# SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 10-KSB

|[ X ]  | Annual Report under Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the fiscal year ended December 31,
     2001      
|------ | ------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                           
|[    ] | Transition Report under Section 13 or 15(d) of
     the Securities Exchange Act of 1934 for the transition period from _____ to
     _____

Commission file number: 1-31070

DERMA SCIENCES, INC.(Name of small business issuer in its charter)

|Pennsylvania                                                        | 23-2328753                              
|------------------------------------------------------------------- | ----------------------------------------
|(State or other jurisdiction of
     incorporation or organization) | (I.R.S. EmployerIdentification
     No.)
|                                                                    |                                         
|214 Carnegie Center,
     Suite 100, Princeton, New Jersey          | 08540                                   
|(Address of principal executive
     offices)                       | (Zip code)                              

Registrant's telephone number: (800) 825-4325

Securities registered under Section 12(b) of the Exchange Act:

|Title of each class               | Name of each exchange on which registered
|--------------------------------- | -----------------------------------------
|                                  |                                          
|Common Stock, $.01 par
     value | Boston Stock Exchange                    
|Common Stock, $.01 par value      | Pacific Stock Exchange                   

Securities registered under Section 12(g) of the Exchange Act:

Title of Class

Common Stock, $.01 par value

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

Check if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [  X  ]

Issuer's
revenues for its most recent fiscal year were $8,946,710.

The aggregate
market value of the voting stock held by non-affiliates, computed by reference
to the average bid and asked prices of such stock as of February 28, 2002, was
approximately $855,493.

The number of
shares outstanding of each of the issuer's classes of common equity, as of
February 28, 2002, was 3,707,109.

Documents
Incorporated by Reference:  None

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Part I

Item 1.  Description of Business

Overview

Derma Sciences,
Inc. ("Derma Sciences") was incorporated under the laws of Colorado on September
10, 1984. On June 3, 1996 Derma Sciences changed its state of domicile to
Pennsylvania. In September, 1998, pursuant to an Agreement and Plan of Merger
dated as of July 8, 1998, Derma Sciences acquired Genetic Laboratories Wound
Care, Inc. ("Genetic Labs") by means of a tax-free reorganization whereby
Genetic Labs became a wholly-owned subsidiary of Derma Sciences. In December,
1999, pursuant to an Agreement and Plan of Merger dated December 27, 1999,
Genetic Labs was merged into Derma Sciences by means of a tax-free
reorganization whereby the separate corporate existence of Genetic Labs ceased.

In 1998, Derma
Sciences purchased the stock of Sunshine Products, Inc. ("Sunshine Products") in
a cash transaction. As a result of the stock purchase, Sunshine Products became
a wholly-owned subsidiary of Derma Sciences.

Derma Sciences
and its subsidiary Sunshine Products are referred to collectively as the
"Company." The Company's executive offices are located at 214 Carnegie Center,
Suite 100, Princeton, New Jersey.

The Company
engages in the marketing and sale of three dermatological products lines: (1)
sprays, ointments and dressings for the management of chronic non-healing skin
ulcerations such as pressure, diabetic and venous ulcers, surgical incisions and
burns; (2) wound closure strips, specialty fasteners and net dressings; and (3)
bathing, skin care products and disinfectants.

The Company's Markets

Chronic Wound Care

The Company
markets chronic wound care, incontinent care and related products both to
extended care facilities, such as nursing homes, rehabilitation centers,
hospitals and home healthcare agencies, and to retail and "closed door"
pharmacies. Chronic wounds, unlike acute wounds which heal within a natural
timeframe, may linger for weeks, months or years and may defy all traditional
attempts at treatment.

The most common
chronic wounds are: (1) bedsores (decubitus ulcers) which result from prolonged
pressure on the skin impairing the blood supply to the affected area; (2) venous
ulcers which result from poorly functioning veins; and (3) diabetic leg ulcers.
Traditional techniques for the treatment of chronic wounds have principally
involved cleansing and debriding the wound (removing infected and dead tissue),
controlling infection with antibiotics and protecting the wound. However, the
foregoing treatments are passive in nature and do not stimulate or accelerate
wound healing. Many of the Company's chronic wound care products seek to provide
an environment conducive to wound healing by addressing, in addition to healing
factors such as protection and infection control, additional healing factors
such as vitamins, minerals, zinc, moisture, pH balance and nutrition.

Wound Closure Strips, Fasteners and Net
Dressings

The Company
markets wound closure strips, nasal tube fasteners and a variety of catheter
fasteners to doctors, clinics, nursing homes and hospitals. These wound closure
strips eliminate the need for sutures on the surface of many surgical wounds,
decrease the incidence of scarring and infection and promote wound healing. In
contrast to the characteristics of surgical tapes, these wound closure strips
yield to the movement of the skin thereby reducing traction blisters at the
wound site. In addition, these wound closure strips provide excellent adherence,
optimum surgical wound security and protection from irritation and skin
shearing.

The Company's
nasal tube and catheter fasteners facilitate attachment of suction tubes,
feeding tubes, urinary catheters, gastrostomy tubes, wound drainage systems,
IV's and chest tubes. These fasteners incorporate dynamic tape-to-skin adhesion
which minimizes irritation, blistering and skin shear. Further, the fasteners'
single piece

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construction   permits  adoption  of  rapid  and  standardized
attachment procedures. The Company's woven elastic net dressings reduce dressing
time,  allow for proper  ventilation  of the wound site and hold the dressing in
place.

Personal Skin Care

The Company
markets general purpose and specialized skin care products to nursing homes,
hospitals, home healthcare agencies and other institutions. These products
include antibacterial skin cleansers, soaps, hair and body washes, lotions, body
oil and moisturizers. The Company's skin care products are designed to enable
customers to implement and maintain successful skin care/hygiene programs.

The Company's Products

Descriptions of
the Company's products and their intended uses are set forth below:

Wound Prevention and Treatment

|Dermagran AF                                |  | Topical anti-fungal ointment packaged in tubes.
     Contains zinc nutrient technology and 2% micronazole nitrate. Used to treat
     jock itch, ringworm, athletes foot and other superficial fungal
     infections.                                                       
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dermagran BC                                |  | Topical ointment (barrier cream) packaged in
     tubes. Used to provide protective, long lasting barrier ointment for
     perineal care associated with incontinency.                                                                                                       
|Dermagran GP                                |  | Topical ointment, packaged in tubes, containing
     allantoin and aloe vera gel. Used to provide protective, long lasting
     general skin care protectant for perineal care associated with
     incontinency.                                                             
|Dermagran Hydrophilic Wound Dressing        |  | Advanced zinc hydrogel formulation impregnated
     in gauze pad. Used for the management of stages II through IV pressure
     sores, diabetic ulcers, venous stasis ulcerations, thermal burns, surgical
     incisions and superficial lacerations, cuts or
     abrasions.
|Dermagran Hydrogel Dressing                 |  | Clear hydrogel packaged in tubes. Used for the
     management of all stages of pressure sores, surgical incisions, thermal
     burns, cuts and abrasions and venous stasis
     ulcerations.                                                                                
|Dermagran-B Hydrophilic Wound
     Dressing |  | Advanced zinc hydrogel formulation packaged in
     tubes. Used for the management of stages II through IV pressure sores,
     diabetic ulcers, venous stasis ulcerations, thermal burns, surgical
     incisions and superficial lacerations, cuts or abrasions.            
|Dermagran Ointment                          |  | Topical ointment with a lanolin odor, packaged
     in both jars and tubes. Active ingredient: aluminum hydroxide gel. Used to
     manage stage I and II pressure and venous ulcers, incisions, burns and
     other skin irritations.                                       
|Dermagran Spray                             |  | Colorless, odorless liquid, packaged in
     translucent plastic bottles with pump spray nozzles. Active ingredient:
     zinc acetate. Used to manage stage I pressure and venous ulcers, incisions,
     burns and other skin irritations.                                  
|Dermagran Wound Cleanser                    |  | Saline wound cleanser with moisturizing and
     lubricating properties packaged in a four ounce plastic bottle. Used to
     cleanse dermal wounds and contribute to the maintenance of a mildly acidic
     wound environment.                                              
|Dermagran Zinc  Saline
     Dressing       |  | Sterile 4" x 8", 12 ply gauze dressing saturated
     with sterile solution and trace amounts of zinc, packaged in foil envelopes
     with peel-down tabs. Used for the management of pressure sores, venous
     ulcers, incisions, burns and skin irritations.             

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Wound Closure

|Suture Strip       |  | Latex-free, water-resistant, economical wound
     closure strip. Made of the same non-woven material as Suture Strip
     Plus®. Used in various surgical and wound care procedures.
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Suture Strip Plus® |  | Latex-free, water-resistant wound closure strip.
     Made of a macroporous non-woven polyamide with skin friendly adhesive. Used
     for primary closure and early suture removal. 

Catheter Fasteners

|NG Strip            |  | Tube fastener made of flexible material designed
     to maximize adhesion and minimize irritation, blistering and skin shear,
     packaged in various sizes. Used to secure nasal or feeding tubes to the
     nose.                                                
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Percu-Stay          |  | Sterile, self-adhesive catheter fastener for
     percutaneous drainage catheters. Made of a combination moisture-absorbent
     hydrocolloid surrounded by a pressure sensitive adhesive on a non-woven
     backing. Used to secure percutaneous drainage catheters.
|UC Strip/Cath-Strip |  | Catheter tubing fastener made of a flexible
     material designed to maximize adhesion and minimize irritation, blistering
     and skin shear, available in various sizes. Used for securing urinary and
     gastrostomy catheter tubing to the skin.              

Net Dressings

|Flexinet/Systenet |  | Woven elastic net dressing for wounds which
     reduces dressing time, allows for proper ventilation of the wound site and
     holds dressings in place. Packaged in various sizes.
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Personal Skin Care

|Antibacterial Soap |  | Antibacterial hand soap with glycerin and aloe
     vera. Active Ingredient: chloroxylenol. Used as a hand soap for protection
     against both gram-positive and gram-negative organisms as well as yeasts
     and fungi.
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ApriVera           |  | Odor reducing, non-alkaline body lotion and hair
     cleanser with aloe vera.                                                                                                                                              
|Bathe Away         |  | Body and hair cleanser containing glycerin,
     coconut oil products and chamomile.                                                                                                                                        
|Hydro-Soft         |  | Concentrated blend of skin emollients and gentle
     skin cleansers for moisturizing and conditioning the skin. Used in
     whirlpool and hydrotherapy units.                                                             
|In Between         |  | Perineal spray skin cleanser. Used to remove dry
     fecal matter and odor resulting from incontinence.                                                                                                                    
|MPH Ointment       |  | Topical ointment, packaged in pumps and jars,
     containing allantoin and aloe vera gel. Used to provide protective, long
     lasting barrier ointment for perineal care associated with
     incontinency.              
|Mysotrol           |  | Clear gel no-rinse hand sanitizer packaged in
     squeeze bottles. Used as a hand sanitizer to provide germicidal and
     virucidal protection. Meets OSHA protocol for a healthcare
     handwash.                       
|Optima             |  | Bath additive or after-bath moisturizer enhanced
     with acetylated lanolin alcohol. Used to lubricate and soften the
     skin.                                                                                          

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|Skin Care Lotion                   |  | Lotion to moisturize and soften the
     skin.                                                                                                    
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Soft Wash                          |  | No rinse bathing sponge impregnated with
     cleanser and aloe vera moisturizer.                                                                 
|Swash                              |  | Body and hair cleanser.                                                                                                                           
|Therabath                          |  | Lotion type body and hair cleanser.                                                                                                               
|Three to One                       |  | Economical concentrated body and hair
     cleanser.                                                                                              
|Whirlpool/Hardsurface Disinfectant |  | Detergent and disinfectant. Used to clean and
     disinfect any whirlpool or hardsurface. Effective against a broad range of
     microorganisms.

Distribution and Sales

Domestic

The Company
employs a direct sales force and utilizes drug wholesalers, specialty dealers
and medical - surgical distributors to sell and distribute its products in the
hospital, home health, nursing home, and physician office markets. The Company's
direct sales force consists of an Executive Vice President - Sales and
Marketing, a Vice President - Sales, four direct sales representatives and
twenty-eight manufacturer's representatives.

Direct sales
representatives receive a base salary together with commissions. Manufacturer's
representatives receive commissions based upon sales in their territory and/or
market segment. Compensation to wholesalers, dealers and distributors is derived
from markups on the Company's products.

International

The Company's
wound care products and wound closure strips are distributed and sold
internationally pursuant to various licensing and distribution agreements. Sales
are made principally to European and Latin American markets. Sales generated
from foreign countries are payable in U.S. dollars and approximate $500,000 per
year.

eCommerce

The Company
launched an eCommerce initiative in early 2000 with a view to generating sales
via the Internet. This initiative currently consists of two web-sites one of
which is devoted to the Company's institutional markets and one of which is
devoted to individuals caring for themselves at home. Sales generated via the
Internet are not material.

Competition

The wound and
skin care sectors of the medical products industry are characterized by rapidly
evolving technology and intense competition. Many suppliers of competing
products are considerably larger and have much greater resources than the
Company. In addition, many specialized products companies have formed
collaborations with large, established companies to support research,
development and commercialization of wound and skin care products which may be
competitive with those of the Company. Academic institutions, government
agencies and other public and private research organizations are also conducting
research activities and may commercialize wound and skin care products on their
own or through joint ventures.

The Company's
chronic wound care products compete principally with those of Bristol-Myers
Squibb-Convatec, Smith & Nephew, Johnson & Johnson and 3M. The Company's
largest competitor in the field of wound closure strips is 3M. However, several
generic products compete with the Company's specialty fasteners, including
hospital and surgical tapes. The Company's personal skin care products compete
with those of Provon, Calgon Vestal-Steris and Chester Laboratories.

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The ultimate
ability of the Company to remain competitive depends upon its ability to
acquire, commercialize and market wound and skin care technologies which are
superior to those of its competitors. The existence of competing products or
treatments, or products or treatments that may be developed in the future by
competitors, may adversely affect the marketability of products sold by the
Company. However, the Company believes that the quality and performance of its
products, together with the skill and dedication of its employees, allow it to
successfully compete with larger companies.

Product Sourcing

The Company
maintains manufacturing facilities solely for manufacturing its skin care
products. The manufacture of all other products is outsourced. The principal
manufacturers of the Company's products are: Ambix Laboratories (Dermagran-B
Hydrophilic Wound Dressing, Dermagran Wound Cleanser and Dermagran Hydrogel
Wound Dressing); Applied Labs (Dermagran Spray); Integrity Medical (Dermagran
Zinc-Saline Dressing); Kimberly Clark (Dermagran Hydrophilic Wound Dressing);
Topiderm, Inc. (Dermagran Ointment, Dermagran AF, Dermagran BC and Dermagran
GP); Trumed Technologies (Cath Strip); Maersk Medical (Percu-Stay) and TapeMark
Company (Suture Strip, Suture Strip Plus(R), NG Strip and UC Strip).

The Company's
products utilize readily available components and there are numerous
laboratories and production facilities capable of producing these products to
the standards required by the FDA, the Company and the pharmaceutical industry.
Given the ready availability of other suppliers, the Company does not believe
that the loss of one or more of its suppliers would adversely affect its
operations.

The Company
requires that all of its suppliers conform to the standards set forth in the
Good Manufacturing Practice ("GMP") regulations promulgated by the FDA. See
"Government Regulation."

Patents, Proprietary and Non-Proprietary
Technology

Under the title
"Two-Step Procedure for Indolent Would Healing and Aqueous Medium and Topical
Ointment Used in Connection therewith," the Company's Dermagran Spray and
Dermagran Ointment have received patent protection. Patents have been obtained
in: Australia, Canada, European Community (comprised of: Austria, Belgium,
France, Germany, Italy, Luxembourg, Netherlands, Sweden, Switzerland and United
Kingdom), Ireland, Mexico, Philippines, Spain, and the United States. These
patents begin to expire in the year 2003.

Under the title
"Topical Barrier Composition Containing Silicone and Bentonite," the Company's
Dermagran BC (barrier cream) has received patent protection in the United
States. This patent will expire in 2017.

The Company also
has patents on its Suture Strip, NG Strip, Cath-Strip and UC Strip products in
the United States and United Kingdom. These patents begin to expire in the year
2005.

The Company
believes that the foregoing patents and patent applications afford reasonable
protection to the Company against the unauthorized copying of the technology
embodied in the subject products. However, it must be emphasized that: (1) the
means whereby the wound care products may stimulate wound healing are unknown,
and (2) the chemical and biological processes bearing upon wound healing are
highly complex and subject to a wide variety of influences and stimuli. As such,
it is possible that others will develop wound healing products equal or superior
to those of the Company without infringing the Company's patents.

Patent law
relating to the scope of claims with respect to wound care pharmaceutical
products is still evolving and the Company's patent rights are subject to this
uncertainty. Furthermore, the existence of patent rights does not provide
absolute assurance against infringement of these rights. The prosecution and
defense of patent claims is both costly and time consuming, regardless of
outcome.

An important
component of the Company's growth strategy is to acquire, by purchase or
license, both proprietary and non-proprietary wound and skin care technology.
There can be no assurance that the Company will be able to obtain such
technology on acceptable terms, if at all. Future inability to acquire or
license wound care technology could have a material adverse effect on the
Company's business.

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Government Regulation

Scope of Regulation

The manufacture,
distribution and advertising of the Company and its products are subject to
regulation by numerous federal and state governmental agencies in the United
States and by similar agencies in foreign countries. The United States Food and
Drug Administration ("FDA") is responsible for enforcement of the Federal Food,
Drug and Cosmetic Act, as amended, ("FDC Act") which regulates drugs and devices
manufactured and distributed in interstate commerce. Many of the Company's
products are classified either as over-the-counter drugs or medical devices
pursuant to the FDC Act. The Federal Trade Commission ("FTC") administers the
Federal Trade Commission Act ("FTC Act") which regulates the advertising of
products including over-the-counter drugs and devices. All states have
individual laws that resemble the FDC Act and the FTC Act.

Medical Devices

The following
products are registered with the FDA as Class I "devices" pursuant to the
regulations under Section 510(k) of the FDC Act: Dermagran Zinc-Saline Dressing,
Dermagran Hydrogel Wound Dressing, Dermagran Hydrophilic Wound Dressing,
Dermagran-B Hydrophilic Wound Dressing, Dermagran Wound Cleanser, Suture Strip,
NG Strip, Cath-Strip and UC Strip.

The FDC Act
requires that all devices for human use marketed in the United States prior to
May 28, 1976 ("Preamendment Devices") be classified by the FDA, based on
recommendations of expert panels, into one of three regulatory classes. Class I
products are subject only to the general controls which apply to all devices,
irrespective of class. General controls include the registration of
manufacturers, recordkeeping requirements, labeling requirements, and Good
Manufacturing Practice ("GMP") regulations.

Class II
devices are those for which general controls are not sufficient to ensure safety
and effectiveness, and for which enough information exists to develop a
standard. These devices are required to meet performance standards established
by the FDA. Performance standards may specify materials, construction
components, ingredients, labeling and other properties of the device. A standard
may also provide for the testing of devices to ensure that different lots of
individual products conform to the requirements.

The most
restrictive controls are applied to devices placed in Class III. Class III
devices are required to have FDA approval for safety and effectiveness before
they can be marketed unless the FDA determines that pre-market approval is not
necessary. Pre-market approval necessitates the compilation of extensive safety
and effectiveness data which is extremely expensive to compile. Approval of
Class III devices may require several years.

Devices
marketed after May 28, 1976 are considered to be one of two kinds: those that
are and those that are not substantially the same as a Preamendment Device.
Those that are substantially equivalent to a Preamendment Device are given the
same classification as the equivalent Preamendment Device. New devices which are
not substantially equivalent to Preamendment Devices are automatically placed in
Class III thereby requiring pre-market approval.

All
manufacturers are required to give the FDA ninety days notice before they can
introduce a device on the market. During the ninety-day period, the FDA will
determine whether the device is or is not substantially equivalent to a
Preamendment Device. If the FDA determines that the device is not substantially
equivalent to a Preamendment Device, it is automatically placed in Class III and
the manufacturer will have to provide the FDA with a Premarket Approval
Application ("PMA") containing evidence that the device is safe and effective
before the device may be commercially distributed to the public. However, the
manufacturer may request that the FDA reclassify the device by filing a
reclassification petition. All of the devices currently marketed by the Company
have been found by the FDA to be substantially equivalent to a Preamendment
Device.

Over-the-Counter Drugs

Prescription
drugs may be dispensed only by or on the prescription of a licensed practitioner
and must be labeled: "Caution: Federal law prohibits dispensing without
prescription." In general, a drug is restricted to the

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prescription class if it is not safe for use except under
professional supervision. All drugs having characteristics that do not require
prescription dispensing are considered to be over-the-counter ("OTC") drugs.
Those of the Company's products which are classified as over-the-counter drugs
pursuant to the FDC Act are: Dermagran Spray, Dermagran Ointment, Mysotrol,
Antibacterial Soap, Dermagran AF and Dermagran BC.

In 1972, the
FDA began a comprehensive review of the safety, efficacy, and labeling of all
OTC drugs for the purpose of establishing the conditions under which such drugs
could be generally recognized as safe, effective, and not misbranded. To
facilitate the review, these drug products were grouped into therapeutic
classes, and advisory panels were established to review each class. The panels
completed their review in 1983, and it remains for the FDA to complete the
rulemaking process.

On the basis of
the recommendations submitted by the panels, the FDA issues monographs setting
forth the conditions under which OTC drugs in each class are deemed to be
generally recognized as safe, effective, and not misbranded. Generally, the
administrative process includes the publication of a "Preliminary," "Tentative
Final," and "Final Monograph." During the rulemaking process, products are
placed into one of three categories describing whether a drug is deemed to be
generally recognized as safe and effective and not misbranded (Category I), to
be not generally recognized as safe and effective or misbranded (Category II),
or to lack sufficient data for categorization (Category III). Products that do
not comply with general OTC regulations or an applicable Final Monograph are
subject to regulatory action. Any OTC drug not in compliance with the content
and labeling requirements of a Final Monograph is subject to regulatory action
unless it is the subject of an approved new drug application. The FDA has issued
a Compliance Policy Guide in which it determined that it would not pursue
regulatory action against OTC drugs prior to the adoption of a final regulation
unless failure to do so presents a potential public health hazard.

Dermagran
Spray, Dermagran Ointment, Dermagran BC and Dermagran AF are currently being
marketed as over-the-counter skin protectant drug products. Skin protectant
products are the subject of an ongoing FDA rule making procedure which will
result in the issuance of a final regulation specifying those active ingredients
which are permitted in, and designating labeling requirements for, such
products. Preliminary Monographs and Tentative Final Monographs applicable to
Dermagran Spray and Dermagran Ointment have been issued by the FDA in 1978 and
1984, respectively.

Dermagran Spray
and Dermagran Ointment have been formulated and labeled in accordance with the
proposals outlined in the Preliminary Monograph. The Dermagran Spray and
Dermagran Ointment labels carry treatment indications of "For symptoms of oozing
and weeping due to rubbing or friction" and "For the temporary protection and
lubrication of minor skin irritations such as intertrigo, chafing, galling,
rubbing or friction," respectively.

Under the
Tentative Final Monograph, products formulated and identified in the manner of
Dermagran Spray and Dermagran Ointment would be required to carry treatment
indications of "Dries the oozing and weeping of poison ivy, poison oak and
poison sumac." Thus, if the proposals outlined in the Tentative Final Monograph
are adopted without modification in a final regulation, and if no modifications
were made to the formulations of Dermagran Spray and Dermagran Ointment, the
treatment indications on the current Spray and Ointment labels would have to be
revised.

It is currently
impossible to predict when the FDA will promulgate a final regulation, what the
final regulation will provide or how a final regulation (monograph) will affect
either of these products or their labels. Pursuant to the FDA's Compliance
Policy Guide, discussed above, Dermagran Spray and Dermagran Ointment may be
marketed under their current monographs until one year following the issuance of
a Final Monograph. It is the Company's intention to manufacture Dermagran Spray
and Dermagran Ointment pursuant to the FDA's Final Monograph relative to "skin
protectants" and to make whatever formulation and labeling changes are necessary
to fully comply with the final regulation. Given the uncertainty with respect to
both the timing and provisions of a Final Monograph relative to Dermagran Spray
and Dermagran Ointment, it is not possible to assess the probable impact of this
Final Monograph upon these products' manufacture, marketing or sale.

7

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Foreign Regulatory Authorities

Whether or not
FDA approval has been obtained, approval of medical drugs and devices by
regulatory authorities in foreign countries must be obtained prior to marketing
drugs and devices in such countries. The requirements governing the conduct of
clinical trials and product approval vary widely from country to country and the
time required for approval may be longer or shorter than that required for FDA
approval. Although there are procedures for unified filings for certain European
countries, most countries currently maintain their own product approval
procedures and requirements.

Other Regulatory Requirements

In addition to
the regulatory framework for product approvals, the Company is subject to
regulation under state and federal law, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other present and future
local, state, federal and foreign regulation.

The Company is
also subject to federal, state and foreign laws and regulations adopted for the
protection of the environment and the health and safety of employees. Management
believes that the Company is in compliance with all such laws, regulations and
standards currently in effect and that the cost of compliance with such laws,
regulations and standards will not have a material adverse effect on the
Company.

Third Party Reimbursement

The Company
sells its wound care products to nursing homes, hospitals, home healthcare
agencies, retail and "closed door" pharmacies and similar institutions. The
patients at these institutions for whose care the Company's products are
purchased often are covered by medical insurance. Accordingly, the Company's
customers routinely seek reimbursement for the cost of the Company's wound care
products from third party payors such as Medicare, Medicaid, health maintenance
organizations and private insurers. The availability of reimbursement from such
third party payors is a factor in the Company's sales of wound care products.

Medicaid is a
federally funded program administered by the states. Medicaid insurance is
available to individuals who have no Medicare or private health insurance or to
individuals who have exhausted their Medicare benefits. Included in the Medicaid
insurance coverage are in-patient stays in long term care facilities,
hospitalization and drugs.

Medicaid
reimbursement of the Company's products is dependent upon Company paid rebates
to state Medicaid agencies. Effective January 1, 1991, the Omnibus Budget
Reconciliation Act of 1990 requires pharmaceutical companies, as a condition of
the eligibility of its products for Medicaid reimbursement, to enter into a
rebate agreement with the federal government. Only drugs of the pharmaceutical
companies having such rebate agreements are covered by state Medicaid programs.
Pharmaceutical companies participating in the Medicaid rebate program must remit
to state Medicaid agencies a formula-based rebate which varies from quarter to
quarter in accordance with the Company's quarterly net sales and the average
manufacturer price of the individual products. Medicaid rebates represent
approximately 1% of net sales.

Medicare is a
federally funded program administered by four private insurance companies.
Medicare insurance generally is available to individuals who have paid social
security taxes and are over the age of 65 years. Several of the Company's wound
care products, together with Cath-Strip and Percu-Stay, are eligible for
Medicare reimbursement.

The Prospective
Payment Systems (PPS) enacted by Congress as part of the Balanced Budget Act of
1997 places "per capita" (per patient) limits on the amount of Medicare payments
for goods and services provided by skilled nursing facilities. PPS has generally
had a negative impact on the long-term care industry as well as suppliers to
this industry, including the Company.

Federal and
state governments, as well as private insurers, will continue their pursuit of
programs designed to control or reduce the cost of health care. These cost
cutting measures may include reductions in reimbursements

8

---

and/or increases in mandatory rebates for wound care products.
As such, there is uncertainty as to whether, and to what extent, reimbursements
for the Company's products will continue to be available. Likewise, there is
uncertainty as to the future extent of the Company's rebate obligations.

Product Development

The Company
conducts limited product development activities with respect to its skin care
line. The Company does not conduct in-house product development activities
relative to its wound care and wound closure-fastener product lines and relies
for the expansion of these lines upon the purchase or licensing of products from
outside sources.

Employees

The Company
maintained thirty-nine full-time and three part-time employees at December 31,
2001. The Company considers its employee relations to be satisfactory.

Item 2. Description of Property

The Company's
executive offices are located in Princeton, New Jersey. The Company has a lease
for its executive office space, at a rate of $9,200 per month, that expires in
August, 2002. The Company has a month-to-month lease for offices located in
Wilkes Barre, Pennsylvania, at a rate of $1,542 per month. The Company has a
month-to-month lease for 8,200 square feet of warehouse space in Old Forge,
Pennsylvania, at a rate of $1,925 per month. The Company has a lease for 24,000
square feet of office and warehouse space in St. Louis, Missouri, at a rate
$7,298 per month that expires in August, 2002 and a month-to-month lease for
2,000 square feet of warehouse space, also in St. Louis, at a rate of $1,000 per
month.

Item 3. Legal Proceedings

The Company is
not a party to any material litigation.

Item 4. Submission of Matters to a Vote of Security
Holders

The Company did
not submit any matter to a vote of shareholders during the fourth quarter, 2001.

9

---

Part II

Item 5. Market for Common Equity and Related Shareholder
Matters

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's Common Stock commenced trading
on May 13, 1994. The following table sets forth the high and low bid prices for
the Company's Common Stock:

`Quarter Ended                High        Low
          -------------                ----        ---

          March 31, 2000               $4.56      $1.81
          June 30, 2000                $2.00      $0.56
          September 30, 2000           $1.50      $0.50
          December 31, 2000            $1.25      $0.44
          March 31, 2001               $0.59      $0.22
          June 30, 2001                $0.65      $0.23
          September 30, 2001           $0.71      $0.38
          December 31, 2001            $0.80      $0.25`

The stock
prices reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. There is no
public market for the Company's preferred stock.

As of the close
of business on February 28, 2002, there were 1,217 holders of record of the
Common Stock.

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.

Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations

Reference to Consolidated Financial Statements

Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Company's consolidated financial statements and
notes to consolidated financial statements set forth below under Item 7.

Results of Operations

Net sales
decreased $619,424, or 6.5%, in 2001 to $8,946,710 from $ 9,566,134 in 2000.
Gross profit margins increased to 49.8% in 2001 from 48.5% in 2000. Operating
expenses decreased $1,872,767, or 31.1%, in 2001 to $4,144,923 from $6,017,690
in 2000. Interest expense decreased $1,037,763 in 2001 to $187,476 from
$1,225,239 in 2000. Net income of $192,398 was generated in 2001 versus a loss
of $2,581,337 in 2000.

Sales Overview

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

10

---

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

`Year Ended December 31,
                                 --------------------------
                                 2001                  2000
                                 ----                  ----

        Gross sales           $9,970,255           $10,879,234
        Trade rebates           (763,683)           (1,054,042)
        Cash discounts          (194,985)             (191,040)
        Medicaid rebates         (64,877)              (68,018)
                                 --------              --------

        Net Sales             $8,946,710           $ 9,566,134
                              ==========           ===========`

Gross sales
decreased $908,979, or 8.4%, in 2001 versus 2000 reflecting lower skin care
sales associated principally with the loss of the Beverly supply agreement and
lower second half wound closure-fastener sales related to lower Percu-Stay
sales, partially offset by stronger wound care sales. Trade rebates were down
due principally to the reduction in rebate intensive Beverly skin care sales.
Cash discounts are up due to more customers taking advantage of terms. Medicaid
rebates declined slightly due to lower sales.

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

`Year Ended December 31,
                               -----------------------
     Product Line                 2001         2000              Variance
     ------------                 ----         ----        --------------------

     Wound care               $2,957,487    $2,593,160     $364,327      14.0%
     Wound closure-fasteners   2,889,092     2,989,137     (100,045)     (3.3)%
     Skin care                 3,100,131     3,983,837     (883,706)    (22.2)%
                               ---------     ---------     ---------

             Total            $8,946,710    $9,566,134    ($619,424)     (6.5)%
                              ==========    ==========    ==========`

Net sales
declined $619,424, or 6.5%, in 2001 versus 2000. Wound care sales reversed a
trend of declining year-on-year sales in 2001, growing 14.0%. Momentum created
by renewal of clinical education programs and focused sales efforts were the
primary contributors to this growth. Wound closure-fastener sales were down due
principally to lower second half Percu-Stay sales as a major customer worked off
excess inventory. Excluding Percu-Stay, wound closure-fastener sales were up 2%.
Skin care sales were down significantly versus the prior year. The decrease,
which began in the second quarter, is principally due to the loss of the Beverly
supply agreement effective May 31, 2001. To a lesser extent, skin care sales
were adversely impacted by supply interruptions in late 2000 that continued into
the first quarter 2001 and a competitive marketplace.

Net Sales, Cost of Sales and Gross Profit

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

`Year Ended December 31,
                            -----------------------
                         2001                     2000               Variance
               --------------------     --------------------    ------------------
Net sales      $8,946,710    100.0%     $9,566,134    100.0%    ($619,424)  (6.5)%
Cost of sales   4,488,990     50.2%      4,922,318     51.5%      433,328    8.8%
                ---------     -----      ---------     -----      -------

Gross profit   $4,457,720     49.8%     $4,643,816     48.5%    ($186,096)  (4.0)%
               ==========     =====     ==========     =====    ==========`

Gross profit
decreased in 2001 versus 2000 due to lower sales, partially offset by improving
margins. The increase in gross profit margin principally reflects increasing
sales of higher margined wound care products coupled with decreasing sales of
lower margined wound closure-fastener (Percu-Stay) and skin care (Beverly
contract)

11

---

products versus the prior year. Product line net sales as a
percentage of total net sales, together with the gross profit percentages
attributable to each line, are outlined below:

`Percentage of
                                                              Total Net Sales
                                                              ---------------
     Product Line                   Gross Profit Percentage    2001      2000
     ------------                   -----------------------    ----      ----

     Wound care                            60% - 80%           33.1%     27.1%
     Wound closure-fasteners               40% - 60%           32.3%     31.2%
     Skin care                             20% - 40%           34.6%     41.7%
                                                              ------    ------
                             Total                            100.0%    100.0%
                                                              ======    ======`

Lower freight
and obsolescence costs in 2001 also contributed. Freight costs as a percentage
of sales were down in 2001 due to resolution in early 2001 of the inefficiencies
associated with the skin care backorder situation prevalent in the later half of
2000, together with the successful renegotiation of lower freight rates.
Partially offsetting this favorable contribution to margin improvement were
slightly higher product costs.

On average,
contract manufactured wound care and wound closure-fastener line cost increases
approximated 1% to 2%. Skin care line material costs were up 1% to 2%, while
labor and overhead costs were adversely impacted during the Beverly contract
termination transition period and subsequently by the resultant significant
decrease in production volume which, in turn, had an adverse impact on fixed
overhead absorption.

Operating Expenses

Operating
expenses decreased $1,872,767, or 31.1%, to $4,144,923 in 2001 from $6,017,690
in 2000. A summary of selling, marketing and general administrative expenses for
2001and 2000 are outlined in the table below:

`Year Ended December 31,
                                   -----------------------
     Operating Expense               2001          2000                Variance
     -----------------               ----          ----        ---------------------

     Selling                      $1,402,935    $2,544,637     ($1,141,702)  (44.9)%
     Marketing                       343,200       640,141        (296,941)  (46.4)%
     General and administrative    2,398,788     2,832,912        (434,124)  (15.3)%
                                   ---------     ---------        ---------
              Total               $4,144,923    $6,017,690     ($1,872,767)  (31.1)%
                                  ==========    ==========     ============`

Restructuring
of the sales and marketing operations, together with implementation of
company-wide cost reduction initiatives beginning in the second quarter 2000,
are primarily responsible for the decrease. The decrease in general
administrative expense has been somewhat mitigated by the re-establishment of
the headquarters administrative staff.

Interest Expense, net

Interest
expense, net decreased $1,037,763 to $187,476 in 2001 from $1,225,239 in 2000.
Interest expense, net consists of interest income on the Company's investment
account balance, interest expense on the Company's bank line of credit (secured
by the investment account), convertible bond interest and debt refinancing
costs. The decrease is attributable to the absence in 2001 of $1,143,866 of debt
refinancing costs incurred in 2000 associated with the Company's Series C and D
convertible bonds, lower outstanding 2001 line of credit and convertible bond
balances and lower interest rates. These reductions were partially offset by
$160,000 of non-cash interest associated with amortizing the consideration
granted in January 2001 to extend the maturity date of the outstanding Series C
and D convertible bonds.

12

---

Other Income, net

Other income,
net increased $57,801 to $75,577 in 2001 from $17,776 in 2000. One-time Medicaid
adjustments of $31,320, reversal of the $19,468 excess restructuring reserve and
higher recurring profit sharing and royalty income were responsible for the
increase.

Provision for Income Taxes

A provision for
federal and state income taxes of $8,500 has been established in 2001 coincident
with the Company's return to profitability. The provision is at less than
corresponding statutory rates due to available net operating losses.

Net Income (Loss)

The Company
generated net income of $192,398, or $0.08 per share (basic) and $0.04 per share
(diluted), in 2001 compared to a net loss of $2,581,337, or $1.48 per share
(basic and diluted), in 2000. Included in the 2000 net loss were restructuring
costs of $250,000 and write-downs or write-offs totaling $450,000. These latter
charges related primarily to doubtful accounts, inventory obsolescence and
impaired property, plant and equipment. In addition, non-cash related debt
refinancing costs of $1,143,866 were included in the net loss for 2000.

Liquidity and Capital Resources

Operating
results for 2001 versus 2000 were significantly improved. Sales, gross margin
and operating expenses were in line with expectations, cash flow was positive
and the Company achieved four consecutive quarters of profitability.

At December 31,
2001 and December 31, 2000, the Company had unrestricted cash and cash
equivalents on hand of $524,783 and $424,165, respectively. Cash flow provided
by and used in operating activities (excluding restricted cash) was $178,367 in
2001 versus a negative $582,655 in 2000. The Company's return to profitability
and a significant improvement in the accounts receivable aging are principally
responsible for the 2001 cash flow improvement. The positive cash flow was
achieved despite a significant utilization of cash to fund a $568,398 increase
in inventory and a $425,652 reduction in accounts payable. Principal drivers
behind the inventory increase were timing of receipt for contract manufactured
products that are ordered on a semi-annual/annual basis, new products and the
need to increase the unit quantity carried for certain products that had fallen
below normal safety stock levels at year end 2000. The decrease in accounts
payable reflects a clean-up of aged payables and the re-establishment of
customer payments more in line with terms, as cash flow permitted.

At December 31,
2001 and 2000, the Company had working capital of $1,862,072 and $1,390,082
(adjusted for reclass of $475,000 of convertible bonds from long term to
current), respectively. This $471,990 improvement is attributable to the
Company's return to profitability and positive cash flow.

At December 31,
2001 and 2000, $475,000 of the Company's convertible bonds were outstanding.
Interest is payable on these bonds at prime rate. This interest rate was 4.75%
at December 31, 2001. Interest on the convertible bonds accrues and is payable
upon maturity thereof. Convertible bond interest was $39,925 in 2001. At
December 31, 2001 accrued and unpaid convertible bond interest was $119,563. The
convertible bonds matured on January 7, 2002 (see below).

As of January
5, 2001 bondholders owning the convertible bonds extended the maturity date of
the bonds one year to January 7, 2002 in return for non-cash consideration
valued at $160,000. This $160,000 debt refinancing cost was recorded as bond
discount and amortized to interest expense over the one-year maturity extension.

In November
2001, the Company closed out its $1,000,000 bank line of credit facility that
was fully secured with cash deposited with the bank and paid off its $580,455
outstanding loan balance.

The Company's
450,002 Series A warrants with an exercise price of $4.50 expired on November
15, 2001. Other warrants consisting of 10,000 warrants with an exercise price of
$15.63 expired on August 2, 2001. In February

13

---

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 in partial consideration for extending
the maturity date of the Convertible Bonds.

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 our
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.

Conversion of Convertible Bonds and Accrued
Interest

Effective
January 7, 2002, bondholders of all the Company's issued and outstanding Series
C and D convertible bonds entered into an agreement to convert the entirety of
the $475,000 principal and $120,200 accrued interest outstanding. The agreement
provides for conversion of the principal and 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 1,309,440 warrants.

The agreement
further provides that if, prior to July, 2003, the Company offers for sale its
common stock at a price per share below $0.50 or its warrants with a per share
exercise price of less than $0.57, then the Company shall: (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 will recognize imputed non-cash interest
charges of $165,200. A charge of $45,000 will be taken to account for the value
of the reset concession granted the bondholders. This charge will be amortized
over the eighteen-month term of the reset provision. A charge of $120,200 will
be taken immediately to account for the beneficial reduction in conversion terms
associated with the accrued interest.

Common Stock Private Offering

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. At February 28, 2002, the Company had
concluded subscription agreements with its President, together with 15 other
individual and institutional investors for the sale of 1,300,000 shares of
common stock for a total investment of $650,000. At February 28, 2002,
subscriptions totaling $565,000 have been funded. The Company expects the
balance of the subscriptions to be funded on or about March 31, 2002. The
Company has agreed to file a registration statement with the Securities and
Exchange Commission relative to the common stock issued in its private offering.

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

14

---

are not limited to, product demand and market acceptance risk,
impact of competitive products and prices, product development,
commercialization or technological delays or difficulties, and trade, legal,
social, financial and economic risks.

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.

15

---

Item 7.  Financial Statements

Index

|Description                                          | Page
|---------------------------------------------------- | ----
|                                                     |     
|Report of Independent Auditors                       | 17  
|                                                     |     
|Consolidated Balance Sheets                          | 18  
|                                                     |     
|Consolidated Statements of
     Operations           | 19  
|                                                     |     
|Consolidated Statements of Cash
     Flows           | 20  
|                                                     |     
|Consolidated Statements of Shareholders'
     Equity | 21  
|                                                     |     
|Notes to Consolidated Financial
     Statements      | 22  
|                                                     |     

16

---

Financial Index

Report of Independent
Auditors

Board of Directors
Derma Sciences, Inc.

We have audited
the accompanying consolidated balance sheets of Derma Sciences, Inc., as of
December 31, 2001 and 2000 and the related consolidated statements of
operations, cash flows and shareholders' equity for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted
our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Derma Sciences, Inc., at
December 31, 2001 and 2000, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.

/s/  ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 22, 2002

17

---

Financial Index

DERMA SCIENCES, INC.Consolidated Balance Sheets

---

`December 31,
ASSETS                                                             2001                2000
-------------------------------------------------------------------------------------------------

Current Assets
  Cash and cash equivalents                                  $    524,783         $    424,165
  Restricted cash                                                   -                  640,000
  Accounts receivable, net                                        914,458            1,561,633
  Inventories, net                                              1,787,247            1,282,370
  Prepaid expenses and other current assets                        54,661               75,916
-------------------------------------------------------------------------------------------------
Total current assets                                            3,281,149            3,984,084

Property and equipment, net                                       169,708              204,029
Goodwill, patents and trademarks                                1,268,827            1,392,495
-------------------------------------------------------------------------------------------------
Total Assets                                                 $  4,719,684         $  5,580,608
-------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------
Current Liabilities
  Bank line of credit                                        $      -             $    640,000
  Accounts payable                                                551,428              977,080
  Accrued expenses and other current liabilities                  392,649              501,922
  Convertible bonds                                               475,000
-------------------------------------------------------------------------------------------------
Total current liabilities                                       1,419,077            2,119,002
-------------------------------------------------------------------------------------------------
Long-term liabilities
  Convertible bonds                                                 -                  475,000
-------------------------------------------------------------------------------------------------
Total Liabilities                                               1,419,077            2,594,002
-------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares
  authorized; issued and outstanding: 2,407,109 shares
  in 2001; 2,120,940 shares in 2000                                24,071               21,209
Convertible preferred stock, $.01 par value; 11,750,000
  shares authorized; issued and outstanding: 1,960,009 shares
  in 2001; 2,189,178 shares in 2000 (liquidation preference
  of $5,650,000 at December 31, 2001)                              19,600               21,892
Additional paid-in capital                                     13,987,882           13,866,849
Accumulated deficit                                           (10,730,946)         (10,923,344)
-------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                      3,300,607            2,986,606
-------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                   $  4,719,684         $  5,580,608
-------------------------------------------------------------------------------------------------`

See accompanying notes.

18

---

Financial Index

DERMA SCIENCES, INC.Consolidated Statements of Operations

---

`Year ended December 31
                                                                      2001               2000
---------------------------------------------------------------------------------------------------

Net sales                                                          $8,946,710        $ 9,566,134

Cost of sales                                                       4,488,990          4,922,318
---------------------------------------------------------------------------------------------------
Gross Profit                                                        4,457,720          4,643,816
---------------------------------------------------------------------------------------------------
Operating expenses                                                  4,144,923          6,017,690
Interest expense, net                                                 187,476          1,225,239
Other income, net                                                     (75,577)           (17,776)
---------------------------------------------------------------------------------------------------
Total Expenses                                                      4,256,822          7,225,153
---------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes                       200,898         (2,581,337)
Provision for income taxes                                              8,500              -
---------------------------------------------------------------------------------------------------
Net Income (Loss)                                                  $  192,398        $(2,581,337)
---------------------------------------------------------------------------------------------------
Income (loss) per common share - basic                             $     0.08        $     (1.48)
---------------------------------------------------------------------------------------------------
Income (loss) per common share - diluted                           $     0.04        $     (1.48)
---------------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common share - basic     2,375,299          1,743,717
---------------------------------------------------------------------------------------------------
Shares used in computing income (loss) per common share - diluted   4,398,131          1,743,717
---------------------------------------------------------------------------------------------------`

See accompanying notes.

19

---

Financial Index

DERMA SCIENCES, INC.Consolidated Statements of Cash Flows

---

`Year Ended December 31
                                                                  2001               2000
-----------------------------------------------------------------------------------------------
Operating Activities
    Net income (loss)                                          $ 192,398         $(2,581,337)
    Adjustments to reconcile net income (loss) to
      net cash provided by (used in) operating activities:
      Depreciation and amortization                              197,341             356,758
      Non-cash financing costs                                   160,000           1,143,866
      Provision for bad debts and rebates                        110,717             530,324
      Provision for inventory obsolescence                        63,521             118,000
      Changes in operating assets and liabilities
          Restricted cash                                        640,000              10,000
          Accounts receivable                                    536,458              44,506
          Inventories                                           (568,398)           (111,232)
          Prepaid expenses and other current assets               21,255             148,042
          Accounts payable                                      (425,652)           (239,540)
          Accrued expenses and other current liabilities        (109,273)              7,958
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities               818,367           (572,655)
-----------------------------------------------------------------------------------------------
Investing Activities
    Purchases of property and equipment                          (39,352)            (22,494)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities                             (39,352)           (22,494)
-----------------------------------------------------------------------------------------------
Financing Activities
    Net change in bank line of credit                            (640,000)           (10,000)
    Proceeds from issuance of convertible securities               -                 150,000
    Proceeds from the issuance of stock, net of issuance costs   (38,397)            307,623
-----------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities              (678,397)           447,623
-----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents              100,618           (147,526)

Cash and cash equivalents
  Beginning of year                                              424,165             571,691
-----------------------------------------------------------------------------------------------
  End of year                                                  $ 524,783         $   424,165
-----------------------------------------------------------------------------------------------

Supplemental cash flow information
-----------------------------------------------------------------------------------------------
   Warrants issued in payment of debt refinancing                  -             $   411,479
   Conversion of bonds payable to preferred stock                  -             $ 1,000,000
   Conversion of accounts payable to common stock                  -             $    45,000
   Common stock and warrants issued for debt extension         $ 160,000               -
-----------------------------------------------------------------------------------------------`

See accompanying notes.

20

---

Financial Index

DERMA SCIENCES,
INC.Consolidated Statements of Shareholders'
Equity

---

`Common     Preferred              Convertible   Additional                  Total
                                               Shares      Shares       Common    Preferred     Paid-In   Accumulated  Shareholders'
                                               Issued      Issued        Stock      Stock       Capital     Deficit       Equity
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1999                    1,325,938     939,176     $13,259     $ 9,392  $12,123,197  $ (8,342,007) $3,803,841
------------------------------------------------------------------------------------------------------------------------------------

Conversion of preferred shares                   83,334     (83,334)        833        (833)        -                -         -

Issuance of Common Stock in $500,000
   private placement, net of issuance costs     666,668        -          6,667        -         300,956             -     307,623

Issuance of Common Stock in
   payment of trade debt                         45,000        -            450        -          44,550             -      45,000

Conversion of $850,000 of Series C
   Convertible Bonds into Preferred Stock          -      1,133,335        -         11,333      838,667             -     850,000

Conversion of $150,000 of Series D
   Convertible Bonds into Preferred Stock          -        200,001        -          2,000      148,000             -     150,000

Warrants issued in payment of debt refinancing     -           -           -           -         411,479             -     411,479

Net loss                                           -           -           -           -            -       (2,581,337) (2,581,337)
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2000                    2,120,940   2,189,178     $21,209     $21,892  $13,866,849  $(10,923,344) $2,986,606
------------------------------------------------------------------------------------------------------------------------------------

Common stock issued in consideration for
   Series C and Series D Convertible
   Bonds maturity date extension                 57,000        -            570        -         159,430             -     160,000

Conversion of preferred shares                  229,169    (229,169)      2,292      (2,292)        -                -        -

Common stock issuance costs                        -           -           -           -         (38,397)            -     (38,397)

Net income                                         -           -           -           -            -          192,398     192,398
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2001                    2,407,109   1,960,009     $24,071     $19,600  $13,987,882  $(10,730,946) $3,300,607
------------------------------------------------------------------------------------------------------------------------------------`

See accompanying notes.

21

---

Financial Index

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.

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

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

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

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

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.

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

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

22

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Cash Flow
Information - Interest paid during 2001 and 2000 amounted to $31,280 and
$70,419, respectively. Income taxes paid in 2001 and 200 were $1,090 and $1,355,
respectively.

Non cash
transactions in 2001 include the issuance of 57,000 shares of Common Stock at
$0.50 per share together with other equity valued at $160,000 in the aggregate
in consideration for extending the maturity date of the Convertible Bonds. Non
cash transactions in 2000 include the conversion of $1,000,000 of aggregate
principal amount of convertible bonds into Preferred Stock and issuance of
45,000 shares of Common Stock, valued at $1.00 per share, in settlement of trade
debt, as well as equity issued in payment of debt financing of $411,479.

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

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.

Reclassifications - Certain reclassifications have been made to prior year
amounts and balances to conform with the 2001 presentation.

2.      Accounts
Receivable

Accounts
Receivable comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----
     Trade accounts receivable                 $1,051,283         $1,725,001
     Less:  Allowance for doubtful accounts       (50,000)          (175,000)
            Allowance for trade rebates          (100,000)          (135,000)
                                                 ---------          ---------
          Net trade receivables                   901,283          1,415,001
     Other receivables                             13,175            146,632
                                                   ------            -------
          Total receivables                    $  914,458         $1,561,633
                                               ==========         ==========`

Trade
receivable write-offs were $270,717 and $275,845 in 2001 and 2000, respectively.
The allowance for trade rebates reflects estimated rebates embedded in
outstanding trade receivables.

23

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

3.      Inventories

Inventories
comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----

     Finished goods                            $1,617,449          $  994,258
     Packaging materials                          268,001             234,859
     Raw materials                                 96,797             201,253
                                                   ------             -------
          Gross inventory                       1,982,247           1,430,370
     Reserve for obsolescence                    (195,000)           (148,000)
                                                ----------          ----------

          Net inventory                        $1,787,247          $1,282,370
                                               ==========          ==========`

4.      Property and
Equipment

Property and
equipment comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----

     Machinery and equipment                   $  360,188          $320,836
     Furniture and fixtures                       668,336           668,336
                                                  -------           -------
          Gross property and equipment          1,028,524           989,172
     Less:  Accumulated depreciation             (858,816)         (785,143)
                                                 ---------         ---------

          Net property and equipment           $  169,708          $204,029
                                               ==========          ========`

Depreciation
expense was $73,673 and $201,007 in 2001 and 2000, respectively. Depreciation
expense for the year ended December 31, 2000 included $86,957 for the write-down
of impaired property and equipment.

5.      Goodwill, Patents and
Trademarks

Goodwill,
patents and trademarks comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----

     Goodwill                                  $1,497,364         $1,497,364
     Less:    Accumulated amortization           (386,397)          (280,397)
                                                 ---------          ---------
              Net goodwill                      1,110,967          1,216,967
                                                ---------          ---------

     Patents and trademarks                       451,417            451,417
     Less:    Accumulated amortization           (293,557)          (275,889)
                                                 ---------          ---------
              Net patents and trademarks          157,860            175,528
                                                  -------            -------
              Net goodwill, patents and
                trademarks                     $1,268,827         $1,392,495
                                               ==========         ==========`

Goodwill
amortization expense was $106,000 and $137,720 in 2001 and 2000, respectively.
Patent and trademark amortization expense was $17,668 and $18,031 in 2001 and
2000, respectively.

24

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

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 of $580,455 and did not renew the line of credit
facility. The former line of credit agreement required monthly interest payments
at prime minus 1%, or 3.75%. At December 31, 2000, $640,000 of the line of
credit facility was outstanding. Interest expense for the years 2001 and 2000
was $31,280 and $70,419, respectively.

7.      Accrued Expenses and Other
Current Liabilities

Accrued
expenses and other current liabilities comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----

     Accrued compensation                      $ 59,251           $ 52,000
     Reserve for restructuring costs                  -             71,623
     Convertible bond interest                  119,563            105,553
     Medicaid rebates                            17,800             32,000
     Accrued customer service fees               49,750             31,176
     Other                                      146,285            128,875
                                                -------            -------
          Total accrued liabilities             392,649            421,227
     Deferred revenue                             -                 80,695
                                                -------             ------

          Total accrued expenses and other
            current liabilities                $392,649           $501,922
                                               ========           ========`

In connection
with an agreement for the distribution of catheter fasteners with a third party,
the Company received an advance payment of $250,000 in 2000 against the first
83,333 units sold which it recorded as deferred revenue. The advance was
amortized to revenue at a rate of $3.00 per unit sold. The advance was fully
amortized in the first quarter of 2001.

8.      Convertible
Bonds

Convertible
bonds comprise the following:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----

     Series C Bonds                            $ 25,000            $ 25,000
     Series D Bonds                             450,000             450,000
                                                -------             -------

          Total convertible bonds              $475,000            $475,000
                                               ========            ========`

On August 16,
1999, the Company completed a private placement of its Series C Convertible
Bonds ("Series C Bonds") in which an aggregate of $875,000 was raised. The
Series C Bonds pay interest only at the prime rate, as defined, until maturity
and were originally convertible into Series C Units described below.

Each Series C
Unit consists of one share of Series C Preferred Stock convertible into one
share of Common Stock and one warrant to purchase one share of Common Stock at
$1.10 per share. In March 2000, bondholders owning $475,000 in aggregate
principal amount of the Series C Bonds converted the principal of their Series C
Bonds into Series C Units at the rate of $1.10 per Unit. In March, 2000, the
bondholders extended the maturity of the Series C Bonds from the original
maturity date of August 15, 2000 until January 7, 2001.

In July 2000,
bondholders owning $375,000 in aggregate principal amount of the Series C Bonds
converted the principal of their Series C Bonds into "modified" Series E Units
at the rate $0.75 per Unit. Each "modified"

25

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Series E Unit consists of one share of Series C Preferred Stock
and one and one tenth warrants to purchase one share of Common Stock at $0.85
per share. Investors who converted their bonds in March 2000 have had their
conversions adjusted so as to receive conversion terms equivalent to those of
the July 2000 conversion.

In December
1999, the Company received $450,000 of a total of $600,000 in subscriptions for
its Series D Convertible Bonds ("Series D Bonds"). Payments of $50,000 and
$100,000 representing the balance of these subscriptions were received in
January and February, 2000, respectively. The Series D Bonds pay interest only
at the prime rate, as defined, until maturity and were originally convertible
into Series D units described below.

Each Series D
Unit consists of one share of Series D Preferred Stock convertible into one
share of Common Stock and one warrant to purchase one share of common stock at
$1.01 per share. In March 2000, bondholders owning $150,000 in aggregate
principal amount of the Series D Bonds converted the principal of their Series D
Bonds into Series D Units at the rate of $1.0125 per Unit. In March, 2000, the
bondholders extended the maturity of the Series D Bonds from the original
maturity date of December 31, 2000 until January 7, 2001. Investors who
converted their bonds in March, 2000 have had their conversions adjusted so as
to receive conversion terms equivalent to those of the July, 2000 conversion of
Series C Bonds.

The expense
recognized for the beneficial conversion features and other consideration given
in connection with the reset of the conversion terms of the Series C and Series
D convertible bonds in 2000 was $1,143,866.

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. The warrants issuable pursuant to items (3) and (4), in total
aggregating 1,045,000, have been redesignated as the Company's Series F
Warrants.

9.      Shareholders'
Equity

Preferred
Stock

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

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

There are
1,000,001 shares of Series C Convertible Preferred Stock ("Series C Preferred")
outstanding. The Company's directors, on February 10, 2000, designated 795,457
shares of the Company's non-designated preferred stock as Series C Preferred.
The directors, on July 17, 2000, designated an additional 437,878 shares of
non-designated preferred stock as Series C Preferred. The Series C Preferred is
a component of the Company's Series C Units described above under Convertible
Bonds. The Series C Preferred is convertible into Common Stock on a one-for-one
basis, bears no dividend, maintains a liquidation preference of $1.10 per share,
votes as a class on matters affecting the Series C Preferred and maintains
voting rights identical to the Common Stock on all other matters.

26

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

There are
133,334 shares of Series D Convertible Preferred Stock ("Series D Preferred")
outstanding. The Company's directors, on February 10, 2000, designated 592,597
shares of the Company's non-designated preferred stock as Series D Preferred.
The Series D Preferred is a component of the Company's Series D Units described
above under Convertible Bonds. The Series D Preferred is convertible into Common
Stock on a one-for-one basis, bears no dividend, maintains a liquidation
preference of $1.0125 per share, votes as a class on matters affecting the
Series D Preferred and maintains voting rights identical to the Common Stock on
all other matters.

Series E
Financing

On August 11,
2000, the Company completed a private placement of its Series E Units in which
an aggregate of $500,000 was raised. The Series E Units each consist of one
share of Common Stock and one and one tenth warrants to purchase one share of
Common Sock at $0.85 per share ("Series E Warrants"). The Series E Warrants will
expire on July 18, 2005. A total of 733,333 Series E Warrants were issued in
connection with the Series E Common Stock private placement.

Stock
Purchase Warrants

At December 31,
2001, the Company had 2,866,682 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`

The Company's
450,002 Series A warrants with an exercise price of $4.50 per share expired on
November 15, 2001. Other warrants consisting of 10,000 warrants with an exercise
price of $15.63 per share expired on August 2, 2001. In connection with the July
2000 Convertible Bond modification as described in Note 8, all Series C and D
warrants were redesignated as Series E warrants.

Other Equity
Transactions

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. In March 2000, 83,334 shares of Series B Preferred Stock were
converted into 83,334 shares of Common Stock.

27

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

10.      Income Taxes

Significant
components of the Company's deferred tax assets and liabilities are as follows:

`December 31,
                                                   ----------------------
                                                   2001              2000
                                                   ----              ----
     Deferred tax liabilities:
        Prepaid insurance                   $     (6,155)       $   (16,086)
        Patent amortization                      (45,957)           (53,129)
                                                 --------           --------
          Total deferred liabilities             (52,112)           (69,215)
                                                 --------           --------
     Deferred tax assets:
        Net operating loss carryforwards       2,775,333          2,872,881
        Depreciation                             146,454            105,860
        Amortization of intangibles               79,794            109,230
        Accrued expenses                         281,469            261,596
        Allowance for bad debts                   20,297             71,038
        Other                                      9,728               -
                                                   -----          ---------
          Gross deferred tax assets            3,313,075          3,420,605
        Valuation allowance                   (3,260,963)        (3,351,390)
                                              -----------        -----------
          Total deferred tax assets               52,112             69,215
                                                  ------             ------
     Net deferred tax assets                 $     -            $     -
                                             ===========        ===========`

The majority of
the current year valuation allowance relates to net operating loss carryforwards
for which realization is not assured.

The
reconciliation of income tax attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense (benefit) is:

`December 31,
                                                         --------------------
                                                         2001            2000
                                                         ----            ----
     Tax expense (benefit) at U.S. statutory rates    $ 68,305        $(877,655)
     State income taxes, net of Federal benefit         16,268         (116,363)
     (Decrease) increase in valuation allowance        (90,427)         559,971
     Nondeductible expenses                             14,354          434,047
                                                        ------          -------

     Provision for income taxes                       $  8,500         $  -
                                                      ========         ========`

The provision
for income taxes of $8,500 represents an increase in a deferred federal income
tax liability for 2001.

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.

11.      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.

28

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

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 antibacterial skin cleansers, hair and body soaps,
lotions and moisturizers designed to enable customers to implement and maintain
successful skin care / hygiene programs.

Products in all
three operating segments are marketed to long-term care facilities, hospitals,
physicians, clinics, home health care agencies and other healthcare
institutions. The manufacture of wound care and wound closure-fastener products
is primarily outsourced. Skin care products are manufactured in-house.
Internally, the segments are managed at the gross profit level. The aggregation
or allocation of other costs by segment is not practical.

Segment sales
and gross profit for 2001 and 2000 are as follows:

`Year Ended December 31, 2001
                              ----------------------------

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

Net sales        $2,957,487      $2,889,092     $3,100,131           ---     $8,946,710
                 ----------      ----------     ----------    ----------     ----------

Gross profit      2,278,555         1,411,447      767,718           ---      4,457,720
Total expenses          ---               ---          ---    (4,256,822)    (4,256,822)
Income taxes            ---               ---          ---        (8,500)        (8,500)
                                                                                 -------
Net income                                                                    $ 192,398
                                                                              =========

                              Year Ended December 31, 2000
                              ----------------------------
                               Wound Closure-                                  Total
                  Wound Care     Fasteners       Skin Care    Other Costs     Company
                 ----------      ---------       ---------    -----------     -------

Net sales         $2,593,160     $2,989,137     $3,983,837           ---     $9,566,134
                 ----------      ----------     ----------    ----------     ----------

Gross profit       1,740,980      1,643,936      1,258,900           ---      4,643,816
Total expenses           ---            ---            ---    ($7,225,153)   (7,225,153)
Income taxes             ---            ---            ---            ---           ---
                                                                              ----------
Net loss                                                                   ($ 2,581,337)
                                                                           =============`

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 $602,000 in 2001 and $524,000 in 2000. Wound closure-fastener sales
represent the majority of international sales.

29

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

12.      Operating
Leases

The Company has
operating lease agreements for its facilities and equipment expiring in various
years through 2004. Expense under these agreements amounted to $308,991 and
$356,182 in 2001 and 2000, respectively. Minimum future rental payments under
non-cancelable operating leases as of December 31, 2001 are:

`Year Ending
          December 31,
          ------------
              2002                                    $136,265
              2003                                      11,578
              2004                                       4,138
                                                         -----

          Total minimum future rental payments        $151,981
                                                      ========`

13.      Stock
Options

The Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations in accounting
for its stock options. As discussed below, the alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, compensation expense is
recognized if the exercise price of the Company's stock options is less than the
market price of the underlying stock on the date of grant.

The Company has
a stock option plan under which options to purchase a maximum of 300,000 shares
of common stock may be issued. The plan permits the granting of both incentive
stock options and nonqualified stock options to employees and directors of the
Company (excluding members of the Compensation Committee) and certain outside
consultants and advisors to the Company. The option exercise price may not be
less than 100% (110% for owners of more than 10% of common stock of the Company
on the date of grant) of the fair market value of the stock on the date of the
grant of the option. The duration of each option may not exceed 10 years from
the date of grant (five years for owners of more than 10% of the common stock of
the Company). As of December 31, 2001, options to purchase 52,600 shares of the
Company's common stock were issued and outstanding under the plan. No options
granted under the plan have been exercised.

The Company
may, from time to time, grant nonqualified stock options to officers, directors,
agents and employees outside of the stock option plan ("non-plan options").
Non-plan options to purchase 740,000 and 232,800 shares of common stock were
granted to officers and directors in 2001 and 2000, respectively, with exercise
prices ranging from $0.40 to $6.00 per share.

Pro forma
information regarding net income and earnings per share is required by Statement
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. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001 and 2000: risk-free interest rate of 6.0%; dividend yield
of 0%; a volatility factor of the expected market price of the Company's common
stock of 1.173 and 1.371 respectively; and an expected option life of 10 years.

The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's stock options have characteristics significantly different from those
of traded options.

30

---

Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Further,
changes in the subjective input assumptions related to the options can
materially affect the fair value estimate. Therefore, in management's opinion
the existing models do not necessarily provide a reliable single measure of the
fair value of the Company's stock options.

For purposes of
pro forma disclosures, the estimated fair value of stock options is amortized to
expense over the options' vesting period. The Company's pro forma information
follows:

`2001        2000
                                                          -------     -------
     Pro forma net income (loss)                          $74,454   ($2,848,750)
     Pro forma income (loss) per common share - basic       $0.03        ($2.18)
     Pro forma income (loss) per common share - diluted     $0.02          -`

A summary of
the Company's stock option activity and related information for the years ended
December 31, 2001 and 2000 follows:

`2001                     2000
                                  -----------------------   ------------------------
                                              Weighted                  Weighted
                                              Average                   Average
                                  Options  Exercise Price   Options  Exercise Price
                                  -------  --------------   -------  --------------
Outstanding - beginning of year   533,435      $4.14        385,886      $7.00
    Granted                       740,000      $0.40        232,800      $1.59
    Exercised                       -           -             -            -
    Forfeited                       -           -           (85,251)    $10.12
                                ---------                   --------
Outstanding - end of year       1,273,435      $1.97        533,435      $4.14
                                =========                   =======

Exercisable at end of year        706,685                   478,435
                                  =======                   =======`

Exercise prices
for options outstanding under the stock option plan, non-statutory option
agreements and employment agreements at December 31, 2001 ranged from $0.40 to
$12.50. The weighted average fair value of options granted during 2001 and 2000
was $0.38 and $0.85, respectively.

14.      Related Party
Transactions

The Company
previously utilized the accounting firm of Golomb, Wills & Company, PC for
various financial services. Stephen T. Wills, CPA, MST, a director and former
Vice President and Chief Financial Officer of the Company, is a principal of
Golomb, Wills & Company, PC. Payments to Golomb, Wills & Company, PC
during 2001 and 2000 totaled $0 and $47,390, respectively.

The Company has
a consulting agreement with its founder, former president and former director,
Mary G. Clark, RN. In 2001 and 2000 compensation and reimbursed expenses under
this agreement were $56,095 and $56,306, respectively.

The Company
purchases marketing services from a firm owned by a director and his son. Total
expenses for services rendered in 2001 were $50,816.

Srini
Conjeevaram, a director of the Company, is a general partner in the firm owning
$475,000 of convertible bonds outstanding at year end. This firm also holds a
significant equity ownership in the Company.

31

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Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

15.      Restructuring
Costs

Prior to 2001,
the Company established reserves for restructuring costs as part of an ongoing
plan to align its operating costs with revenues and gross profits. These
reserves, and charges against the reserves, are shown below:

`2001           2000
                                                   ----           ----
     Reserve at beginning of year               $ 71,623        $121,631
     Additional reserve established                    -         250,000
     Restructuring payments and adjustments:
         Involuntary termination benefits        (19,047)       (198,244)
         Other costs                             (33,108)       (101,764)
         Reserve adjustment                      (19,468)            -
                                                 --------       ---------

     Reserve at end of year                    $     -         $  71,623
                                               ==========      =========`

Involuntary
termination benefits relate to severance and medical benefits paid to terminated
employees. Other costs relate principally to non-cancelable lease payments and
outplacement.

No new reserves
were established in 2001. Upon completion of all restructuring related actions,
the Company reversed the remaining restructuring reserve balance of $19,468 to
other income.

16.      Retirement
Benefits

The Company
maintains a profit sharing/401(k) plan for eligible full-time employees.
Participants may contribute up to 12% of their salary to the plan, subject to
IRS limitations. The Company initiated a matching contribution of 50% on the
first 6% of each participant's annual earnings contributed to the plan,
effective November, 2001. Company contributions to the plan for the year ended
December 31, 2001 were $5,682.

17.      Subsequent
Events

Effective
January 7, 2002, bondholders of all the Company's issued and outstanding Series
C and D convertible bonds entered into an agreement to convert the entirety of
the $475,000 principal and $120,200 accrued interest outstanding. The agreement
provides for conversion of the principal and 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.

The agreement
further provides that 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 shall: (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 will recognize an imputed non-cash interest
charge of $165,200. A charge of $45,000 will be taken to account for the value
of the reset concession granted to the bondholders. This charge will be
amortized over the eighteen-month term of the reset concession. A charge of
$120,200 will be taken immediately to account for the conversion terms
associated with the accrued interest.

32

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Financial Index

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

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. At February 28, 2002, the Company had
concluded subscription agreements with its President, together with 15 other
individual and institutional investors, for the sale of 1,300,000 shares of
common stock for a total investment of $650,000. At February 28, 2002,
subscriptions totaling $565,000 had been funded. The Company expects the balance
of the subscriptions to be funded on or about March 31, 2002. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission relative to the common stock issued in its private offering.

33

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Part III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act

Directors and Executive Officers

The directors
and executive officers of the Company are:

`Name                                    Age    Position held with the Company
----                                    ---    ------------------------------

Edward J. Quilty (1)..................  51     Chairman, President and Chief Executive Officer
John E. Yetter, CPA...................  49     Vice President and Chief Financial Officer
Mary C. Antensteiner .................  43     Executive Vice President - Sales and Marketing
Stephen T. Wills, CPA, MST (1)(2)(3)..  45     Director
Srini Conjeevaram (1)(2)(3)...........  43     Director
James T. O'Brien (2)(3)...............  63     Director
_________________
(1)  Member of the Nominating Committee.
(2)  Member of the Compensation Committee.
(3)  Member of the Audit Committee.`

Information Relative to Directors and Executive
Officers

Edward J.
Quilty has served as Chief Executive Officer of the Company since November,
1996, Chairman of the Board since May, 1996 and as a director of the Company
since March, 1996. Mr. Quilty was the Chairman of the Board of Palatin
Technologies, Inc., a biopharmaceutical company specializing in peptide drug
design for diagnostic and therapeutic agents from November, 1995 until May,
2000. From July, 1994 through November, 1995, he was President and Chief
Executive Officer of MedChem Products, Inc., a publicly traded developer and
manufacturer of specialty medical products which was acquired by C. R. Bard in
November, 1995. From March, 1992 through July, 1994 Mr. Quilty served as
President and Chief Executive Officer of Life Medical Sciences, Inc., a
developer and manufacturer of specialty medical products including wound healing
agents. The assets of Life Medical Sciences were purchased by MedChem Products,
Inc. Mr. Quilty has over 25 years of experience in the healthcare industry
primarily in strategic planning, management and sales and marketing. Mr. Quilty
is a member of the Healthcare Manufacturing Marketing Council. He earned a
Bachelor of Science degree from Southwest Missouri State University,
Springfield, Missouri in 1972 and a Master of Business Administration degree
from Ohio University, Athens, Ohio in 1987.

John E.
Yetter, CPA has served as Vice President and Chief Financial Officer of the
Company since August, 2000. Prior to joining the Company, Mr. Yetter held a
variety of senior financial positions with Bristol-Myers Squibb. Prior to his
association with Bristol-Myers, he held several supervisory financial positions
with Cooper Industries, Inc., Price Waterhouse and Hulse Manufacturing Company.
Mr. Yetter is a member of the American Institute of Certified Public Accountants
and the New York Society of Certified Public Accountants. He earned a Bachelor
of Science in Accounting, Magna Cum Laude, from Boston College School of
Management, Boston, Massachusetts in 1975.

Mary C.
Antensteiner has served as the Company's Executive Vice President-Sales and
Marketing since June, 2000. Prior to assuming her present position, Ms.
Antensteiner served as Vice President of Corporate Accounts since July, 1999 and
Regional Vice President since being hired by the Company in January, 1999. Prior
to her affiliation with the Company, Ms. Antensteiner was Vice President, Sales
& Marketing, for Ferris Manufacturing and a Regional Sales Director for
FoxMeyer Drug Company. She has also held key sales positions with J. M. Murray
and ParMed Pharmaceuticals. Ms. Antensteiner earned a Bachelor of Science degree
in Business Management from the State University of New York, Buffalo, New York
in 1982.

Stephen T.
Wills, CPA, MST has served as a director of the Company since May, 2000. He
also served as Chief Financial Officer of the Company since July, 1997 and Vice
President since November, 1997 until his

34

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resignation from these positions in July, 2000. Mr. Wills also
serves as President and Chief Operating Officer of Golomb, Wills & Company,
PC, a public accounting firm, and as Vice President and Chief Financial Officer
of Palatin Technologies, Inc., a publicly traded biopharmaceutical company. Mr.
Wills is a member of the American Institute of Certified Public Accountants, New
Jersey Society of Certified Public Accountants and Pennsylvania Institute of
Certified Public Accountants. He earned a Bachelor of Science degree in
Accounting from West Chester University, West Chester, Pennsylvania in 1979 and
a Master of Science in Taxation from Temple University, Philadelphia,
Pennsylvania in 1994.

Srini
Conjeevaram has served as director of the Company since May, 1998. Mr.
Conjeevaram has been the General Partner and Chief Financial Officer of Galen
Associates, a healthcare venture capital firm, since January, 1991. Prior to his
affiliation with Galen Associates, he was an Associate in Corporate Finance at
Smith Barney from July, 1989 to December, 1990 and a Senior Project Engineer for
General Motors Corporation from April, 1982 to July, 1987. Mr. Conjeevaram
serves as a director of Halsey Drug Company, Inc., a publicly traded company. He
earned a Bachelor of Science degree in Mechanical Engineering from Madras
University, Madras, India, a Master of Science degree in Mechanical Engineering
from Stanford University, Stanford, California and a Master of Business
Administration in Finance from Indiana University, Bloomington, Indiana.

James T.
O'Brien has served as a director of the Company since May, 2001. Mr. O'Brien
also serves as President and Chief Executive Officer of O'Brien Marketing &
Communications, a full service advertising agency which he formed in 1991.
Previously, Mr. O'Brien served from 1989 to 1991 as President and Chief
Operating Officer for Elan Corporation (NYSE: ELN), a multi-national medical
products and pharmaceutical company. In 1986, Mr. O'Brien founded O'Brien
Pharmaceuticals and served as its President and Chief Executive Officer until
the acquisition of this company by Elan Corporation. During the period 1980 to
1986, Mr. O'Brien held several division presidencies with the Revlon Health Care
Group. Prior to his association with Revlon, he served for seventeen years with
Sandoz Pharmaceuticals, Inc., most recently as Vice President of U.S. Marketing
and Sales. Mr. O'Brien serves on the boards of directors of Ashni
Naturaceuticals, CyDex, Inc., Crititech, Inc., Pharmquest, Inc. and Benedictine
College. He earned a Bachelor of Science in Business Administration from
Benedictine College, Atchison, Kansas, in 1960 and attended the Harvard
University Advanced Management Program in 1974.

Compliance with Section 16(a) of the Exchange
Act

Section 16(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
shareholders are required by Commission regulation to furnish the Company with
copies of all Section 16(a) forms they file.

To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company, all reports under Section 16(a) required to be filed
by its officers, directors and greater than ten-percent beneficial owners were
timely filed.

Item 10. Executive Compensation

Compensation of Executive Officers

Summary Compensation Table

The following
table shows all compensation paid by the Company to its Chief Executive Officer,
Chief Financial Officer and each of the Company's current officers or directors
whose compensation exceeded $100,000 for their services in all capacities during
the years 1999, 2000 or 2001:

35

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`Annual Compensation
                                           ---------------------      # of Options    All Other
Name and Principal Position      Year      Salary          Bonus        Granted(*)  Compensation
---------------------------      ----      ------          -----      ------------  ------------

Edward J. Quilty                 2001     $187,583           --         225,000           --
Chairman, President and          2000     $168,750           --            --             --
Chief Executive Officer          1999     $150,000        $25,000          --             --

John E. Yetter, CPA              2001     $152,020           --         100,000           --
Vice President and               2000    $  62,077(3)     $15,000(2)     60,000           --
Chief Financial Officer          1999         --             --            --             --

Mary C. Antensteiner             2001     $120,000        $16,000       100,000           --
Executive Vice President -       2000     $115,000           --            --             --
Sales and Marketing              1999     $108,000        $10,000(2)       --             --

Stephen T. Wills, CPA, MST       2001         --         --              35,000           --
Director and former Vice         2000    $  70,125(4)        --          15,000           --
President and Chief Financial    1999     $109,500(4)        --          32,000           --
Officer

John T. Borthwick                2001     $114,762       $14,589         75,000           --
Vice President for Sales         2000     $165,375       --              37,800(1)    $9,962(5)
                                 1999     $180,000       --                --         $9,962(5)
___________________________

(*)  All options have been adjusted for the Company's 5-for-1 stock split
     effective August 2, 1999.
(1)  Options issued pursuant to the anti-dilution provisions of the subject
     executive's employment agreement.
(2)  Sign-on bonus.
(3)  Represents compensation earned during the period August through December,
     2000.
(4)  Does not include payments made to an affiliate of Mr. Wills, Golomb, Wills
     & Company, PC. See Certain Relationships and Related Transactions
     below.
(5)  The Company enrolled Mr. Borthwick in a split-dollar life insurance program
     on July 1, 1993. The monthly premiums are $830.18 for $500,000 of coverage.
     This policy was terminated effective December 31, 2000.`

Option Grants Table

The following
table sets forth information regarding grants of stock options to the following
named executive officers and directors made during the year ended December 31,
2001:

`Percent of Total
                                              Options Granted to   Exercise
                                # of Options     Employees and       Price
            Name                   Granted     Directors in 2001   ($/Share)   Expiration Date
            ----                ------------  ------------------   ---------   ---------------

Mary A. Antensteiner           100,000 (1)           14.1%           $0.40     August 24, 2011
John T. Borthwick                75,000 (1)          10.6%           $0.40     August 24, 2011
Srini Conjeevaram                35,000 (2)           4.9%           $0.40     May 22, 2011
James T. O'Brien                 35,000 (2)           4.9%           $0.40     May 22, 2011
Edward J. Quilty               225,000 (1)           31.7%           $0.40     August 24, 2011
Stephen T. Wills, CPA, MST       35,000 (2)           4.9%           $0.40     May 22, 2011
John E. Yetter, CPA            100,000 (1)           14.1%           $0.40     August 24, 2011

______________________
(1)  Options vest 20% on date of grant and 20% per year thereafter.
(2)  To the extent of 20,000 options, 5,000 vest on date of grant and 5,000 vest
     on each anniversary of the date of grant until fully vested. To the extent
     of 15,000 options, 1,250 vest each month beginning June 22, 2001 and
     monthly thereafter through May 22, 2002.`

36

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Aggregate Year End Option Value Table

The following
table sets forth information regarding the aggregate number and value of options
to purchase Common Stock held by the named executive officers as of December 31,
2001. No options have been exercised:

`Number of Shares                $ Value of Unexercised
                               Underlying Unexercised              In-The-Money Options
                            Options at December 31, 2001          At December 31, 2001 (1)
                           ------------------------------      ------------------------------
Name                       Exercisable      Unexercisable      Exercisable      Unexercisable
                           -----------      -------------      -----------      -------------
Edward J. Quilty .........   181,055          180,000            $18,000            $72,000

John E. Yetter, CPA ......    60,000          100,000            $10,000            $33,000

Mary C. Antensteiner .....    35,000           80,000             $8,000            $32,000

John T. Borthwick ........    82,800           60,000             $6,000            $24,000

_____________________
(1)  Determined based on the fair market value for the Company's Common Stock at
     December 31, 2001 of $0.80 per share.`

Compensation of Directors

For each year
of service, outside directors receive options to purchase 35,000 shares of the
Company's Common Stock at a price per share equal to the fair market value of
the Common Stock on the date of the option grant. To the extent of 20,000
options, 5,000 vest on date of grant and 5,000 per year thereafter. To the
extent of 15,000 options, 1,250 vest monthly beginning one month after date of
grant and for the next 11 months thereafter. All directors are reimbursed for
expenses incurred in connection with each board and committee meeting attended.
Inside directors receive no compensation for their services as directors.

Employment Arrangements

Edward J. Quilty

The Company
employed Edward J. Quilty, its Chairman, President and Chief Executive Officer,
through May 31, 2001 under an oral agreement providing for compensation at the
rate of $175,000 per year. Effective June 1, 2001, the Company executed a
one-year employment agreement with Mr. Quilty providing for base compensation in
the amount of $200,000 per year and incentive compensation in the discretion of
the Company's board of directors. The agreement further provides for the payment
of severance compensation in the amount of one-year's base salary upon failure
of the Company to renew the agreement for successive one-year terms. In
addition, upon a change in control of the Company, Mr. Quilty may, within
six-months of the change in control, tender his resignation and receive
one-year's severance compensation.

On August 10,
2001, the compensation committee of the board of directors approved an extension
of the term on Mr. Quilty's employment contract through May 31, 2003 and
approved an amendment to the severance provisions of his contract increasing
severance compensation from one to two years of base compensation at the rate
most recently in effect at the time of severance.

John E. Yetter, CPA

The Company
employed John E. Yetter, CPA, its Vice President and Chief Financial Officer,
through May 31, 2001 under an oral agreement providing for a sign-on bonus of
$15,000 (paid in August, 2000) and

37

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compensation at the rate of $150,000 per
year. Effective June 1, 2001, the Company executed a one-year employment
agreement with Mr. Yetter providing for base compensation in the amount of
$160,500 per year and incentive compensation in the discretion of the board of
directors. The agreement further provides for the payment of severance
compensation in the amount of one-year's base salary upon failure of the Company
to renew the agreement for successive one-year terms. In addition, upon a change
in control of the Company, Mr. Yetter may, within six-months of the change in
control tender his resignation and receive one-year's severance compensation.

Mary C. Antensteiner

The Company
employed Mary C. Antensteiner, its Executive Vice President - Sales and
Marketing, through December 31, 2000 pursuant to an employment agreement dated
December 30, 1998. The agreement provided that Ms. Antensteiner would receive
compensation of $100,000 per year together with performance based bonuses. The
agreement also granted Ms. Antensteiner the option to purchase 15,000 shares of
the Company's Common Stock at a price of $6.00 per share. These options became
exercisable at the rate of 5,000 options on each of December 15, 1999, 2000 and
2001.

Effective
January 1, 2001 the Company executed an employment agreement with Ms.
Antensteiner, terminable upon 30 days written notice by either party, providing
for base compensation in the amount of $120,000 per year and incentive
compensation in the discretion of the Company's president and chief executive
officer. The agreement provides that if her employment is terminated by the
Company "without cause," the Company shall pay severance compensation in the
amount of six-months base compensation at the rate most recently in effect. The
agreement further provides that upon a change in control of the Company, Ms.
Antensteiner may resign her position, if such change in control results in
adverse changes to her responsibilities or status, and receive severance
compensation as if she had been terminated without cause.

John T. Borthwick

The Company
employed John T. Borthwick, its Vice President - Sales, through December 31,
2001 pursuant to an employment agreement dated February 1, 2001. The agreement
provided that Mr. Borthwick would receive compensation of $110,000 per year
together with performance based bonuses. The agreement also granted Mr.
Borthwick the immediately exercisable option to purchase 37,800 shares of the
Company's Common Stock at a price of $5.93 per share. The agreement further
provided that Mr. Borthwick would waive the benefit of any prior employment
agreement with the Company, including the severance provisions thereof. In
consideration for this waiver, the agreement provided that the Company would
forgive the principal and accrued interest under a promissory note in the
principal amount of $99,364 payable to the Company by Mr. Borthwick.

Effective
January 1, 2001 the Company executed an employment agreement with Mr. Borthwick,
terminable upon 30 days written notice by either party, providing for base
compensation in the amount of $110,000 per year and incentive compensation in
the discretion of the Company's president and chief executive officer. The
agreement provides that if his employment is terminated by the Company "without
cause," the Company shall pay severance compensation in the amount of six-months
base compensation at the rate most recently in effect. The agreement further
provides that upon a change in control of the Company, Mr. Borthwick may resign
his position, if such change in control results in adverse changes to his
responsibilities or status, and receive severance compensation as if he had been
terminated without cause.

Stock Option Plan

The Company
adopted the Stock Option Plan (the "Plan") in July 1991 and amended the Plan in
January, 1994, November 21, 1995 and July 14, 1998. The number of shares of
Common Stock reserved for issuance pursuant to the Plan is 300,000 shares. The
Plan authorizes the Company to grant two types of equity incentives: (i) options
intended to qualify as "incentive stock options" ("ISOs") as defined in Section
422 of the Internal Revenue Code of 1986, as amended, and (ii) non-qualified
stock options ("NQSOs"). The Plan authorizes options to be granted to directors,
officers, key employees and consultants of the Company, except that ISOs may be
granted only to employees. The Plan is administered by a committee of
disinterested directors designated by the Board of Directors (the "Compensation
Committee"). Subject to the provisions of the Plan, the Compensation Committee

38

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determines who is eligible to receive stock options, together with the nature,
amount, timing, exercise price, vesting schedule and all other terms and
conditions of the options to be granted.

Under the Plan,
ISOs and NQSOs may have a term of up to ten years. Stock options are not
assignable or transferable except by will or the laws of descent and
distribution. Stock options granted under the Plan which have lapsed or
terminated revert to the status of "unissued" and become available for
reissuance.

At December 31,
2001, options to purchase 52,600 shares of the Company's Common Stock at prices
ranging from $4.00 to $5.625 per share were issued and outstanding under the
Plan.

Item 11. Security Ownership of Certain Beneficial Owners and
Management

The following
table sets forth as of February 28, 2002 certain information regarding the
current beneficial ownership of shares of the Company's Common Stock by: (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each officer of the Company, and (iv) all directors and officers of the Company
as a group:

`Number of Shares             Percent
Name and Address of Beneficial Owner (1)               Beneficially Owned(14)  Beneficially Owned(14)
----------------------------------------               ----------------------  ----------------------

Srini Conjeevaram (2)..................................       4,630,934                55.92%
Kensington Management Group, LLC (3)...................       1,312,000                31.64%
Hambrecht & Quist California (4).......................       1,165,834                23.92%
Redwood Asset Management (5)...........................         916,671                21.05%
Edward J. Quilty (6)...................................         718,324                17.42%
Dolphin Offshore Partners (7)..........................         480,002                12.46%
Guerrilla Partners (8).................................         300,000                 8.09%
Stephen T. Wills, CPA, MST (9).........................         229,670                 5.96%
John E. Yetter, CPA (10)...............................          84,000                 2.23%
James T. O'Brien (11)..................................          60,350                 1.62%
Mary C. Antensteiner (12)..............................          35,000                  (*)
All directors and officers as a group (6 persons)(13)..       5,758,278                 (* *)
_____________________
(1)  Except as otherwise noted, the address of each of the persons listed is:
     214 Carnegie Center, Suite 100, Princeton, New Jersey 08540.
(2)  Srini Conjeevaram is a general partner of the Galen III Partnerships. The
     Galen III Partnerships can be reached at: 610 Fifth Avenue, Fifth Floor,
     New York, New York 10020. Includes shares owned by Galen Partners III,
     L.P., Galen Partners International III, L.P. and Galen Employee Fund III,
     L.P. Ownership consists of: 57,000 shares of Common Stock; 125,003 shares
     of Class A Convertible Preferred Stock ("Class A Preferred"); 416,668
     shares of Class B Convertible Preferred Stock ("Class B Preferred");
     416,668 warrants to purchase Common Stock exercisable at $6.75 per share
     ("Class B Warrants"); 619,055 shares of Class C Convertible Preferred Stock
     ("Class C Preferred"); 1,071,346 shares of Class D Convertible Preferred
     Stock ("Class D Preferred"); 550,003 warrants to purchase Common Stock
     exercisable at $0.85 per share ("Class E Warrants"); 1,309,441 warrants to
     purchase common stock exercisable at $0.57 per share ("Class F Warrants");
     and exercisable options to purchase 65,750 shares of Common Stock. No
     additional options to purchase Common Stock will become exercisable within
     60 days of February 28, 2002.
(3)  Kensington Management Group, LLC can be reached at: 200 Park Avenue, New
     York, New York 10016. Includes shares owned by Kensington Partners L.P.,
     Kensington Partners II L.P., Bald Eagle Fund Ltd., Peter Orthwein Managed
     Account and Peter Orthwein Family Trust. Ownership consists of: 872,000
     shares of Common Stock and 440,000 Class E Warrants.
(4)  Hambrecht & Quist California can be reached at: One Bush Street, San
     Francisco, California 94104. Ownership consists of: 122,500 shares of Class
     A Preferred; 101,667 shares of Class B Preferred; 101,667 Class B Warrants;
     400,000 shares of Class C Preferred; and 440,000 Class E Warrants.`

39

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`(5)  Redwood Asset Management can be reached at: Ovre Ullorn Terrasse 32, 0358
     Oslo, Norway. Ownership consists of: 150,001 shares of Common Stock; 83,334
     Class B Warrants; 100,000 shares of Class C Preferred; 133,334 shares of
     Class D Preferred; and 330,002 Class E Warrants.
(6)  Ownership consists of: 301,684 shares of Common Stock; 9,584 Class B
     Warrants; 220,001 Class E Warrants; and exercisable options to purchase
     187,055 shares of Common Stock. No additional options to purchase Common
     Stock will become exercisable within 60 days of February 28, 2002.
(7)  Dolphin Offshore Partners can be reached at: 129 East 17th Street, New
     York, New York 10003. Ownership consists of: 333,334 shares of Common Stock
     and 146,668 Class E Warrants.
(8)  Guerrilla Partners can be reached at: 237 Park Avenue, New York, New York
     10017. Includes shares owned by Guerrilla Partners and Guerrilla IRA
     Partners. Ownership consists of: 300,000 shares of Common Stock.
(9)  Ownership consists of: 85,668 shares of Common Stock; 4,584 Class B
     Warrants; 58,668 Class E Warrants; and exercisable options to purchase
     80,750 shares of Common Stock. No additional options to purchase Common
     Stock will become exercisable within 60 days of February 28, 2002.
(10) Ownership consists of: 20,000 shares of Common Stock; and exercisable
     options to purchase 64,000 shares of Common Stock. No additional options to
     purchase Common Stock will become exercisable within 60 days of February
     28, 2002.
(11) Ownership consists of: 41,600 shares of Common Stock; and exercisable
     options to purchase 18,750 shares of common stock. No additional options to
     purchase Common Stock will become exercisable within 60 days of February
     28, 2002.
(12) Ownership consists of: exercisable options to purchase 35,000 shares of
     Common Stock. No additional options to purchase Common Stock will become
     exercisable within 60 days of February 28, 2002.
(13) Ownership consists of: an aggregate of 5,758,278 shares of Common Stock,
     Class A Preferred, Class B Preferred, Class C Preferred, Class D Preferred,
     Class B Warrants, Class E Warrants, Class F Warrants and options currently
     exercisable and exercisable within 60 days of February 28, 2002 to purchase
     shares of Common Stock.
(14) The number of shares beneficially owned and the percent beneficially owned
     by each entity or individual assume the exercise of all exercisable options
     (including those that would be exercisable within 60 days of February 28,
     2002), the conversion of all convertible bonds into units consisting of
     warrants to purchase Common Stock and Convertible Preferred Stock and the
     exercise of all warrants and the conversion into Common Stock of all
     Convertible Preferred Stock owned by such entity or individual. The percent
     beneficially owned is a fraction the numerator of which is the number of
     shares of Common Stock beneficially owned by each entity or individual and
     the denominator of which is the number of outstanding shares of Common
     Stock plus the number of shares of Common Stock which would be issued upon
     exercise by the subject entity or individual of its/his/her own options and
     warrants, the conversion into units of its/his/her own convertible bonds
     and the conversion into Common Stock of its/his/her own Convertible
     Preferred Stock. This method of computing the percent beneficially owned
     results in the aggregate ownership percentages exceeding 100%.
(*)  Less than one percent
(**) In excess of 100 percent. See note 14.`

Item 12. Certain Relationships and Related
Transactions

The Company
previously utilized the accounting firm of Golomb, Wills & Company, PC for
various financial services. Stephen T. Wills, CPA, MST, a director and former
Vice President and Chief Financial Officer of the Company, is a principal of
Golomb, Wills & Company, PC. Payments to Golomb, Wills & Company, PC
during 2001 and 2000 totaled $0 and $47,390, respectively.

The Company has
a consulting agreement with its founder, former president and former director,
Mary G. Clark, RN. In 2001 and 2000 compensation and reimbursed expenses under
this agreement were $56,095 and $56,306, respectively.

The Company
purchases marketing services from a firm owned by a director and his son. Total
expenses for services rendered in 2001 were $50,816.

Srini
Conjeevaram, a director of the Company, is a general partner in the firm owning
$475,000 of convertible bonds outstanding at year end. This firm also holds a
significant equity ownership in the Company.

40

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Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

`Exhibit
Number                             Description                                         Page
------                             -----------                                         ----

3.1      Articles of Incorporation effective June 3, 1996 (previously filed as          --
         Exhibit B to the -- Company's Proxy Statement filed on April 23, 1996
         and incorporated herein by reference).

3.2      Amendment to the Articles of Incorporation effective February 10, 1998         --
         (previously -- filed as Exhibit A to the Company's Proxy Statement
         filed on December 22, 1997 and incorporated herein by reference).

3.3      Amendment to the Articles of Incorporation effective October 20, 1998          --
         (previously filed -- as Exhibit A to the Company's Proxy Statement
         filed on August 14, 1998 and incorporated herein by reference).

3.4      Amendment to the Articles of Incorporation effective May 26, 1999              --
         (previously filed as -- Exhibit A to the Company's Proxy Statement
         filed on April 13, 1999 and incorporated herein by reference).

3.5      Amendment to the Articles of Incorporation effective August 2, 1999            --
         (previously filed -- as Exhibit 3 to the Company's Form 8-K filed on
         August 6, 1999 and incorporated herein by reference).

3.6      Certificate of Designations, Voting Powers, Preferences and Rights of          --
         the Series of -- Preferred Stock of Derma Sciences, Inc. to be
         Designated Series C Convertible Preferred Stock (previously filed as
         Exhibit 10.05 to the Company's Form 8-K filed on August 20, 1999 and
         incorporated herein by reference).

3.7      Certificate of Designations, Voting Powers, Preferences and Rights of          --
         the Series of -- Preferred Stock of Derma Sciences, Inc. to be
         Designated Series D Convertible Preferred Stock (previously filed as
         Exhibit 10.05 to the Company's Form 8-K filed on January 10, 2000 and
         incorporated herein by reference).

3.8      Bylaws effective May 14, 1997 (previously filed as Exhibit 3.1 to the          --
         Company's Form -- 10-QSB filed on August 15, 1997 and incorporated
         herein by reference).

10.01    Agreement and Plan of Merger dated December 27, 1999 by and among Derma        --
         Sciences, Inc. -- and Genetic Laboratories Wound Care, Inc. (previously
         filed as Exhibit 10.01 to the Company's Form 8-K filed on January 10,
         2000 and incorporated herein by reference).

10.02    Stock Purchase Agreement with annexes dated October 29, 1998 by and            --
         among Derma -- Sciences, Inc., the John G. Vogel, Jr. Revocable Trust
         U/A dated August 23, 1995, Martha A. Crimmins, the Gordon E. Cory
         Revocable Trust U/A dated August 24, 1995, John G. Vogel, Jr., Gordon
         E. Cory and Sunshine Products, Inc. (previously filed as Exhibit 2.1 to
         the Company's Form 8-K filed on November 13, 1998 and incorporated
         herein by reference).

10.03*   Senior Management Stock Option Agreement, dated April 30, 1997, between        --
         the Company and -- Edward J. Quilty (previously filed as Exhibit 10.05
         to the Company's Form 8-K filed on May 6, 1997 and incorporated herein
         by reference).

10.04*   Senior Management Stock Option Agreement, dated April 14, 1997, between        --
         the Company and -- Richard S. Mink (previously filed as Exhibit 10.10
         to the Company's Form 8-K filed on May 6, 1997 and incorporated herein
         by reference).

10.05*   Employment Agreement, dated May 7, 1999, between the Company and               --
         Richard S. Mink -- (previously filed as Exhibit 10.05 to the Company's
         Form 10-KSB filed on March 31, 1999 and incorporated herein by
         reference).

10.06*   Employment Agreement, dated February 1, 1999, between the Company and          --
         Stephen T. Wills, CPA, MST (previously filed as Exhibit 10.06 to the
         Company's Form 10-KSB filed on March 31, 1999 and incorporated herein
         by reference).`

41

---

`10.07*   Stock Option Agreement, dated July 23, 1997, between the Company and           --
         Stephen T. Wills, -- CPA, MST (previously filed as Exhibit 10.01 to the
         Company's Form 10-QSB filed on August 15, 1997 and incorporated herein
         by reference).

10.08*   Employment Agreement, dated December 29, 1995, between the Company and         --
         John T. -- Borthwick (previously filed as Exhibit 10.37 to the
         Company's Form 10-KSB filed on March 29, 1996 and incorporated herein
         by reference).

10.09*   Addendum to Employment Agreement, dated March 5, 1997, between the             --
         Company and John T. -- Borthwick (previously filed as Exhibit 10.38 to
         the Company's Form 10-KSB filed on March 31, 1997 and incorporated
         herein by reference).

10.10*   Senior Management Stock Option Agreement, dated April 30, 1997, between        --
         the Company and -- John T. Borthwick (previously filed as Exhibit 10.06
         to the Company's Form 8-K filed on May 6, 1997 and incorporated herein
         by reference).

10.11*   Senior Management Stock Option Agreement, dated April 30, 1997, between        --
         the Company and -- Robert P. DiGiovine (previously filed as Exhibit
         10.09 to the Company's Form 8-K filed on May 6, 1997 and incorporated
         herein by reference).

10.12*   Promissory Note, dated January 17, 1995, between the Company and John          --
         T. Borthwick -- (previously filed as Exhibit 10.73 to the Company's
         Form 10-KSB filed on March 30, 1995 and incorporated herein by
         reference).

10.13    Stock Option Agreement dated October 29, 1998 by and between Derma             --
         Sciences, Inc. and -- John G. Vogel, Jr. (previously filed as Exhibit
         10.01 to the Company's Form 8-K filed on November 13, 1998 and
         incorporated by reference).

10.14    Stock Option Agreement dated October 29, 1998 by and between Derma             --
         Sciences, Inc. and -- Martha A. Crimmins (previously filed as Exhibit
         10.02 to the Company's Form 8-K filed on November 13, 1998 and
         incorporated by reference).

10.15    Stock Option Agreement dated October 29, 1998 by and between Derma             --
         Sciences, Inc. and -- Gordon E. Cory (previously filed as Exhibit 10.03
         to the Company's Form 8-K filed on November 13, 1998 and incorporated
         by reference).

10.16    Lease Agreement, dated January 5, 1994, between James S. Reid, Frances         --
         S. Reid and Joan -- R. Milburn and Sunshine Products, Inc. (previously
         filed as Exhibit 10.38 to the Company's Form 10-KSB filed on March 31,
         1999 and incorporated herein by reference).

10.17    Lease Agreement, dated July 1, 1997, between the Company and Cross             --
         Creek Pointe -- (previously filed as Exhibit 10.44 to the Company's
         Form 10-KSB filed on March 31, 1998 and incorporated by reference).

10.18    Lease Agreement, dated September 1, 1993, between the Company and              --
         Mariotti Building -- Products (previously filed as Exhibit 10.51 to the
         Company's Registration Statement filed on Form SB-2, No. 33-52246-NY,
         declared effective on May 13, 1994 and incorporated herein by
         reference).

10.19    Sales Agreement, dated June 4, 1999, between the Company and Beverly           --
         Enterprises, Inc. -- (previously filed as Exhibit 10.01 to the
         Company's Form 8-K filed on June 11, 1999 and incorporated herein by
         reference.)

10.20    Generic Products Agreement, dated September 29, 1997, between the              --
         Company and -- Innovative Technologies Ltd. (previously filed as
         Exhibit 10.01 to the Company's Form 10-QSB filed on November 10, 1997
         and incorporated herein by reference).

10.21    Private Label Agreement, dated September 29, 1997, between the Company         --
         and Innovative -- Technologies Ltd. (previously filed as Exhibit 10.02
         to the Company's Form 10-QSB filed on November 10, 1997 and
         incorporated herein by reference).

10.22    Manufacturers Agreement, dated August 25, 1992, between the Company and        --
         TapeMark -- Company (previously filed as Exhibit 10.50 to the Company's
         Form 10-KSB filed on March 31, 1999 and incorporated herein by
         reference).

10.23*   Stock Option Plan, dated July 18, 1991 (previously filed as Exhibit            --
         10.01 to the -- Company's Registration Statement and incorporated
         herein by reference).

10.24*   Stock Option Plan Amendment, dated January 14, 1994 (previously filed          --
         as Exhibit 10.02 -- to the Company's Registration Statement and
         incorporated herein by reference).`

42

---

`10.25*   Stock Option Plan Amendment, dated November 21, 1995 (previously filed         --
         as Exhibit 10.03 -- to the Company's Form 10-KSB filed on March 31,
         1996 and incorporated herein by reference). 10.26* Stock Option Plan
         Amendment, dated July 14, 1998 (previously filed as Appendix C to the
         -- Company's Registration Statement on Form S-4 filed July 17, 1998 and
         incorporated herein by reference).

10.27*   The Company's 401(k) Plan, dated June 30, 1995 (previously filed as            --
         Exhibit 10.56 to -- the Company's Form 10-KSB filed on March 31, 1996
         and incorporated herein by reference).

10.28*   401(k) Plan Amendment, dated January 1, 2000 (previously filed as              --
         Exhibit 10.28 to the -- Company's Form 10-KSB/A-1 filed on August 10,
         2001 and incorporated herein by reference).

10.29*   Employment Agreement, dated February 1, 2000, between the Company and          --
         John T. Borthwick -- (previously filed as Exhibit 10.29 to the
         Company's Form 10-KSB/A-1 filed on August 10, 2001 and incorporated
         herein by reference).

10.30*   Employment Agreement, dated December 30, 1998, between the Company and         --
         Mary C. -- Antensteiner (previously filed as Exhibit 10.30 to the
         Company's Form 10-KSB/A-1 filed on August 10, 2001 and incorporated
         herein by reference).

10.31*   Stock Option Agreement, dated August 28, 2000, between the Company and         --
         John E. Yetter, -- CPA (previously filed as Exhibit 10.31 to the
         Company's Form 10-KSB/A-1 filed on August 10, 2001 and incorporated
         herein by reference).

10.32    Purchase Agreement, dated July 18, 2000, between the Company and Edward        --
         J. Quilty, -- Kensington Management Group, LLC, Dolphin Offshore
         Partners and Redwood Asset Management (previously filed as Exhibit
         10.01 to the Company's Form 8-K/A filed August 14, 2000 and
         incorporated by reference).

10.33    Registration Rights Agreement, dated July 18, 2000, between the Company        --
         and Edward J. -- Quilty, Kensington Management Group, LLC, Dolphin
         Offshore Partners and Redwood Asset Management (previously filed as
         Exhibit 10.02 to the Company's Form 8-K/A filed August 14, 2000 and
         incorporated by reference).

10.34    Warrant Agreement, dated July 18, 2000, between the Company and Edward         --
         J. Quilty, -- Kensington Management Group, LLC, Dolphin Offshore
         Partners and Redwood Asset Management (previously filed as Exhibit
         10.03 to the Company's Form 8-K/A filed August 14, 2000 and
         incorporated by reference).

10.35    Distribution Agreement, dated July 13, 2000, between the Company and           --
         Merit Medical -- Systems, Inc. (previously filed as Exhibit 10.01 to
         the Company's Form 8-K filed August 1, 2000 and incorporated by
         reference).

10.36*   Employment Agreement, dated June 1, 2001, between the Company and              --
         Edward J. Quilty -- (previously filed as Exhibit10.01 to the Company's
         Form 8-K filed June 13, 2001 and incorporated herein by reference).

10.37*   Employment Agreement, dated May 22, 2001, between the Company and John         --
         E. Yetter, CPA -- (previously filed as Exhibit10.02 to the Company's
         Form 8-K filed June 13, 2001 and incorporated herein by reference).

10.38    Bond Amendment Agreement, dated January 5, 2001 between the Company and        --
         Galen Partners III, L.P., Galen Partners International III, L.P. and
         Galen Employee Fund III, L.P. (previously filed as Exhibit 10.01 to the
         Company's Form 8-K filed March 19, 2001 and incorporated herein by
         reference).

10.39*   Employment Agreement, dated December __, 2001, between the Company and         --
         John T. -- Borthwick.

10.40*   Employment Agreement, dated December __, 2001, between the Company and         --
         Mary C. Antensteiner.

21       Information relative to subsidiaries.                                          --

23.1     Consent of Ernst & Young LLP.                                                  --
____________________________
* Management contract or compensatory plan.`

43

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(b) Reports on Form 8-K

No reports on
Form 8-K were filed during the fourth quarter, 2001.

SIGNATURES

In accordance
with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|               | DERMA SCIENCES, INC.                                
|-------------- | ----------------------------------------------------
|               |                                                     
|               |                                                     
|March 29, 2002 | By: /s/ Edward J. Quilty                            
|               | Edward J.
     Quilty                               
|               | Chairman,
     President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 2002.

| | Signatures: |  |  | Title: | 
| | ----------- |  |  | ------ | 

|/s/ Edward J. Quilty       | President, Chief Executive Officer and Chairman of the Board
|-------------------------- | ------------------------------------------------------------
|Edward J. Quilty           | of Directors (Principal Executive
     Officer)             
|                           |                                                             
|/s/ John E. Yetter         | Vice President and Chief Financial Officer                  
|John E. Yetter, CPA        | (Principal Financial and Accounting
     Officer)           
|                           |                                                             
|/s/ Srini Conjeevaram      | Director                                                    
|Srini Conjeevaram          |                                                             
|                           |                                                             
|/s/ Stephen T. Wills       | Director                                                    
|Stephen T. Wills, CPA, MST |                                                             
|                           |                                                             
|/s/ James T. O'Brien       | Director                                                    
|James T. O'Brien           |                                                             

44