---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934   For Quarter Ended
     
     March 31, 2002Commission File Number
     
     1-31070    Derma Sciences, Inc.(Exact name of small business issuer as specified in its charter)   Pennsylvania
     23-2328753(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)  214 Carnegie Center, Suite 100Princeton, New Jersey
08540(609) 514-4744(Address including zip code and telephonenumber,
of principal executive offices)


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

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

|Date: March 31, 2002 | Class: Common Stock, par value $.01 per share
|-------------------- | ---------------------------------------------
|                     | Shares Outstanding: 3,707,109                

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

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

Part I - Financial Information

|        |                                                                                                       |   
|------- | ----------------------------------------------------------------------------------------------------- | --
|Item 1. | Consolidated Financial Statements                                                                     |   
|        |                                                                                                       |   
|        | Consolidated Balance Sheets - March
     31, 2002 and December 31, 2001                               | 2 
|        |                                                                                                       |   
|        | Consolidated Statements of Operations
     - Three months ended March 31, 2002and March 31,
     2001 | 3 
|        |                                                                                                       |   
|        | Consolidated Statements of Cash Flows -
     Three months ended March 31, 2002and March 31, 2001      | 4 
|        |                                                                                                       |   
|        | Notes to Consolidated Financial
     Statements                                                       | 5 
|        |                                                                                                       |   
|Item 2. | Management's Discussion and Analysis of
     Financial Condition
     and Results of Operations       | 12
|        |                                                                                                       |   

Part II - Other Information

|Item 1. | Legal Proceedings                | 16
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 16
|        |                                  |   

1

---

DERMA SCIENCES, INC.Consolidated Balance Sheets

`=============================================================================================
                                                                   March 31,     December 31,
                                                                      2002           2001
ASSETS                                                            (Unaudited)
---------------------------------------------------------------------------------------------
Current Assets
  Cash and cash equivalents                                     $    577,581    $    524,783
  Restricted cash                                                    565,000          -
  Accounts receivable, net                                           946,024         914,458
  Inventories, net                                                 1,567,478       1,787,247
  Prepaid expenses and other current assets                          158,997          54,661
---------------------------------------------------------------------------------------------
Total current assets                                               3,815,080       3,281,149

Property and equipment, net                                          187,074         169,708
Goodwill and other intangibles, net                                1,264,433       1,268,827
Other assets                                                         154,392          -
---------------------------------------------------------------------------------------------
Total Assets                                                    $  5,420,979    $  4,719,684

---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------
Current Liabilities
  Accounts payable                                              $    484,494    $    551,428
  Accrued expenses                                                   246,262         392,649
  Convertible bonds                                                    -             475,000
  Other current liabilities                                          565,000          -
---------------------------------------------------------------------------------------------
Total current liabilities                                          1,295,756       1,419,077
---------------------------------------------------------------------------------------------
Total Liabilities                                                  1,295,756       1,419,077
---------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares authorized;
  issued and outstanding: 2,407,109 shares in 2002 and 2001           24,071          24,071
Convertible preferred stock, $.01 par value; 11,750,000 shares
  authorized; issued and outstanding: 3,150,409 shares in 2002;
  1,960,009 shares in 2001 (liquidation preferences of
  $5,860,240 at March 31, 2002)                                       31,504          19,600
Additional paid-in capital                                        14,736,379      13,987,882
Accumulated deficit                                              (10,666,731)    (10,730,946)
---------------------------------------------------------------------------------------------
Total Shareholders' Equity                                         4,125,223       3,300,607
---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                      $  5,420,979    $  4,719,684
=============================================================================================`

See accompanying notes.

2

---

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

`==========================================================================================
                                                                  Three months ended
                                                                        March 31,
                                                                  2002            2001
------------------------------------------------------------------------------------------
Net sales                                                      $2,114,491      $2,371,058

Cost of sales                                                     949,954       1,281,779
------------------------------------------------------------------------------------------
Gross Profit                                                    1,164,537       1,089,279
------------------------------------------------------------------------------------------
Operating expenses                                                985,521       1,031,979
Interest expense                                                  124,375          49,022
Other income, net                                                  (9,574)           (911)
------------------------------------------------------------------------------------------
Total Expenses                                                  1,100,322       1,080,090
------------------------------------------------------------------------------------------
Income before provision for income taxes                           64,215           9,189
Provision for income taxes                                           -               -
------------------------------------------------------------------------------------------
Net Income                                                     $   64,215      $    9,189
------------------------------------------------------------------------------------------
Income per common share - basic                                $     0.03      $     0.00
------------------------------------------------------------------------------------------
Income per common share - diluted                              $     0.01      $     0.00
------------------------------------------------------------------------------------------
Shares used in computing income per common share - basic        2,407,109       2,279,871
--------------------------------------------------------------------------- --------------
Shares used in computing income per common share - diluted      5,843,397       4,351,918
==========================================================================================`

See accompanying notes.

3

---

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

`=================================================================================================
                                                                            Three months ended
                                                                                 March 31,
                                                                            2002           2001
-------------------------------------------------------------------------------------------------
Operating Activities
    Net income                                                          $  64,215      $   9,189
    Adjustments to reconcile net income to
      net cash provided by (used in) operating activities:
       Depreciation                                                        16,615         19,352
       Amortization                                                         4,394         30,918
       Non-cash financing costs                                           127,700         40,000
       Provision for bad debts                                             20,000         25,163
       Provision for rebates                                              (15,000)           333
       Provision for inventory obsolescence                                 9,000         20,609
       Changes in operating assets and liabilities
           Restricted cash                                               (565,000)        50,771
           Accounts receivable                                            (36,566)       326,953
           Inventories                                                    210,769        (90,031)
           Prepaid expenses and other current assets                     (109,336)       (87,955)
           Other assets                                                  (111,892)         -
           Accounts payable                                               (66,934)       (65,449)
           Accrued expenses                                               (26,187)      (127,883)
           Other current liabilities                                      565,000           -
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                  86,778        151,970
-------------------------------------------------------------------------------------------------
Investing Activities
    Purchases of property and equipment                                   (33,980)       (20,151)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities                                     (33,980)       (20,151)
-------------------------------------------------------------------------------------------------
Financing Activities
    Net change in bank line of credit                                         -          (50,771)
-------------------------------------------------------------------------------------------------
Net cash used in financing activities                                         -          (50,771)
-------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                  52,798         81,048

Cash and cash equivalents
  Beginning of period                                                     524,783        424,165
-------------------------------------------------------------------------------------------------
  End of period                                                         $ 577,581      $ 505,213
-------------------------------------------------------------------------------------------------

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       $160,000
  Bond conversion reset provision charge to paid-in capital               $45,000           -
=================================================================================================`

See accompanying notes.

4

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

1.      Organization and Summary of
Significant Accounting Policies

Derma
Sciences, Inc. and its subsidiary (the Company) is a full line
provider of advanced wound care, wound closure-fasteners and skin care products.
The Company markets its products principally through independent distributors
servicing the long-term care, home health and acute care markets in the United
States and select international markets.

Basis of
Presentation

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

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2002, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 2001, included in Form 10-KSB filed with the Securities
and Exchange Commission.

Summary of
Significant Accounting Policies

Principles
of Consolidation  The consolidated financial statements include the
accounts of Derma Sciences, Inc. and its wholly owned subsidiary Sunshine
Products, Inc. All significant intercompany accounts and transactions have been
eliminated.

Use of
Estimates  In conformity with accounting principles generally accepted
in the United States, the preparation of financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these estimates are
based on knowledge of current events and actions which may be undertaken in the
future, actual results may ultimately differ from these estimates.

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

Net Income
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, convertible preferred stock and convertible
bonds in the weighted average number of common shares outstanding for a period,
if dilutive.

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

Property and
Equipment  Property and equipment are stated at cost and are
depreciated principally by the straight-line method over the estimated useful
lives of the assets ranging from three to ten years.

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.

5

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Goodwill  Goodwill relates to the acquisition of Sunshine Products, Inc.
in 1998. The Company does not believe that the goodwill is impaired. However, an
impairment charge would be recognized if the Company expected that the present
value of future earnings from Sunshine Products, Inc. did not exceed the
unamortized goodwill.

On January 1,
2002, the Company adopted Statement of Financial Accounting Standards No. 141
(SFAS No. 141), Business Combinations and Statement of
Financial Accounting Standards No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. SFAS No. 142 requires that goodwill and
intangible assets deemed to have indefinite lives no longer be amortized but be
subject to an annual impairment test. Other intangible assets will continue to
be amortized over their useful lives. Application of the nonamortization
provisions of SFAS No. 142 for the three months ended March 31, 2001 would have
resulted in an increase in net income of approximately $26,500. The Company will
perform the first of the required impairment tests of goodwill as of January 1,
2002 and has not yet determined what the effect of this test will be on the
earnings and financial position of the Company.

Revenue
Recognition  The Company operates in three segments, wound care, wound
closure-fasteners and skin care. Sales are recorded when product is shipped and
title passes to customers. Gross sales are adjusted for cash discounts, Medicaid
rebates and trade rebates to derive net sales. Freight costs to ship product to
customers are recorded as a component of cost of sales.

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

2.      Accounts
Receivable

Accounts
Receivable comprise the following:

`March 31,      December 31,
                                                           2002            2001
                                                       -----------     -----------

        Trade accounts receivable                     $1,074,319       $1,051,283
        Less:  Allowance for doubtful accounts           (58,658)         (50,000)
               Allowance for trade rebates               (85,000)        (100,000)
                                                         --------        ---------
           Net trade receivables                         930,661          901,283
        Other receivables                                 15,363           13,175
                                                         -------          -------
           Total receivables                          $  946,024       $  914,458
                                                       =========        =========`

3.      Inventories

Inventories
comprise the following:

`March 31,      December 31,
                                                          2002             2001
                                                          ----             ----

        Finished goods                                $1,320,293       $1,617,449
        Packaging materials                              255,227          268,001
        Raw materials                                     96,661           96,797
                                                       ---------        ---------
             Gross inventory                           1,672,181        1,982,247
        Reserve for obsolescence                        (104,703)        (195,000)
                                                      -----------      -----------

             Net inventory                            $1,567,478       $1,787,247
                                                      ==========       ==========`

6

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

4.      Property and
Equipment

Property and
equipment comprise the following:

`March 31,      December 31,
                                                          2002             2001
                                                          ----             ----

        Machinery and equipment                       $  380,288       $  360,188
        Furniture and fixtures                           682,216          668,336
                                                       ---------          -------
             Gross property and equipment              1,062,504        1,028,524
        Less:  Accumulated depreciation                 (875,430)        (858,816)
                                                        ---------        ---------

             Net property and equipment               $  187,074       $  169,708
                                                       =========        =========`

5.      Goodwill, Patents and
Trademarks

Goodwill,
patents and trademarks comprise the following:

`March 31,      December 31,
                                                          2002             2001
                                                          ----             ----

        Goodwill                                      $1,497,364       $1,497,364
        Less:  Accumulated amortization                 (386,397)        (386,397)
                                                      -----------      -----------
             Net goodwill                              1,110,967        1,110,967
                                                       ---------        ---------

        Patents and trademarks                           451,417          451,417
        Less:  Accumulated amortization                 (297,951)        (293,557)
                                                      -----------      -----------
             Net patents and trademarks                  153,466          157,860
                                                      ----------       ----------

             Net goodwill, patents and trademarks     $1,264,433       $1,268,827
                                                       =========        =========`

Amortization of
goodwill was discontinued effective January 1, 2002 in accordance with SFAS No.
142. Goodwill amortization expense was $26,500 in the first quarter of 2001.

6.      Bank Line of
Credit

The Company
previously had a $1,000,000 bank line of credit facility fully secured with cash
deposited with the bank. On November 5, 2001, the Company paid off its
outstanding loan balance and did not renew the line of credit facility. At March
31, 2001, $589,229 of the line of credit facility was outstanding.

7.      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 warrants.

Further, 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

7

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

lower common stock price as the conversion rate, and (2) lower
the per share exercise price of the Series F Warrants to the lower per share
exercise price.

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

As of January
5, 2001, bondholders owning an aggregate of $475,000 of the Companys
Series C and Series D Convertible Bonds extended the maturity date of their
bonds from January 7, 2001 to January 7, 2002. In consideration for this
maturity postponement, the Company accorded the bondholders the following: (1)
57,000 shares of the Companys Common Stock with registration rights, (2)
reduction in the per unit conversion rate of the Series C and Series
D Convertible Bonds remaining outstanding from $0.75 to $0.50, (3) increase in
the ratio of preferred stock to warrants comprising the units from one share of
preferred stock and one warrant to one share of preferred stock and one and one
tenth warrants, and (4) reduction of the exercise price of the warrants from
$0.85 per share to $0.57 per share. The $160,000 value of the foregoing was
recorded as bond discount and amortized to interest expense over the one-year
bond maturity extension.

8.      Shareholders
Equity

Preferred
Stock

There are
272,503 shares of Series A Convertible Preferred Stock (Series A
Preferred) outstanding. The Series A Preferred is convertible into Common
Stock on a one-for-one basis, bears no dividend, maintains a liquidation
preference of $4.00 per share, votes as a class on matters affecting the Series
A Preferred and maintains voting rights identical to the Common Stock on all
other matters.

There are
554,171 shares of Series B Convertible Preferred Stock (Series B
Preferred) outstanding. The Series B Preferred is convertible into Common
Stock on a one-for-one basis, bears no dividend, maintains a liquidation
preference of $6.00 per share, votes as a class on matters affecting the Series
B Preferred and maintains voting rights identical to the Common Stock on all
other matters.

There are
1,119,055 shares of Series C Convertible Preferred Stock (Series C
Preferred) outstanding. The Series C Preferred is convertible into Common
Stock on a one-for-one basis, bears no dividend, maintains a liquidation
preference averaging $0.72 per share, votes as a class on matters affecting the
Series C Preferred and maintains voting rights identical to the Common Stock on
all other matters.

There are
1,204,680 shares of Series D Convertible Preferred Stock (Series D
Preferred) outstanding. The Series D Preferred 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 and maintains voting rights identical to the Common Stock on
all other matters.

Stock
Purchase Warrants

At March 31,
2002, the Company had warrants outstanding to purchase the Companys common
stock as outlined below:

`Series       Number of Warrants      Exercise Price    Expiration Date
          ------       ------------------      --------------    ---------------

             B                 666,673               $6.75       June 15, 2002
             E               2,200,009               $0.85       July 18, 2005
             F               1,309,441               $0.57       January 6, 2007`

8

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Other Equity
Transactions

The Company
initiated in January 2002 a private offering of 2,000,000 shares of its common
stock at a price of $0.50 per share. The proceeds will be used to fund an
acquisition or other strategic initiatives of the Company approved by the
purchasers. In the event the proceeds are not so utilized by July 31, 2002, each
purchaser has the option to rescind his/its purchase of common stock and receive
all consideration paid therefor. This right of rescission must be exercised, if
at all, prior to August 31, 2002.

At March 31,
2002 the Company had concluded subscription agreements with its president,
together with 15 other individuals and institutional investors, for the sale of
1,300,000 shares of common stock for a total investment of $650,000 from the
above private placement. At March 31, 2002, subscriptions totaling $565,000 had
been funded. This $565,000 has been recorded as Restricted Cash and Other
Current Liabilities on the balance sheet as of March 31, 2002 and will be so
recorded until the rescission rights relative to this investment lapse.

The shares
issued subject to the right of rescission have not been reported as outstanding
or considered in the earnings per share calculation as they are deemed to be
temporary equity.

In February
2001, a total of 229,169 shares of Series B, C and D Preferred Stock were
converted into 229,169 shares of Common Stock. In January 2001, 57,000 shares of
Common Stock were issued as consideration for extending the maturity date of the
Convertible Bonds.

9.      Income Taxes

No provision
for income taxes has been made in the first quarter 2002, given the Company's
available net operating loss carry forwards.

At December 31,
2001, the Company has net operating loss carryforwards of approximately
$6,800,000 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 $6,800,000 that expire in years 2004 through 2010. During 1998
the Company had a change in control as defined by the Internal Revenue Code
Section 382. Consequently, certain limitations may apply to the timing and
amount of the utilization of such net operating loss carryforwards.

10.      Operating
Segments

The Company
consists of three operating segments, wound care, wound closure-fasteners and
skin care. Products in the wound care segment consist of dressings, ointments
and sprays designed to treat chronic wounds. Wound closure-fasteners products
include wound closure strips, 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.

Products in all
three operating segments are marketed to long-term care facilities, hospitals,
physicians, clinics, home health care agencies and other healthcare
institutions. The manufacture of wound care and wound closure-fastener products
is primarily outsourced. Skin care products are manufactured in-house 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.

9

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Segment sales
and gross profit for the three months ended March 31, 2002 and 2001 are as
follows:

`Three Months Ended March 31, 2002
                             ---------------------------------

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

Net sales         $750,079         $767,770       $596,642             ---    $2,114,491
                   -------          -------        -------      ----------     ---------

Gross profit       571,514          392,943        200,080             ---     1,164,537
Total expenses         ---              ---            ---     ($1,100,322)   (1,100,322)
                                                                               ---------
Net income                                                                    $   64,215
                                                                             ===========


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

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

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

Gross profit        529,426           394,313      165,540            ---      1,089,279
Total expenses          ---               ---        ---      ($1,080,090)    (1,080,090)
                                                                              -----------
Net income                                                                    $    9,189
                                                                              ==========`

With the
exception of goodwill associated with the acquisition of Sunshine Products, Inc.
(attributable to the skin care operations segment), the Companys property,
equipment and intangible assets support each of the Companys operating
segments in approximately equal measure. Accordingly, the Company does not
classify its assets by operating segments.

International
sales were $169,000 in 2002 and $115,000 in 2001. Wound closure-fastener sales
represent the majority of international sales.

11.      Deferred
Costs

The Company
deferred $115,000 of costs during the first quarter 2002 relating to the
potential acquisition of a business, debt financing costs associated with
securing a collateralized line of credit and equity issuance costs associated
with a private placement offering. These costs are included in Other Assets on
the balance sheet at March 31, 2002. Through April 30, 2002, additional costs of
$60,000 have been deferred. These deferred costs will be expensed if the
transactions are not completed.

12.      Subsequent
Events

On April 30,
2002, the Company entered into a three year revolving credit facility agreement
(the Agreement) for a maximum principal amount of $2,500,000.
Advances may be drawn, repaid and redrawn, from time to time as permitted under
the Agreement. The Company may request advances under the Agreement up to the
value of eighty-five percent (85%) of eligible receivables (as defined) and
fifty percent (50%) of eligible finished goods inventory (as defined). Interest
on outstanding advances is payable monthly in arrears at the rate of prime plus
2.5% per annum, but not less than 7.5% per annum. The Company will pay a monthly
collateral management fee at the rate of 1.5% per annum upon the daily average
amount of advances outstanding each month. In addition, the Company will pay a
monthly unused line fee at the rate of 0.6% per annum upon the difference
between the daily average amount of advances outstanding and $2,500,000.
Outstanding advances are secured by all existing and

10

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

after-acquired tangible and intangible assets of the company. At
April 30, 2002, maximum potential advances under the Agreement are estimated to
be in the range of $1.2 to $1.4 million. Advances will be utilized to fund
strategic initiatives and general working capital requirements. Lender and legal
fees of approximately $75,000 ($55,000 at March 31, 2002) will be deferred and
amortized to interest expense over the three-year term of the Agreement.

Over the term
of the Agreement, the Company has agreed to comply with the following covenants
as measured at the end of each month for the average of the three most recent
calendar months: (a) the Company will maintain a positive EBITDA (earnings
before interest, taxes, depreciation and amortization), and (b) the fixed charge
ratio (EBITDA divided by the sum of debt service, capital expenditures, income
taxes and dividends) shall not be less that 1.2:1.0. Additional covenants
governing permitted indebtedness, liens, payments of dividends and protection of
collateral are included in the Agreement.

The Company may
terminate the Agreement at any time by paying off all outstanding indebtedness
and any other payments due lender. Early termination fees of $50,000 or $25,000
are payable if termination occurs before April 30, 2003 or April 30, 2004,
respectively. There is no fee for termination of the Agreement after April 30,
2004.

11

---

DERMA SCIENCES, INC.

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

QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH
31, 2001.

Results of Operations

Net sales
decreased $256,567, or 10.8%, to $2,114,491 in the first quarter 2002 from
$2,371,058 in the first quarter 2001. Gross profit increased $75,258, or 6.9%,
to $1,164,537 in the first quarter 2002 from $1,089,279 in the first quarter
2001. Gross Profit margins increased to 55.1% in the first quarter 2002 from
45.9% in the first quarter 2001. Operating expenses decreased $46,458, or 4.5%,
in the first quarter 2002 to $985,521 from $1,031,979 in the first quarter 2001.
Interest expense increased $75,353 in the first quarter 2002 to $124,375 from
$49,022 in the first quarter 2001. Net income of $64,215 was generated in the
first quarter of 2002 versus net income of $9,189 in the first quarter of 2001.

Sales Overview

The
Companys sales are derived from its wound care, wound closure-fasteners
and skin care product lines. Wound care sales consist mainly of Dermagran
ointment and spray and hydrophilic wound dressings. Wound closure-fasteners
sales consist primarily of wound closure strips and catheter fasteners. Skin
care sales consist of bath sponges, body washes, shampoos, incontinent care
products, skin conditioners, disinfectants and deodorizers.

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

`Quarter Ended March 31,
                                  -----------------------
                                  2002              2001
                                  ----              ----

Gross Sales                    $2,300,901       $2,683,647

Trade rebates                    (124,372)        (239,911)
Cash discounts                    (43,413)         (53,928)
Medicaid rebates                  (18,625)         (18,750)
                                  --------         --------

Net Sales                      $2,114,491       $2,371,058
                               ==========       ==========`

Gross sales
were down $382,746, or 14.3%, quarter to quarter reflecting lower skin care
sales associated principally with the loss of the Beverly supply agreement.
Trade rebates were down significantly due to the reduction in rebate intensive
Beverly skin care sales and discontinuation of a wound care related incentive
rebate agreement in November 2001. Cash discounts are down due to the lower
sales base and efforts undertaken by the Company to improve adherence to terms.

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

`Quarter Ended March 31,
                                  -----------------------
Product Line                      2002              2001             Variance
                                  ----              ----             --------

Wound care                     $  750,079       $  675,786      $ 74,293    11.0%
Wound closure-fasteners           767,770          766,325         1,445     0.2%
Skin care                         596,642          928,947      (332,305)  (35.8)%
                               ----------       ----------      ---------

Total                          $2,114,491       $2,371,058     ($256,567)  (10.8)%
                               ==========       ==========     ==========`

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Skin care sales
decreased principally due to the loss of the Beverly supply agreement effective
May 31, 2001. Market pressure in a competitive marketplace also contributed.
Sales of the Companys new bath sponge included in this product line were
$13,323. The increase in wound care sales was largely attributable to increases
in sales of impregnated gauze dressings. These sales were depressed in the first
quarter 2001 due to backorders. In addition, first quarter 2002 wound care sales
benefited from discontinuation of an incentive rebate agreement with a major
customer in November 2001. Overall, wound closure-fastener sales were flat.
Suture strips experienced growth due to new business associated with a private
label agreement entered into in the second half of 2001. Catheter fasteners
exhibited good growth in the first quarter. Offsetting these gains were lower
Percu-Stay sales due to supply interruptions from the products supplier.

Net Sales, Cost of Sales and Gross Profit

The Company's
net sales, cost of sales, gross profit and gross profit margins for the first
quarter of 2002 and 2001 are outlined in the table below:

`Quarter Ended March 31,
                                -----------------------
                           2002                         2001                 Variance
                  --------------------     --------------------     ----------------------

Net sales         $2,114,491    100.0%     $2,371,058    100.0%      ($256,567)    (10.8%)
Cost of sales        949,954     44.9%      1,281,779     54.1%        331,825      25.9%
                  ----------   -------      ---------   -------      ---------

Gross profit      $1,164,537     55.1%     $1,089,279     45.9%      $  75,258       6.9%
                  ==========   =======     ==========   =======      =========`

Gross profit
and profit margins increased in the first quarter 2002 versus the first quarter
2001 due principally to favorable sales mix. Higher margined wound care sales
increased to 36% of quarterly sales in 2002 versus 29% in 2001. Conversely,
lower margined skin care sales decreased to 29% of quarterly sales in 2002 from
39% in 2001. Skin care line margins improved significantly in 2002 due to cost
reduction initiatives implemented in response to the loss of the Beverly
business in 2001 and the reclassification of certain overhead costs previously
charged to cost of sales to operating expense in 2002.

Operating Expenses

A summary of
selling, marketing and general administrative expenses for the first quarter
2002 and 2001 are outlined in the table below.

`Quarter Ended March 31,
                            -----------------------
                             2002             2001                Variance
                             ----             ----        ---------------------

Selling                   $348,703     $   380,645         ($31,942)     (8.4%)
Marketing                   64,574          63,794              780       1.2%
General administrative     572,244         587,540         ( 15,296)     (2.6%)
                           -------      ----------         ---------

         Total            $985,521      $1,031,979         ($46,458)     (4.5%)
                          ========      ==========         =========`

Selling
expenses are down quarter to quarter due to the elimination of a sales
administration position in April 2001 and lower commission expense associated
with the reorganization of the manufacturer representative network early in the
first quarter 2002. Marketing costs were essentially flat quarter to quarter. In
2002, marketing spending was directed in support of higher advertising and
promotion efforts, while clinical support activities were reduced versus the
prior year. The decrease in general administrative expense reflects
discontinuation of goodwill amortization of $26,500 coupled with lower other
general administrative spending due to cost containment initiatives partially
offset by higher compensation and benefit costs for existing personnel.

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Interest Expense, net

Interest
expense, net increased $75,353 to $124,375 in the first quarter 2002 from
$49,022 in the first quarter 2001. The increase is attributable to an imputed
non-cash interest charge of $127,700 associated with the conversion of the
Companys Series C and D bonds and accrued interest outstanding in January
2002. This increase was partially offset by the non-recurrence of $40,000 of
non-cash interest expense associated with amortizing the consideration granted
in January 2001 to extend the maturity date of the outstanding Series C and D
convertible bonds, a significant reduction in convertible bond interest expense
associated with the conversion in early January 2002 and elimination of line of
credit interest expense due to payoff of the line in November 2001.

Provision for Income Taxes

No provision
for income taxes has been provided in the first quarter of 2002 and 2001 given
available net operating loss carry forwards.

Net Income

The Company
generated net income of $64,215, or $0.03 per share (basic) and $0.01 per share
(diluted), in the first quarter 2002 compared to net income of $9,189, or $0.00
per share (basic) and $0.00 per share (diluted) in the first quarter 2001.
Non-cash imputed interest costs of $127,700 and $40,000 were included in first
quarter 2002 and 2001 net income, respectively. In addition, first quarter 2001
net income includes $26,500 of goodwill amortization expense.

Liquidity and Capital Resources

Operating
results for the first quarter 2002 versus the corresponding period last year are
positive. Sales, while softer than expected, are comparable with the last two
quarters. Operating expenses remain in line with revenues and cash flow is
positive.

At March 31,
2002 and 2001, the Company had unrestricted cash and cash equivalents of
$577,581 and $505,213, respectively. Cash of $86,778 was provided by operations
in the first quarter of 2002. Working capital improved $927,934 at March 31,
2002 to $2,519,324 from $1,591,390 at March 31, 2001. The improvement in working
capital is principally attributable to the $595,200 conversion of the
Companys Series C and D bonds and accrued interest in January 2002 and a
significant reduction in accounts payable reflecting the Companys
improving cash flow.

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 $.057
(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 warrants.

Further, if
prior to July, 2003 the Company offers for sale its common stock at a price per
share below $.050 or its warrants with 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.

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

The Company
initiated in January 2002 a private offering of 2,000,000 shares of its common
stock at a price of $0.50 per share. The proceeds will be used to fund an
acquisition or other strategic initiatives of the Company approved by the
purchasers. In the event the proceeds are not so utilized by July 31, 2002, each
purchaser has the option to rescind his/its purchase of common stock and receive
all consideration paid therefor. This right of rescission must be exercised, if
at all, prior to August 31, 2002.

At March 31,
2002 the Company had concluded subscription agreements with its president,
together with 15 other individuals and institutional investors, for the sale of
1,300,000 shares of common stock for a total investment of $650,000 from the
above private placement. At March 31, 2002, subscriptions totaling $565,000 had
been funded. This $565,000 has been recorded as Restricted Cash and Other
Current Liabilities on the balance sheet as of March 31, 2002 and will be so
recorded until the rescission rights relative to this investment lapse.

During the
first quarter 2002, the Company deferred charges of $115,000 related to the
ongoing evaluation of strategic initiatives, securing debt financing and private
placement issuance costs. These costs are included in Other Assets on the
balance sheet. Through April 30, 2002 additional costs of $60,000 have been
deferred. These deferred costs will be expensed if the transactions are not
completed as planned.

On April 30,
2002, the Company entered into a three year revolving credit facility agreement
(the Agreement) for a maximum principal amount of $2,500,000. The
Company may request advances under the Agreement up to the value of eighty-five
percent (85%) of eligible receivables and fifty percent (50%) of eligible
finished goods inventory (as defined). Interest on outstanding advances is
payable at the rate of prime plus 2.5% per annum, but not less than 7.5% per
annum. Additional fees include a collateral management fee of 1.5% per annum on
average outstanding advances and an unused line fee of 0.6% per annum. At
current prime interest rates and Company borrowing capacity, the overall
effective interest rate is anticipated to be approximately 9.5% per annum.
Outstanding advances are secured by all existing and after-acquired tangible and
intangible assets of the Company.

At April 30,
2002, maximum potential advances under the Agreement are estimated to be in the
range of $1.2 to 1.4 million. Advances will be utilized to fund strategic
initiatives and general working capital requirements.

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.

Prospectively,
the Company expects to build on the momentum created in 2001 in a competitive
market place. Modest sales and profitability growth are projected in 2002. Sales
are projected to grow based upon identified new customers, new products and
expanded sales and marketing efforts. Steps are planned to better control
product costs and minimize year-to-year cost increases. Operating expenses will
continue to be properly balanced with revenues. Cash flow is projected to
improve in concert with the Companys operating performance.

Strategically,
the Company's plan is to stay focused on its base business while considering
external opportunities to leverage its core capabilities and grow the business.

Forward Looking Statements

Statements that
are not historical facts, including statements about the Companys
confidence, strategies, expectations about new or existing products,
technologies, opportunities, market demand or acceptance of new or existing
products are forward-looking statements that involve risks and uncertainties.
These uncertainties include, but are not limited to, product demand and market
acceptance risk, impact of competitive products and prices,

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product development, commercialization or technological delays
or difficulties, and trade, legal, social, financial and economic risks.

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.

Reserve for Obsolete Inventory

The Company
establishes a reserve for obsolete inventory based on quantities of the
inventory on hand, expected future sales and inventory expiration dates. If the
estimated reserve for obsolete inventory is not sufficient to cover actual
obsolete inventory, additions to the reserve may be required.

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 April 1, 2002, are incorporated herein by reference.

(b) Reports
on Form 8-K.Forms 8-K were filed on March 5, 2002 relative to the
Registrants private placement of securities and on March 7, 2002 relative
to the conversion into equity of the Registrants Series C and Series D
Convertible Bonds.

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

|                    |  | DERMA SCIENCES, INC.                                                                         
|------------------- |  | ---------------------------------------------------------------------------------------------
|                    |  |                                                                                              
|                    |  |                                                                                              
|                    |  |                                                                                              
|Dated: May 14, 2002 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

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