and Reports on Form
8-K

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

| | Exhibit | Description                                                                                                                                           
| | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |         |                                                                                                                                                       
| | 31.1    | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
     Act of 2002                                       
| |         |                                                                                                                                                       
| | 31.2    | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
     Act of 2002                                       
| |         |                                                                                                                                                       
| | 32.1    | Certification of Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002
| |         |                                                                                                                                                       
| | 32.2    | Certification of Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002

(b)       
          Reports on Form 8-K. Forms 8-K were filed on April 4, 2003 relative to the
          Registrants, financial results for the fourth quarter and year ended
          December 31, 2002, on May 2, 2003 relative to the Registrants initiation
          of a $2,000,000 revolving credit facility and on June 12, 2003 relative to
          completion of the Registrants private placement of 4,000,000 shares of its
          common stock.

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 13, 2003 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

28

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