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

# FORM 10-KSB/A-1

|[ X ]  | Annual Report under Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the fiscal year ended December 31,
     2000      
|------ | ------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                           
|[    ] | 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. [    ]

Issuer's
revenues for its most recent fiscal year were $9,566,134.

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 March 22, 2001, was
approximately $681,000.

The number of
shares outstanding of each of the issuer's classes of common equity, as of March
29, 2001, was 2,407,109.

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) 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 additional, 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

1

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piece 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. Contains zinc
     nutrient technology and 2% micronazole nitrate. Used to treat routine
     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 pumps and jars,
     containing allantoin and aloe vera gel. Used to provide protective, long
     lasting general skin care protectant for perineal care associated with
     incontinency.                                               
|Dermagran Hydrogel 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 Hydrophilic B 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 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 and II 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

|LC Strip           |  | Wound closure strip made of a flexible material
     that allows blood and waste materials to escape the wound site. Used for
     wounds resulting from minimally invasive surgery. 
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.              

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|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.                                                                   
|Skin Care Lotion                   |  | Lotion to moisturize and soften the
     skin.                                                                                                                                                       
|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 fifty-two 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.
The Company sells products in the following countries: Argentina, Austria,
Belgium, Canada, Chile, Columbia, Costa Rica, Denmark, Egypt, Finland, France,
Germany, Guatemala, Israel, Italy, Netherlands, New Zealand, Norway, Panama,
Peru, Philippines, Portugal, Puerto Rico, Spain, Sweden, Switzerland, Taiwan,
United Kingdom, Uruguay and Venezuela. Sales generated from foreign countries
are payable in U.S. dollars and are not material.

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.

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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.

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: Applied Labs (Dermagran Spray and
Dermagran Hydrogel Dressing); Kimberly Clark (Dermagran Hydrophilic Wound
Dressing); Topiderm, Inc. (Dermagran Ointment, Dermagran AF, Dermagran BC and
Dermagran Hydrophilic B Dressing); Trumed Technologies (Cath Strip); Maersk
Medical (Percu-Stay) and TapeMark Company (LC Strip, 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. Patent
applications relative to these products are pending in various other countries.

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. Patent applications for this
product are pending in various other countries.

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

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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.

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 Dressing, Dermagran Hydrophilic Wound Dressing, Dermagran
Hydrophilic B 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

6

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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 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

7

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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.

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.

8

---

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 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 forty-four full-time and two part-time employees at December 31,
2000. 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 leases its executive office space on a month-to-month basis at a price
of $9,200 per month. The Company has a lease for offices located in Wilkes
Barre, Pennsylvania, at a rate of $1,542 per month that expires June, 2001. 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, 2000.

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 and, where applicable, as adjusted for a 1:5 stock split
implemented on August 2, 1999:

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

           March 31, 1999                    $4.06        $3.13
           June 30, 1999                     $4.06        $2.03
           September 30, 1999                $2.03        $0.50
           December 31, 1999                 $2.63        $0.88
           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`

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 March 22, 2001, there were 1,221 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. With
the concurrence of our independent auditors, the Company increased reported
other expense, net and net loss by $1,143,866 and $592,613 and increased
reported net loss per share by $0.66 and $0.46, respectively, for the years
ended December 31, 2000 and 1999. Correspondingly, the restatement resulted in
un-amortized bond discount of $732,387 at December 31, 1999 and additional
paid-in capital of $1,736,479 and $1,325,000 at December 31, 2000 and 1999,
respectively. See Note 1 to the consolidated financial statements included
herein for additional information and comparisons of previously reported and
restated financial statement amounts for each of the periods impacted.

Results of Operations

Net sales
decreased $815,545, or 7.9%, in 2000 to $9,566,134 from $10,381,679 in 1999.
Gross profit margins declined to 48.5% in 2000 from 57.1% in 1999 and operating
expenses decreased $2,305,301, or 27.7%, in 2000 to $6,017,690 from $8,322,991
in 1999. Net losses declined $417,582, or 13.9%, in 2000 to $2,581,337 from
$2,998,919 in 1999.

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 Ending December 31,
                                          -----------------------------
                                          2000                     1999
                                          ----                     ----

     Gross sales                     $10,879,234              $11,216,653

     Trade rebates                    (1,054,042)                (579,815)
     Cash discounts                     (191,040)                (157,355)
     Medicaid rebates                    (68,018)                 (97,804)
                                         --------                 --------

     Net Sales                       $ 9,566,134              $10,381,679
                                      ==========               ==========`

Trade rebates
increased significantly in 2000 versus 1999. The increase reflects an increase
in the level of non-standard contract pricing due to a competitive marketplace
and an exclusive two year supply contract with a large nursing home chain
implemented in the later half of 1999 at discounted prices. Cash discounts
increased due to the extension of more favorable discount terms to accelerate
cash flow. Medicaid rebates declined due to lower sales and declining prices.

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

`Year Ended December 31,
                                     -----------------------
     Product Line                    2000               1999               Variance
     ------------                    ----               ----        --------------------

     Wound care                  $2,593,160         $3,478,031      ($884,871)   (25.4)%
     Wound closure-fasteners      2,989,137          3,186,902       (197,765)    (6.2)%
     Skin care                    3,983,837          3,716,746        267,091      7.2%
                                  --------           ---------        -------

         Total                   $9,566,134         $10,381,679     ($815,545)    (7.9)%
                                 ==========         ===========     ==========`

Net Sales
declined $815,545, or 7.9%, in 2000 versus 1999. Wound care sales declined
$884,871, or 25.4%, due principally to market price erosion and the loss of a
major account. Wound care sales were also adversely impacted in the short term
by the downsizing of the direct sales force in early 2000 and the transition to
greater reliance on manufacturers representatives. Wound closure-fastener
sales declined $197,765, or 6.2%, due to domestic and international market price
erosion and lower volume associated with an increasingly competitive market.
Skin care sales increased $267,091, or 7.2%, in 2000 due principally to an
exclusive supply agreement with a large nursing home chain. This agreement was
in force throughout 2000 as opposed to seven months in 1999.

Net Sales, Cost of Sales and Gross Profit

The Company's
net sales, cost of sales, gross profit and gross profit margins for 2000 and
1999 are outlined in the table below:

`Year Ended December 31,
                                -----------------------
                            2000                        1999                  Variance
                  --------------------     ---------------------     ----------------------

Net sales         $9,566,134    100.0%     $10,381,679    100.0%     ($  815,545)    (7.9)%
Cost of sales      4,922,318     51.5%       4,452,784     42.9%        (469,534)   (10.5)%
                   ---------     -----       -------       -----        ---------

Gross profit      $4,643,816     48.5%      $ 5,928,895    57.1%     ($1,285,079)   (21.7)%
                  ===========    =====      ===========    =====     ============`

Gross profit
decreased $1,285,079, or 21.7%, to $4,643,816 in 2000 from $5,928,895 in 1999.
Lower overall sales volumes, price erosion, unfavorable product mix, product
cost increases and an increase in the inventory obsolescence reserve were
contributing factors to the gross profit decline.

11

---

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        2000         1999
   ------------                -----------------------        ----         ----

   Wound care                          50% - 70%              27.1%        33.5%
   Wound closure-fasteners             40% - 60%              31.2%        30.7%
   Skin care                           25% - 45%              41.7%        35.8%
                                                              ----         -----

                                                             100.0%       100.0%
                                                             ======       ======`

In 2000, lower
margin skin care products constituted a larger percentage of net sales at the
expense of higher margin wound care products. This shift in product mix had a
negative impact both on the Companys gross profits and gross profit
margin. In July 2000, the Company granted a major distributor the exclusive
right to market the Percu-Stay line of catheter fasteners to hospitals. This
agreement resulted both in higher fastener sales volume and lower prices. Thus,
while positively impacting gross profits, the distribution agreement had the
effect of reducing the Companys gross profit margin.

Inventory
cost increases ranging from 3% to 7% for the contract manufactured wound care
and wound closure-fastener lines also contributed to reduce gross profit
margins. Skin care line material costs were essentially flat while labor and
overhead costs were up slightly due to operational inefficiencies. Freight costs
to ship product to customers included in cost of sales was $497,797 and $326,004
in 2000 and 1999, respectively. The significant increase in outbound freight
costs is attributable to a sales mix shift towards freight intensive skin care
sales in 2000, inefficiencies associated with backorders of skin care products
and higher overall freight costs due to higher petroleum prices. Gross profit
margins were also adversely impacted in 2000 by an increase in the inventory
obsolescence reserve of $118,000.

Operating Expenses

Operating
expenses decreased $2,305,301, or 27.7%, to $6,017,690 in 2000 from $8,322,991
in 1999. Restructuring of the sales and marketing operations together with
implementation of company-wide cost reduction initiatives were responsible for
the decrease. A summary of selling, marketing and general administrative
expenses for 2000 and 1999 are outlined in the table below:

`Year Ended December 31,
                                      -----------------------
     Operating Expense                 2000             1999              Variance
     -----------------                 ----             ----        ----------------------

     Selling                        $2,544,637       $4,157,570     ($1,612,933)   (38.8)%
     Marketing                         640,141        1,221,847        (581,706)   (47.6)%
     General and Administration      2,832,912        2,943,574        (110,662)    (3.8)%
                                     ---------        ---------        ---------

              Total                 $6,017,690       $8,322,991     ($2,305,301)   (27.7)%
                                    ==========       ==========     ============`

Selling expenses
decreased $1,612,933, or 38.8%, to $2,544,637 in 2000 from $4,157,570 in 1999.
The compensation and benefits component of selling expenses was down $1,005,230,
or 40.3%, reflecting a significant reduction in the direct sales force and
administrative staff. Consulting, travel and other operating expenses were also
down significantly reflecting reorganization of the sales force and general cost
containment initiatives.

Marketing
expenses decreased $581,706, or 47.6%, to $640,141 in 2000 from $1,221,847 in
1999. The compensation and benefits component of marketing expenses declined
$219,102, or 42.5%, as a result of the reorganization and reduction of marketing
personnel. Promotion, travel and other operating expenses also declined as a
result of the foregoing reorganization and cost containment efforts.

12

---

General and
administrative expenses decreased $110,662, or 3.8%, to $2,832,912 in 2000 from
$2,943,574 in 1999. The compensation and benefits component of general and
administrative expenses increased $256,780, or 32.4%, due primarily to
re-establishment of the headquarters finance staff. Other non-compensation
related expenses declined $367,442, or 17.1%, in 2000. Components of this
decline were a reduction of $451,968 in legal costs and settlement of a legal
fee dispute which generated a credit of $122,000 against legal expenses. Lower
overall costs associated with cost containment efforts also contributed.
Offsetting these savings were higher bad debt expense of $283,924, higher
depreciation/amortization expense of $98,418 and increased headquarters rental
expense.

Other Expense, net

Other expense,
net increased $602,640 to $1,207,463 in 2000 from $604,823 in 1999. Other
expense, net consists of interest income on the Company's investment account
balance, debt financing costs, interest expense associated with the Company's
bank line of credit (secured by the investment account), convertible bond
interest and other miscellaneous expense. A debt financing cost increase of
$551,253 to $1,143,866 in 2000 from $592,613 in 1999 is responsible for the
majority of the increase. The increase relates to the recognition of additional
financing costs associated with the issuance of the Series C and Series D
convertible bonds in 1999 and 2000 and the subsequent refinancing of these bonds
in July 2000.

Net Loss

The Company
incurred net losses in 2000 and 1999 of $2,581,337 and $2,998,919, or $1.48 and
$2.30 per share, respectively. Included in the 2000 net loss are restructuring
costs of $250,000 and write-downs or write-offs totaling $450,000. These latter
charges relate primarily to doubtful accounts, inventory obsolescence and
impaired property, plant and equipment. In addition, non-cash related debt
financing costs of $1,143,866 and $592,613 are included in the net loss for 2000
and 1999, respectively.

Liquidity and Capital Resources

At December 31,
2000 and 1999, the Company had gross cash and cash equivalents balances of
$1,064,165 and $1,221,691, respectively. Cash on hand at December 31, 2000
consisted of general operating cash of $31,064 and cash equivalents of
$1,033,101 deposited in a money market investment account. Balances on deposit
in the money market investment account earn interest at prevailing market rates.
During 2000, interest rates on this account varied between 5.5% and 6.5%.

The Company has
a line of credit facility for $1,000,000 which is fully secured by the money
market investment account discussed above. On December 31, 2000 and 1999,
$640,000 and $650,000, respectively, of this line of credit was outstanding.
Interest on the line of credit balance is payable monthly at prime minus 1%.
This interest rate was 8.5% at December 31, 2000.

The $157,526
decrease in cash and cash equivalents during 2000 resulted from net cash used in
operations of $582,655 and cash used to purchase property, plant and equipment
of $22,494 offset by $447,623 of cash provided by financing activities. Cash
used in operations during 2000 declined $2,135,607, or 79%, to $582,655 from
$2,718,262 in 1999. This decline is attributable to the above discussed expense
containment measures.

Cash and cash
equivalents of $424,165 and $571,691, representing cash on hand less the
outstanding line of credit balance, was available for working capital at
December 31, 2000 and 1999, respectively.

During 2000, the
Company received a total of $150,000 and $500,000 from the sale of its Series D
Convertible Bonds and Series E Units, respectively. Costs associated with these
financing activities were $192,377 resulting in net proceeds of $457,623.

At December 31,
2000 and 1999, the Company had working capital of $1,865,082 and $2,388,794,
respectively. The decline in working capital of $523,712 in 2000 is primarily
due to the Companys net operating losses. During 2000, cash used
in/provided by operations experienced a reversal going from a negative $793,186
in the first six months to a positive $210,531 in the last six months of the
year.

13

---

At December 31,
2000 and 1999, $475,000 and $1,325,000, respectively, of the Company's
convertible bonds were outstanding. Interest is payable on these bonds at the
prime rate. This interest rate was 9.5% at December 31, 2000. Interest on the
convertible bonds accrues and is payable upon maturity thereof. Convertible bond
interest expense was $79,976 and $25,577 in 2000 and 1999, respectively. At
December 31, 2000 accrued and unpaid convertible bond interest was $105,553.
Outstanding convertible bonds in the amount of $475,000 mature January 7, 2002.

In July 2000 the
Company reset the conversion rates on its Series C and Series D convertible
bonds to more favorable terms as an inducement for bondholders to convert their
bonds into equity securities. Bondholders who had converted $475,000 in
aggregate principal amount of their bonds in March 2000 at the original
conversion rates were retroactively granted the new rates. In total, $1,000,000
of the aggregate Series C and Series D convertible bond principal amount of
$1,475,000 were converted. Modification of the reset rates constituted a
beneficial conversion feature relative to the original conversion terms that was
valued at $526,045. This amount was recorded as a debt financing cost under
other expense.

Additional debt
financing costs of $617,821, for a total of $1,143,866, were recognized in 2000
as a result of the amortization of beneficial conversion features and
consideration given associated with original issuance of the Series C and Series
D convertible bonds. Series C and Series D debt financing costs of $592,613 were
recognized in 1999. Unamortized bond discount of $732,387 existed at December
31, 1999.

In March 2000,
83,334 shares of Series B Preferred Stock were converted into 83,334 shares of
Common Stock. In August 2000, the Company completed a private placement of
666,668 Series E Units in which an aggregate of $500,000 was raised. Each Series
E Unit consists of one share of Common Stock and one and one tenth (1.1)
warrants to purchase one share of Common Stock at $0.85 per share. In September
2000, 45,000 shares of Common Stock were issued in settlement of trade accounts
payable.

During 2000, the
Company implemented steps to improve operating results and cash flow. In April
and May, the Company initiated steps to modify its selling strategy and
restructure its sales and marketing operations. The direct sales force and
corresponding administrative support staff were downsized in favor of greater
reliance on manufacturing representatives and specialty dealers. Sales
stabilized in the second and third quarters and grew slightly in the fourth
quarter.

Nasdaq Stock Market Delisting

On October 3,
2000 the Companys Common Stock was delisted from the Nasdaq SmallCap
Market for failure to maintain a $1.00 minimum closing bid price for a
prescribed ten day trading period. This delisting has become final. Effective
October 4, 2000, the Companys Common Stock commenced trading on the OTC
Bulletin Board under the symbol DSCI.OB. The Company maintains its listing on
the Boston Stock Exchange and Pacific Stock Exchange.

Convertible Bonds - Postponement of Maturity
Date

As of January 5,
2001, bondholders owning an aggregate of $475,000 of the Companys Series C
and Series D Convertible Bonds, constituting all of the Companys
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 has agreed to accord the bondholders the following consideration: (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 effect of
the foregoing consideration will be to increase the number of Series C Units and
Series D Units obtainable upon conversion of the Series C and Series D
Convertible Bonds from 33,334 to 50,000 and from 600,000 to 900,000,
respectively.

14

---

Loss of Major Customer

Beverly
Enterprises, Inc., a large nursing home chain, has declined to exercise its
option to renew its exclusive sales contract for the purchase of the
Companys skin care line of products. The term of the contract runs from
June 1, 1999 through May 31, 2001. Sales attributable to the Beverly contract
were approximately $1,250,000 in 2000 and represented approximately 13% of the
Companys year 2000 sales. Due to aggressive pricing and non-recurring
start up costs, net profits derived from the Beverly Contract have been minimal.
While non-renewal of the contract will adversely impact sales, no near term
adverse impact on profitability is expected.

Forward Looking Statements

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

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

---

Report of Independent
Auditors

Report of Independent Auditors

Board of Directors
Derma Sciences, Inc.

We have audited
the accompanying balance sheets of Derma Sciences, Inc., as of December 31, 2000
and 1999 and the related 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 financial position of Derma Sciences, Inc., at December 31, 2000
and 1999, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States.

As discussed in
Note 1, the accompanying financial statements for the year ended December 31,
2000 and 1999 have been restated.

/s/ ERNST & YOUNG
LLP

Philadelphia, Pennsylvania
August 3, 2001

17

---

DERMA SCIENCES, INC.Consolidated Balance Sheets

`==================================================================================================
                                                                           December 31,
ASSETS                                                               2000                 1999
--------------------------------------------------------------------------------------------------
                                                                  (Restated)           (Restated)
Current Assets
   Cash and cash equivalents, including restricted cash of
     $640,000 in 2000 and $650,000 in 1999                        1,064,165           $ 1,221,691
   Accounts receivable, net                                       1,561,633             2,041,099
   Inventories, net                                               1,282,370             1,289,138
   Current portion of officer's note receivable                         -                  19,330
   Prepaid expenses and other current assets                         75,916               223,120
--------------------------------------------------------------------------------------------------
Total current assets                                              3,984,084             4,794,378

Property and equipment, net                                         204,029               382,542

Other Assets
   Officer's note receivable                                            -                  76,034
   Goodwill, patents and trademarks, net                          1,392,495             1,548,246
   Other                                                                -                     838
--------------------------------------------------------------------------------------------------
Total Assets                                                    $ 5,580,608           $ 6,802,038
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
Current Liabilities
   Bank line of credit                                          $   640,000           $   650,000
   Accounts payable                                                 977,080             1,261,620
   Accrued expenses and other
     current liabilities                                            501,922               493,964
--------------------------------------------------------------------------------------------------
Total current liabilities                                         2,119,002             2,405,584
--------------------------------------------------------------------------------------------------
Long-Term Liabilities
   Convertible bonds                                                475,000               592,613
--------------------------------------------------------------------------------------------------
Total Liabilities                                                 2,594,002             2,998,197
--------------------------------------------------------------------------------------------------
Shareholders' Equity
   Common stock $.01 par value,
     30,000,000 shares authorized;
     issued and outstanding: 2,120,940
     shares in 2000; 1,325,938 in 1999                               21,209                13,259
   Convertible preferred stock $.01 par
     value; 11,750,000 shares authorized;
     issued and outstanding: 2,189,178
     shares in 2000; 939,188 in 1999                                 21,892                 9,392
   Additional paid-in capital                                    13,866,849            12,123,197
   Accumulated deficit                                          (10,923,344)           (8,342,007)
--------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                        2,986,606             3,803,841

--------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                      $ 5,580,608           $ 6,802,038
==================================================================================================`

See accompanying notes.

18

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DERMA SCIENCES, INC.Consolidated Statements of Operations

`==================================================================================================
                                                                      Year Ended December 31,
                                                                     2000                 1999
--------------------------------------------------------------------------------------------------
                                                                 (Restated)            (Restated)

Net sales                                                       $ 9,566,134           $10,381,679

Cost of sales                                                     4,922,318             4,452,784
--------------------------------------------------------------------------------------------------
Gross profit                                                      4,643,816             5,928,895
--------------------------------------------------------------------------------------------------
Operating expenses                                                6,017,690             8,322,991
Other expense, net (including interest expense of
   $1,294,258 and $678,751 in 2000 and 1999)                      1,207,463               604,823
--------------------------------------------------------------------------------------------------
Total Expenses                                                    7,225,153             8,927,814
--------------------------------------------------------------------------------------------------
Loss before provision for income taxes                           (2,581,337)           (2,998,919)
Provision for income taxes                                              -                     -
--------------------------------------------------------------------------------------------------
Net Loss                                                        $(2,581,337)          $(2,998,919)
--------------------------------------------------------------------------------------------------
Loss per common share basic and diluted                         $     (1.48)          $     (2.30)
--------------------------------------------------------------------------------------------------
Shares used in computing loss per common share                    1,743,717             1,305,928
==================================================================================================`

See accompanying notes.

19

---

DERMA SCIENCES, INC.Consolidated Statements of Cash Flows

`==================================================================================================
                                                                     Year Ended December 31,
                                                                     2000                1999
--------------------------------------------------------------------------------------------------
                                                                  (Restated)           (Restated)
Operating Activities
   Net loss                                                     $(2,581,337)          $(2,998,919)
   Adjustments to reconcile net loss to
     net cash used in operating activities
       Depreciation and amortization                                356,758               237,966
       Non-cash financing costs                                   1,143,866               592,613
       Provision for bad debts                                      299,960               111,400
       Provision for rebates                                        135,000                   -
       Write-off of officer's notes receivable                       95,364                   -
       Provision for inventory obsolescence                         118,000                   -
       Changes in operating assets and liabilities
           Accounts receivable                                       44,506              (774,280)
           Inventories                                             (111,232)              356,418
           Prepaid expenses and other assets                        148,042                 5,558
           Accounts payable                                        (239,540)              227,205
           Accrued expenses and other current liabilities             7,958              (476,223)
--------------------------------------------------------------------------------------------------
Net cash used in operating activities                              (582,655)           (2,718,262)
--------------------------------------------------------------------------------------------------
Investing Activities
   Purchases of property and equipment, net                         (22,494)              (84,390)
--------------------------------------------------------------------------------------------------
Net cash used in investing activities                               (22,494)              (84,390)
--------------------------------------------------------------------------------------------------
Financing Activities
   Net change in bank line of credit                                (10,000)              350,000
   Proceeds from issuance of convertible
     securities and warrants                                        150,000             1,325,000
   Retirement of treasury stock                                         -                  (1,018)
   Proceeds from issuance of common stock,
     net of issuance costs                                          307,623                   -
   Proceeds from exercise of stock options                              -                  11,809
--------------------------------------------------------------------------------------------------
Net cash provided by financing activities                           447,623             1,685,791
--------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                          (157,526)           (1,116,861)

Cash and cash equivalents
   Beginning of year                                              1,221,691             2,338,552
--------------------------------------------------------------------------------------------------
   End of year                                                  $ 1,064,165           $ 1,221,691
==================================================================================================`

See accompanying notes.

20

---

DERMA SCIENCES, INC.Consolidated Statements of Shareholders' Equity

`=============================================================================================================
                                                      Convertible   Additional     Accumu-        Total
                                            Common     Preferred     Paid-In       lated      Shareholders'
                                            Stock       Stock         Capital      Deficit       Equity
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998                 $62,357     $50,709    $10,696,991    $(5,343,088)     $5,466,969

Conversion of preferred shares               3,750      (3,750)           -              -               -

One-for-five reverse stock split           (53,037)    (37,567)        90,604            -               -

Exercise of stock options                      189         -           11,620            -            11,809

Retirement of treasury stock,
   at cost                                     -           -           (1,018)           -            (1,018)

Equity issued in payment of debt refinancing   -           -        1,325,000            -         1,325,000

Net loss (restated)                            -           -              -       (2,998,919)     (2,998,919)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (RESTATED)       13,259       9,392     12,123,197     (8,342,007)      3,803,841

Conversion of preferred shares                 833        (833)           -              -               -

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

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

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

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

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

Net loss (restated)                            -           -              -       (2,581,337)     (2,581,337)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (RESTATED)      $21,209    $$21,892     $13,866,849   $(10,923,344)   $ 2,986,606
=============================================================================================================`

See accompanying notes.

21

---

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, would 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.

On September 9,
1998, the Company acquired Genetic Laboratories Wound Care, Inc. (Genetic
Labs), in a business combination accounted for as a pooling of interests.
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.

Restatements

Subsequent to
the filing of its Annual Report on Form 10-KSB for the year ended December 31,
2000 with the Securities and Exchange Commission, and its Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2001, the Company became aware that
certain beneficial conversion features and consideration associated with the
issuance of Series C Convertible Bonds and Series D Convertible Bonds as
described in Note 10 were not correctly accounted for during the years ended
December 31, 2000 and 1999. The Company determined that additional interest
expense should have been recorded related to the beneficial conversion features
and consideration given in 2000 and 1999.

As a result, the
Company has restated its financial statements for the years ended December 31,
2000 and 1999, and for interim periods, as appropriate. The restatement of the
financial statements revises the accounting for the beneficial conversion
features and consideration given related to the Series C and Series D
Convertible Bonds as described above. The restatement for the year ended
December 31, 2000 and 1999 results in an increase in other expense, net and net
loss of $1,143,866 and $592,613, respectively, and an increase in net loss per
share of $0.66 and $0.46, respectively. The restatement also results in
unamortized bond discount of $732,387 at December 31, 1999 and an increase in
additional paid-in capital at December 31, 2000 and 1999 of $1,736,479 and
$1,325,000, respectively.

The following is
a summary of the effects of the restatement:

`Year ended December 31, 2000
                                                        ------------------------------
                                                        As Reported        As Restated
                                                        -----------        -----------
     Consolidated Statement of Operations:

        Net sales                                        $9,566,134        $9,566,134
        Cost of sales                                     4,922,318         4,922,318
                                                        -----------       -----------
        Gross profit                                      4,643,816         4,643,816
                                                        -----------       -----------

        Operating expenses                                6,017,690         6,017,690
        Other expense, net                                   63,597         1,207,463
                                                       ------------       -----------

        Total expense                                     6,081,287         7,225,153
                                                          ---------         ---------

        Loss before provision for income taxes           (1,437,471)       (2,581,337)
        Provision for income taxes                           -                  -
                                                         ----------         -----

        Net loss                                        ($1,437,471)      ($2,581,337)
                                                         ----------        ----------

        Loss per common share basic and diluted               ($0.82)          ($1.48)
                                                        ------------      -----------
    Shares used in computing loss per common share        1,743,717         1,743,717
                                                          ---------         ---------`

22

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

`Year ended December 31, 1999
                                                        ------------------------------
                                                        As Reported        As Restated
                                                        -----------        -----------
     Consolidated Statement of Operations:

        Net sales                                       $10,381,679       $10,381,679
        Cost of sales                                     4,452,784         4,452,784
                                                        -----------       -----------
        Gross profit                                      5,928,895         5,928,895
                                                        -----------       -----------

        Operating expenses                                8,322,991         8,322,991
        Other expense, net                                   12,210           604,823
                                                       ------------      ------------

        Total expense                                     8,355,201         8,927,814
                                                          ---------      ------------

        Loss before provision for income taxes           (2,406,306)       (2,998,919)
        Provision for income taxes                           -                  -
                                                         ----------         -----

        Net loss                                        ($2,406,306)      ($2,998,919)
                                                         ----------        ----------

        Loss per common share basic and diluted               ($1.84)          ($2.30)
                                                        ------------      -----------
    Shares used in computing loss per common share        1,305,928         1,305,928
                                                          ---------         ---------`

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 Loss per
Share- Net loss per common share is calculated based upon the weighted
average number of shares of common stock outstanding during each period. No
exercise of stock options, stock purchase warrants or the conversion of
preferred stock is included because the exercise of all these securities would
be anti-dilutive.

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

Reverse Stock
Split- In August, 1999, the Company effected a one-for-five reverse
split of its Common and Preferred Shares. All share and per share amounts for
all periods presented have been adjusted for the split.

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.

23

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

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.

The majority of
goodwill and other intangible assets represents goodwill obtained in 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.

Cash Flow
Information - Interest paid during 2000 and 1999 amounted to $70,419 and
$61,099, respectively. Income taxes paid during 2000 and 1999 amounted to $1,355
and $37,534, respectively.

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 and $1,325,000 in 2000
and 1999, respectively.

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 generally expensed
in the year incurred.

## 2.     Acquisitions

On September 9,
1998, the Company acquired Genetic Labs in a business combination accounted for
as a pooling of interests. Genetic Labs became a wholly owned subsidiary of the
Company through the exchange of 338,158 shares of the Companys common
stock for all the outstanding stock of Genetic Labs. 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.

## 3.     Accounts
Receivable

Accounts
Receivable comprise the following:

`December 31,
                                                              --------------------
                                                              2000            1999
                                                              ----            ----

Trade accounts receivable                                 $1,725,001      $1,978,384
Less: Allowance for doubtful accounts and trade rebates     (310,000)       (151,400)
                                                            ---------       ---------
     Net trade receivables                                 1,415,001       1,826,984
Other receivables                                            146,632         214,115
                                                            --------        --------

         Total receivables                                $1,561,633      $2,041,099
                                                          ==========      ==========`

Trade receivable
write-offs were $275,845 and $111,400 in 2000 and 1999, respectively. The
Allowance for trade rebates reflects estimated rebates embedded in outstanding
trade receivables. Other receivables at

24

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

December 31, 2000 consist of outstanding Medicaid rebate
adjustments and cash surrender value on officer life insurance.

## 4.     Officers Note
Receivable

At December 31,
1999, the Company had outstanding officers note receivable of $95,364. In
2000, the employment agreement of the obligee-officer was renegotiated. In
return for a significant reduction in annual compensation and other
consideration, the Company waived repayment of the note.

## 5.     Inventories

Inventories
comprise the following:

`December 31,
                                              --------------------
                                              2000            1999
                                              ----            ----

 Finished goods                            $ 919,872      $1,108,244
 Packaging materials                         309,245         159,931
 Raw materials                               201,253          50,963
                                           ---------        --------
     Gross inventory                       1,430,370       1,319,138
 Reserve for obsolescence                   (148,000)        (30,000)
                                           ----------      ----------

         Net inventory                    $1,282,370      $1,289,138
                                          ==========      ==========`

## 6.     Property and
Equipment

Property and
equipment comprise the following:

`December 31,
                                                  --------------------
                                                  2000            1999
                                                  ----            ----

 Machinery and equipment                        $320,836        $302,977
 Furniture and fixtures                          668,336         663,701
                                                 -------         -------
     Gross property and equipment                989,172         966,678
 Less: Accumulated depreciation                 (785,143)       (584,136)
                                                 -------         -------

         Net property and equipment              $204,029       $382,542
                                                 ========       ========`

Depreciation
expense was $201,007 and $111,786 in 2000 and 1999, respectively. Depreciation
expense for the year ended December 31, 2000 includes $86,957 for the write-down
of impaired property and equipment.

## 7.     Goodwill, Patents and
Trademarks

Goodwill,
patents and trademarks comprise the following:

`December 31,
                                                     --------------------
                                                     2000            1999
                                                     ----            ----
 Goodwill                                        $1,497,364      $1,497,364
 Patents and trademarks                             451,417         451,417
                                                  ---------       ---------
     Gross goodwill, patents and trademarks       1,948,781       1,948,781
 Less: Accumulated amortization                    (556,286)       (400,535)
                                                  ---------       ---------

     Net goodwill, patents and trademarks        $1,392,495      $1,548,246
                                                 ==========      ==========`

25

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Goodwill,
patent and trademark amortization expense was $155,751 and $123,123 in 2000 and
1999, respectively.

## 8.     Bank Line of
Credit

The Company has
a $1,000,000 bank line of credit facility, with $640,000 and $650,000
outstanding at December 31, 2000 and 1999, respectively. The maturity date of
the line is October 31, 2001. The line of credit agreement requires monthly
interest payments at prime minus 1%, or 8.5% at December 31, 2000. Interest
expense for the years 2000 and 1999 was $70,416 and $60,560, respectively. Cash
deposited with the bank of $1,000,000 secures the line of credit.

Unrestricted
cash of $424,165 and $571,691 was available for working capital at December 31,
2000 and 1999, respectively.

## 9.     Accrued Expenses and
Other Current Liabilities

Accrued expenses
and other current liabilities comprise the following:

`December 31,
                                                               ------------------
                                                               2000          1999
                                                               ----          ----

 Sales commissions                                          $ 52,000      $ 85,925
 Reserve for restructuring costs                              71,623       121,631
 Convertible bond interest                                   105,553        25,578
 Medicaid rebates                                             32,000        25,000
 Other                                                       160,051       235,830
                                                             -------        -------
     Total accrued liabilities                               421,227       493,964
 Deferred revenue                                             80,695           -
                                                             -------       -------


     Total accrued expenses and other current liabilities   $501,922      $493,964
                                                            ========      ========`

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

## 10.   Convertible Bonds

Series A

On November 19,
1997, the Company completed a private placement of its Series A Convertible
Bonds (Series A Bonds) in which an aggregate of $1.8 million was
raised. Terms of the Series A Bonds required that upon approval by the
Companys shareholders of at least 1,750,000 shares of a new class of
preferred stock (which approval was obtained in January, 1998) the Series A
Bonds automatically convert into units (Series A Units) at the rate
of $4.00 per Series A Unit. Each Series A Unit consists of: (1) one share of
Series A Preferred Stock convertible into one share of Common Stock, and (2) one
warrant to purchase one share of Common Stock at a price of $4.50.

Series B

On July 14,
1998, the Company completed a private placement of its Series B Convertible
Bonds (Series B Bonds) in which an aggregate of $4.0 million was
raised. Terms of the Series B Bonds required that upon approval by the
Companys shareholders of at least 666,680 additional shares of preferred
stock (which approval was obtained in September, 1998) the Series B Bonds
automatically convert into units (Series B Units) at the rate

26

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

of $6.00 per Series B Unit. Each Series B Unit consists of: (1)
one share of Series B Preferred Stock convertible into one share of Common
Stock, and (2) one warrant to purchase one share of Common Stock at a price of
$6.75.

Series C

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 originally matured on August 15, 2000. However, in March of
2000 and in January of 2001, the bondholders extended the maturity of the Series
C Bonds until January 7, 2001 and January 7, 2002, respectively. The Series C
Bonds pay interest only, at New York prime, until maturity.

Each Series C
Unit consists of: (1) one share of Series C Preferred Stock convertible into one
share of Common Stock, and (2) 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 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 Series E Unit
consists of one share of Series C Preferred Stock and one and one tenth (1.1)
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 similar to those of the July 2000 conversion.

Series D

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 originally matured
on December 31, 2000. However, in March of 2000 and January of 2001, the
bondholders extended the maturity of the Series D Bonds until January 7, 2001
and January 7, 2002, respectively. The Series D Bonds pay interest only, at New
York prime, until maturity.

Each Series D
Unit consists of: (1) one share of Series D Preferred Stock convertible into one
share of Common Stock, (2) 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. Investors who
converted their bonds in March 2000 have had their conversions adjusted so as to
receive conversion terms similar to those of the July 2000 conversion of Series
C Bonds.

## 11.   Shareholders
Equity

Increase in
Authorized Common Stock

On May 26, 1999
the Company, upon recommendation of its Board of Directors and approval of its
shareholders, amended its articles of incorporation to increase authorized
Common Stock from 15,000,000 to 30,000,000 shares. The par value of the Common
Stock remains at $.01 per share.

Reverse Stock
Split

On August 2,
1999 the Company, upon recommendation of its Board of Directors and approval of
its shareholders, amended its articles of incorporation to implement a
one-for-five reverse split of its Common Stock, Series A Preferred Stock and
Series B Preferred Stock pursuant to which: (1) each five issued and outstanding
shares of Common Stock were combined into one share of Common Stock; (2) each
five issued and outstanding shares of Series A Preferred Stock were combined
into one share of Series A Preferred Stock; and (3) each five issued and
outstanding shares of Series B Preferred Stock were combined into one share of
Series B Preferred Stock.

27

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Fractional shares resulting from the reverse split were rounded
to the next higher number of whole shares. The Companys outstanding stock
purchase warrants and stock purchase options, and the exercise prices thereof,
were adjusted to reflect the reverse split. The number of authorized shares and
the par value of the Common Stock, Series A Preferred Stock and the Series B
Preferred Stock were not affected by the reverse split.

Preferred
Stock

The
Companys shareholders, at a special meeting of shareholders held on
January 7, 1998, authorized creation of 1,750,000 shares of preferred stock. The
Companys directors then designated 350,000 shares of preferred stock as
Series A Convertible Preferred Stock (Series A Preferred). Upon
authorization of the Series A Preferred, the $1,400,000 of outstanding Series A
Convertible Bonds were automatically converted into 350,000 Series A Units,
described above under Convertible Bonds - Series A, effective as of
December 31, 1997. The Series A Preferred 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.

The
Companys shareholders, at a special meeting of shareholders held on
September 9, 1998, authorized creation of an additional 10,000,000 shares of
preferred stock. The Companys directors then designated 666,680 shares of
the 10,000,000 shares of newly authorized preferred stock as Series B
Convertible Preferred Stock (Series B Preferred). Upon authorization
of the Series B Preferred, the $4,000,000 of outstanding Series B Convertible
Bonds were automatically converted into 666,880 Series B Units described above
under Convertible Bonds - Series B. The Series B Preferred 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.

The
Companys directors, on February 10, 2000, designated 795,457 shares of the
Companys non-designated preferred stock as Series C Convertible Preferred
Stock (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  Series C. The
Series C Preferred 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.

The
Companys directors, on February 10, 2000, designated 592,597 shares of the
Companys non-designated preferred stock as Series D Convertible Preferred
Stock (Series D Preferred). The Series D Preferred is a component of
the Companys Series D Units described above under Convertible Bonds 
Series D. The Series D Preferred 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.

During 1999,
75,000 shares of Series A Preferred were converted into 75,000 shares of Common
Stock. During 2000, 83,334 shares of Series B Preferred were converted into
83,334 shares of Common Stock.

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 (1.1) Series E Warrants to purchase
one share of Common Sock at $0.85 per share (Series E Warrants). The
warrants will expire on July 18, 2005. The Company has agreed to file a
registration statement with the Securities and Exchange Commission relative to
the Common Stock component of the Units and the Common Stock issuable upon
exercise of the Series E Warrants. An additional 733,336 Series E Warrants were
issued in connection with the Series E Common Stock private placement.

28

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

Stock
Purchase Warrants

At December 31,
2000, the Company had 3,326,683 warrants outstanding to purchase the Company's
common stock as outlined below:

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

     A               450,002               $4.50          November 15, 2001
     B               666,672               $6.75          June 15, 2002
     E             2,200,009               $0.85          July 18, 2005
     Other            10,000              $15.63          August 2, 2001`

In connection
with the July 2000 modifications as described in Note 10, all Series C and
Series D Warrants were reclassified as Series E Warrants.

## 12.   Income Taxes

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

`December 31,
                                                     ---------------------
                                                     2000             1999
                                                     ----             ----
Deferred tax liabilities:
  Prepaid insurance                             $  (16,086)     $     (4,177)
  Contributions                                        -                (812)
  Patent amortization                              (53,129)          (69,176)
                                                  ---------        ----------
     Total deferred liabilities                    (69,215)          (74,165)
                                                  ---------        ----------
Deferred tax assets:
  Net operating loss carryforwards               2,872,881         2,353,095
  Depreciation                                     105,860            84,350
  Amortization of intangibles                      109,230           150,142
  Foreign tax, research and development credits        -              24,559
  Accrued expenses                                 261,596           189,357
  Allowance for bad debt                            71,038            61,458
  Other                                                -               2,263
                                                 ---------         ---------
                                                 3,420,605         2,865,584
  Valuation allowance                           (3,351,390)       (2,791,419)
                                                -----------       -----------
     Total deferred tax assets                      69,215            74,165
                                                  --------        ----------
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:

29

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

`December 31,
                                                   --------------------
                                                   2000            1999
                                                   ----            ----

 Tax benefit at U.S. statutory rates           $(877,655)    $(1,019,632)
 State income taxes, net of Federal benefit     (116,363)        (16,539)
 Increase in valuation allowance                 559,971         809,615
 Nondeductible expenses                          434,047         226,556
                                                  ------          ------
 Provision for Income Taxes                    $     -         $     -
                                                ========        ========`

At December 31,
2000, the Company has net operating loss carryforwards of approximately
$7,100,000 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 $7,100,000 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.

## 13.   Operating Segments

The Company
consists of three operating segments, wound care, wound closure-fasteners and
skin care. Products in the wound care segment consist of dressings, ointments
and sprays designed to treat chronic wounds. Wound closure-fasteners products
include wound closure strips, nasal tube fasteners, a variety of catheter
fasteners and net dressings. The skin care segment consists of 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 2000 and 1999 are as follows:

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

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

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
Other costs            --            --             --     ($7,225,153)  ($7,225,153)
                                                                           ---------
Net loss (restated)                                                      $(2,581,337)
                                                                         ============


                                   Year Ended December 31, 1999
                                   ----------------------------

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

Sales           $3,478,031    $3,186,902     $3,716,746           --     $10,381,679
Gross profit     2,523,088     1,893,819      1,511,988           --       5,928,895
Other costs            --            --             --     ($8,927,814)   (8,927,814)
                                                                          -----------
Net loss (restated)                                                      $(2,998,919)
                                                                         ============`

30

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

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 $524,000 in 2000 and $627,000 in 1999. Wound closure-fastener sales
represent the majority of international sales.

## 14.   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 $356,182 and
$355,247 in 2000 and 1999, respectively. Minimum future rental payments under
non-cancelable operating leases as of December 31, 2000 are:

`Year Ending
               December 31,
               ------------

               2001                          $291,710
               2002                           143,805
               2003                             9,525
               2004                             4,138
                                              -------

     Total minimum future rental payments    $449,178
                                              =======`

## 15.   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 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). 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 232,800 and 36,000 shares of common stock were
granted to officers and directors in 2000 and 1999, respectively, with exercise
prices ranging from $0.75 to $6.00 per share. Options to purchase 3,780 shares
of common stock were exercised during 1999.

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 subsequent to December 31, 1994
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

31

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

assumptions for 2000 and 1999: risk-free interest rate of 6.25%;
dividend yield of 0%; a volatility factor of the expected market price of the
Company's common stock of 1.371 and 0.830 respectively; and a weighted average
life of the option of 4 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.

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 (restated):

`2000               1999
                                          --------           --------

   Pro forma net loss                  ($2,848,750)       ($3,195,985)
   Pro forma loss per common share
                                            $(2.18)             $(2.45)`

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

`2000                    1999
                                    ------------------------   ------------------------

                                                Weighted                    Weighted
                                                 Average                     Average
                                    Options   Exercise Price   Options   Exercise Price
                                    -------   --------------   -------   --------------

Outstanding - beginning of year     385,886       $7.00        419,766       $6.60
   Granted                          232,800       $1.59         43,000       $5.41
   Exercised                            -            -          (3,780)      $3.12
   Forfeited                        (85,251)     $10.12        (73,100)      $4.07
                                    --------                   --------
Outstanding - end of year           533,435       $4.14        385,886       $7.00
                                    ======                     ======

Exercisable at end of year          478,435                    360,866
                                    -------                    -------`

Exercise prices
for options outstanding under the stock option plan, non-statutory option
agreements and employment agreements at December 31, 2000 ranged from $0.75 to
$12.50.

## 16.   Related Party
Transactions

On March 15,
1999 the Company renewed its consulting agreement with a director and
shareholder through March 15, 2003. The agreement retains the individual as a
special consultant in return for an annual fee of $50,000 plus health insurance
and expenses. In 2000 and 1999, total fees paid were $56,306 and $64,291,
respectively.

In 1997, the
Company entered into a consulting arrangement with a firm with which the
Companys former Chief Financial Officer and current director is affiliated
to provide financial and accounting services. Total expenses for these services
amounted to $47,390 and $18,035 in 2000 and 1999, respectively.

32

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

One of the
Companys directors is a general partner in the firm owning the $475,000 of
outstanding convertible bonds at year-end. This firm also holds a significant
equity ownership in the Company.

## 17.   Restructuring Costs

During 2000 and
1999 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:

`2000             1999
                                           ----             ----

   Reserve at beginning of year          $121,631         $463,183
   Additional reserve established         250,000          250,000
   Restructuring expense:
      Involuntary termination benefits   (198,244)        (532,510)
      Other costs                        (101,764)         (59,042)
                                          -------          -------

   Reserve at end of year                $ 71,623         $121,631
                                          =======          =======`

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

## 18.   Proposed Accounting
Standard

The Financial
Accounting Standards Board has issued an Exposure Draft, Business
Combinations and Intangible Assets - Accounting for Goodwill. If the
Exposure Draft is adopted, the Company would no longer amortize existing or new
goodwill obtained from a business combination and would periodically evaluate
goodwill for impairment.

## 19.   Subsequent Events

As of January 5,
2001, bondholders owning an aggregate of $475,000 of the Companys Series C
and Series D Convertible Bonds, constituting all of the Companys
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 has agreed to accord the bondholders the following consideration: (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.

Beverly
Enterprises, Inc., a large nursing home chain, has declined to exercise its
option to renew its exclusive sales contract for the purchase of the
Companys skin care line of products. The term of the contract runs from
June 1, 1999 through May 31, 2001. Sales attributable to the Beverly contract
were approximately $1,250,000 in 2000 and represented approximately 13% of the
Companys year 2000 sales. Due to aggressive pricing and non-recurring
start up costs, net profits derived from the Beverly Contract have been minimal.
While non-renewal of the contract will adversely impact sales, no near term
adverse impact on profitability is expected.

## 20.   Quarterly Financial Information
(Unaudited)

As discussed in
Note 1, the Company restated its financial statements for certain interim
periods during 2000 and 1999 due to the matters therein described. The interim
periods that were restated were the six quarters ended December 2000. The table
below reflects the effects of these restatements for those six quarters. The
As Reported and As Restated figures for net sales and
cost of sales have been reclassified from the original presentation in the
respective Forms 10-QSB for consistency purposes to accord with the presentation
in the

33

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

December 31, 2000 Form 10-KSB. Outbound freight costs are now
treated as an element of cost of sales as opposed to the previous accounting
treatment which was to account for these costs as a reduction of sales. Gross
profit was unaffected by this reclassification. Similar reclassifications
occurred in the first two quarters of 1999. However, that financial information
is not presented here as these quarters were unaffected by the restatement and
the reclassification had no impact on gross profit.

`As Reported
                                                               -----------
                                                   Six Quarters ended December 31, 2000
                         --------------------------------------------------------------------------------------
                                                   2000                                         1999
                         --------------------------------------------------------    --------------------------

                            Fourth         Third         Second          First         Fourth          Third
                            Quarter       Quarter        Quarter        Quarter        Quarter        Quarter
                            -------       -------        -------        -------        -------        -------

Net sales                  $2,556,115     $2,358,399    $2,378,537     $2,273,083     $2,790,182     $2,439,562
Cost of sales               1,519,586      1,198,799     1,117,955      1,085,978      1,291,904      1,129,005
                            ---------      ---------     ---------      ---------      ---------      ---------
Gross profit                1,036,529      1,159,600     1,260,582      1,187,105      1,498,278      1,310,557
                            ---------      ---------     ---------      ---------      ---------      ---------

Operating expenses          1,662,379      1,389,206     1,478,503      1,487,602      1,592,379      2,077,726
Other (income)/
  expense, net                 (8,144)        11,538        32,280         27,923         19,484         10,669
                          ------------   -----------   -----------    -----------    -----------    -----------

Total expense               1,654,235      1,400,744     1,510,783      1,515,525      1,611,863      2,088,395
                            ---------      ---------     ---------      ---------      ---------      ---------

Loss before provi-
  sion for income
  taxes                      (617,706)      (241,144)     (250,201)      (328,420)      (113,585)      (777,838)
Provision for income
  taxes                          -              -             -              -              -              -
                             --------     ----------      ---------      --------       ---------      -----

Net loss                  ($  617,706)  ($   241,144)  ($  250,201)   ($  328,420)   ($  113,585)   ($  777,838)
                           ----------   ------------    -----------    -----------   ------------   ------------

Loss per common
  share basic and
  diluted                      ($0.30)        ($0.12)       ($0.18)        ($0.23)        ($0.09)        ($0.59)
                            ---------      ---------     ----------      ---------     ----------     ----------
Shares used in
  computing loss per
  common share              2,080,384      2,075,940     1,409,272       1,409,272     1,325,938      1,325,938
                            ---------      ---------     ---------       ---------     ---------      ---------`

34

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

`As Restated
                                                               -----------
                                                   Six Quarters ended December 31, 2000
                         --------------------------------------------------------------------------------------
                                                   2000                                         1999
                         --------------------------------------------------------    --------------------------

                            Fourth         Third         Second          First         Fourth          Third
                            Quarter       Quarter        Quarter        Quarter        Quarter        Quarter
                            -------       -------        -------        -------        -------        -------

Net sales                  $2,556,115     $2,358,399    $2,378,537     $2,273,083     $2,790,182     $2,439,562
Cost of sales               1,519,586      1,198,799     1,117,955      1,085,978      1,291,904      1,129,005
                            ---------      ---------     ---------      ---------      ---------      ---------
Gross profit                1,036,529      1,159,600     1,260,582      1,187,105      1,498,278      1,310,557
                          -----------      ---------     ---------      ---------      ---------      ---------

Operating expenses          1,662,379      1,389,206     1,478,503      1,487,602      1,592,379      2,077,726
Other expense, net            104,356        650,083       148,814        304,210        160,677        462,089
                            ---------    -----------    ----------     ----------     ----------     ----------

Total expense               1,766,735      2,039,289     1,627,317      1,791,812      1,753,056      2,539,815
                            ---------      ---------     ---------      ---------      ---------      ---------

Loss before provi-
  sion for income
  taxes                      (730,206)      (879,689)     (366,735)      (604,707)      (254,778)    (1,229,258)
Provision for income
  taxes                          -              -             -             -               -              -
                           ----------   ------------    -----------    -----------   ------------   ------------

Net loss                  ($  730,206)   ($   879,689)($   366,735)  ($   604,707)  ($   254,778)   ($1,229,258)
                           ----------     -----------  ------------   ------------   -----------    ------------

Loss per common
  share basic and
  diluted                      ($0.35)        ($0.42)       ($0.26)        ($0.43)        ($0.19)        ($0.93)
                            ---------      ---------     ----------     ----------     ----------     ----------
Shares used in
  computing loss per
  common share              2,080,384      2,075,940     1,409,272      1,409,272      1,325,938      1,325,938
                            ---------      ---------     ---------      ---------      ---------      ---------`

35

---

# 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)(2)..............    50      Chairman, President and Chief Executive Officer
Mary C. Antensteiner.................    42      Executive Vice President - Sales and Marketing
John E. Yetter, CPA..................    48      Vice President and Chief Financial Officer
Stephen T. Wills, CPA, MST (2).......    44      Director
Srini Conjeevaram (1)(2)(3)..........    42      Director
Timothy J. Patrick (1)...............    42      Director
Mary G. Clark, RN....................    68      Director
---------------
(1)  Member of the Compensation Committee.
(2)  Member of the Nominating 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.

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.

John E.
Yetter, CPAhas 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.

36

---

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 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.

Timothy J.
Patrick has served as director of the Company since February, 1998. Mr.
Patrick has been the President and Chief Executive Officer of Proxima
Therapeutics, Inc., a medical device company developing proprietary
site-specific delivery systems for the treatment of solid tumors, since April,
1996. He previously served as President of Gesco International, a subsidiary of
MedChem Products that manufactured and marketed PICC vascular access catheters,
from July, 1994 to January, 1996. Mr. Patrick served McGaw, Inc. for 13 years in
various sales executive positions the last of which was President of Central
Admixture Pharmacy Services, a business unit of McGaw, Inc. that provided
patient-specific intravenous solution products to hospitals and home care
companies. Mr. Patrick earned a Bachelor of Arts degree in Biology from Miami
University, Oxford, Ohio in 1981.

Mary G.
Clark, RNhas served as director of the Company since May, 1999. She founded
the Company and has served as a Special Consultant for Scientific Affairs to the
Company since March, 1994. She served as Chairman of the Board of the Company
from February, 1991 through March, 1994 and Vice Chairman from April, 1994 to
May, 1998. Mrs. Clark served as the Companys President from 1984 to 1990
and as director of the Company from November, 1984 to March, 1994. She is the
inventor and original patent holder of the Companys flagship products,
Dermagran Spray and Dermagran Ointment. She is also the founder, owner and
operator of the Primary Medical and Nutritional Clinic, Old Forge, Pennsylvania,
a clinic specializing in medical and nutritional preventative therapies. She has
extensive clinical medical experience with emphasis in the nutritional
biochemistry and ortho-molecular medicine fields. Mrs. Clark earned a Registered
Nurse degree from Scranton State General Hospital in 1954 and a Clinical Nurse
Therapist degree in Intensive Cardiovascular Care from Mechanicsburg
Rehabilitation Center in 1972. She was appointed by former Pennsylvania Governor
Robert P. Casey to membership on the Entrepreneurial Advisory Board for the
Commonwealth of Pennsylvania.

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 with the exception of reports of Redwood Asset Management, Oslo,
Norway.

37

---

## 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 1998, 1999 or 2000:

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

Edward J. Quilty                      2000     $168,750          --            --            --
Chairman, President and               1999     $150,000      $25,000                         --
Chief Executive Officer               1998     $150,000      $25,000        96,055(1)        --

Mary C. Antensteiner                  2000     $115,000          --            --            --
Executive Vice President -            1999     $108,000      $10,000(2)        --            --
Sales and Marketing                   1998        --             --         15,000           --

John E. Yetter, CPA                   2000      $62,077(3)   $15,000(2)     60,000           --
Vice President and                    1999        --             --            --            --
Chief Financial Officer               1998        --             --            --            --

Stephen T. Wills, CPA, MST            2000      $70,125(4)       --         15,000           --
Director and former Vice President    1999     $109,500(4)       --         32,000           --
and Chief Financial Officer           1998     $100,000(4)       --            --            --

John T. Borthwick                     2000     $165,375          --         37,800(1)      $  9,962(5)
Vice President for Sales              1999     $180,000          --            --          $  9,962(5)
                                      1998     $180,000          --            --          $  9,962(5)`

---

|*   | All options have been adjusted to effect 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.

38

---

Option Grants Table

The following
table sets forth information regarding grants of stock options to the following
named executive officers made during the year ended December 31, 2000:

`Percent of Total     Exercise
                                  Options     Options Granted to      Price
Name                            Granted (#)    Employees in 2000    ($/Share)   Expiration Date
----                            -----------   ------------------    ---------   ---------------
John T. Borthwick               37,800 (1)          16.2%             $5.93     December 10, 2008
Mary G. Clark                   30,000 (1)          12.9%             $0.75     August 1, 2010
Srini Conjeevaram               45,000 (1)          19.3%             $0.75     August 1, 2010
Timothy J. Patrick              45,000 (1)          19.3%             $0.75     August 1, 2010
Stephen T. Wills, CPA, MST      15,000 (1)           6.5%             $0.75     August 1, 2010
John E. Yetter, CPA             60,000 (2)          25.8%             $0.75     August 28, 2010`

---

|(1) | Options are 100% vested.                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(2) | These options vest at the rate of 20,000 options
     on each of August 28, 2000, August 28, 2001 and August 28,
     2002.

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,
2000. No options have been exercised:

`Number of Shares               $ Value of Unexercised
                                   Underlying Unexercised             In-The-Money Options
                                Options at December 31, 2000        At December 31, 2000 (1)
                                ------------------------------      ---------------------------
Name                            Exercisable      Unexercisable      Exercisable   Unexercisable
----                            -----------      -------------      -----------   -------------
Edward J. Quilty ..............   134,055           2,000                   0           0

Mary C. Antensteiner ..........    10,000           5,000                   0           0

John E. Yetter, CPA............    20,000          40,000                   0           0`

---

|(1) | Determined based on the fair market value for
     the Company's Common Stock at December 31, 2000 of $0.50 per
     share.
|--- | ---------------------------------------------------------------------------------------------------------------------------

## Compensation of Directors

For each year of
service, outside directors receive fully vested options to purchase 15,000
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. 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.

Mary G. Clark
has a consulting agreement with the Company. See Certain Relationships and
Related Transactions.

39

---

## Employment Arrangements

Edward J. Quilty

The Company
employs Edward J. Quilty, its Chairman, President and Chief Executive Officer,
under an oral agreement providing for compensation at the rate of $175,000 per
year. The agreement is subject to termination by the Company or Mr. Quilty at
any time and for any reason.

Mary C. Antensteiner

The company
employees Mary C. Antensteiner, its Executive Vice President  Sales and
Marketing, pursuant to an employment agreement dated December 30, 1998. The
agreement provides that Ms. Antensteiner will receive compensation of $100,000
per year together with performance based bonuses. The agreement further provides
for a vehicle allowance of $500.00 per month, reimbursement of certain business
and home office expenses and paid vacation of three weeks per year.

The agreement
grants 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 become
exercisable at the rate of 5,000 options on each of December 15, 1999, 2000 and
2001.

The agreement
may be terminated by either party upon thirty days notice. If the Agreement is
terminated by the Company without cause, the Company will pay Ms.
Antensteiner severance compensation of $34,000.

John T. Borthwick

The company
employees John T. Borthwick, its Vice President  Sales, pursuant to an
employment agreement dated February 1, 2001. The agreement provides that Mr.
Borthwick will receive compensation of $110,000 per year together with
performance based bonuses. The agreement further provides for a vehicle
allowance of in accordance with Company policies, reimbursement of certain
business expenses and paid vacation of three weeks per year. The agreement also
grants 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
may be terminated by either party upon thirty days notice. If the agreement is
terminated by the Company without cause, the Company will pay Mr.
Borthwick severance of one weeks base compensation multiplied by the
number of Mr. Borthwicks full years of service with the Company. Mr.
Borthwicks employment began July 1, 1984.

The agreement
provides that Mr. Borthwick waives the benefit of any prior employment agreement
with the Company including the severance provisions thereof. In consideration
for this waiver, the agreement further provides that the Company forgives the
principal and accrued interest under a promissory note in the principal amount
of $99,364 payable to the Company by Mr. Borthwick.

John E. Yetter, CPA

The Company
employs John E. Yetter, CPA, its Vice President and Chief Financial Officer,
under an oral agreement providing for a sign-on bonus of $15,000 (paid in
August, 2000) and compensation at the rate of $150,000 per year. The Agreement
is subject to termination by the Company or Mr. Yetter at any time and for any
reason.

## 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

40

---

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 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,
2000, options to purchase 52,600 shares of the Companys common stock at
prices ranging from $4.00 to $5.625 per share had been granted under the Plan.

## Item 11.  Security Ownership of Certain
Beneficial Owners and Management

The following
table sets forth as of March 29, 2001 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(13)   Beneficially Owned(13)
----------------------------------------               ----------------------   ----------------------

Srini Conjeevaram (2)..................................      4,879,011                  67.49%
Hambrecht & Quist California (3)                             1,288,334                  34.86%
Redwood Asset Management (4)...........................        846,671                  27.28%
Edward J. Quilty (5)...................................        655,324                  23.31%
Stephen T. Wills, CPA, MST (6).........................        198,295                   7.81%
Mary G. Clark, RN (7) .................................        185,095                   7.60%
John T. Borthwick (8)..................................        119,683                   4.84%
Timothy J. Patrick (9).................................         47,000                   1.92%
John E. Yetter, CPA(10)................................         20,000                    (*)
Mary C. Antensteiner (11)..............................         10,000                    (*)
All directors and officers as a group (7 persons)(12)..      5,994,725                   (* *)`

---

|(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"); 75,002 warrants to purchase Common Stock exercisable at
     $4.50 per share ("Class A Warrants"); 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"); 500,001 shares
     of Class C Convertible Preferred Stock ("Class C Preferred"); bonds
     convertible into 50,000 shares of Class C Convertible Preferred; bonds
     convertible into 900,000 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"); bonds convertible into
     696,666 Class E Warrants; bonds convertible into 1,045,000 warrants to
     purchase Common Stock at $0.57 per share ("Class F Warrants"); and
     exercisable options to purchase 47,000 shares of Common Stock. No
     additional options to purchase Common Stock will become exercisable within
     60 days of March 29, 2001.
|(3) | Hambrecht & Quist California can be reached
     at: One Bush Street, San Francisco, California 94104. Ownership consists
     of: 122,500 shares of Class A Preferred; 122,500 Class A Warrants; 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

41

---

|(4)  | Redwood Asset Management can be reached at: Ovre
     Ullorn Terrasse 32, 0358 Oslo, Norway. Ownership consists of: 150,001
     shares of Common Stock; 50,000 Class A Warrants; 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5)  | Ownership consists of: 251,684 shares of Common
     Stock; 38,000 Class A Warrants; 9,584 Class B Warrants; 220,001 Class E
     Warrants; and exercisable options to purchase 136,055 shares of Common
     Stock. No additional options to purchase Common Stock will become
     exercisable within 60 days of March 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(6)  | Ownership consists of 65,668 shares of Common
     Stock; 7,375 Class A Warrants; 4,584 Class B Warrants; 58,668 Class E
     Warrants; and exercisable options to purchase 62,000 shares of Common
     Stock. No additional options to purchase Common Stock will become
     exercisable within 60 days of March 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(7)  | Ownership consists of: 155,095 shares of Common
     Stock; and exercisable options to purchase 30,000 shares of Common Stock.
     No additional options to purchase Common Stock will become exercisable
     within 60 days of March 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8)  | Ownership consists of: 51,883 shares of Common
     Stock; and exercisable options to purchase 67,800 shares of Common Stock.
     No additional options to purchase Common Stock will become exercisable
     within 60 days of March 29, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(9)  | Ownership consists of: exercisable options to
     purchase 47,000 shares of Common Stock. No additional options to purchase
     Common Stock will become exercisable within 60 days of March 29,
     2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(10) | Ownership consists of: exercisable options to
     purchase 20,000 shares of common stock. No additional options to purchase
     Common Stock will become exercisable within 60 days of March 29,
     2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(11) | Ownership consists of: exercisable options to
     purchase 10,000 shares of Common Stock. No additional options to purchase
     Common Stock will become exercisable within 60 days of March 29,
     2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(12) | Ownership consists of: an aggregate of 5,994,725
     shares of Common Stock, Class A Preferred, Class B Preferred, Class C
     Preferred, Class D Preferred, Class A Warrants, Class B Warrants, Class E
     Warrants, Class F Warrants and options currently exercisable and
     exercisable within 60 days of March 29, 2001 to purchase shares of Common
     Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(13) | 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 March 29, 2001), 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
     13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

## Item 12. Certain Relationships and Related
Transactions

The Company
employs the accounting firm of Golomb, Wills & Company, PC for various tax
and financial planning 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 2000 and 1999 totaled $47,390 and $18,035, respectively.

The Company has
a consulting agreement with its founder, director and former President,
Mary G. Clark, RN. In 2000 and 1999, compensation and reimbursed expenses under
this agreement were $56,306 and $64,291, respectively.

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

42

---

## 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).                                                                                                                                                                                                                                | --  

43

---

|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).                                                                                                                            | --

44

---

|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.                                                                                                                                                                                                                                                                               | --
|10.29* | Employment Agreement, dated February 1, 2000,
     between the Company and John T. Borthwick.                                                                                                                                                                                                                                    | --
|10.30* | Employment Agreement, dated December 30, 1998,
     between the Company and Mary C. Antensteiner.                                                                                                                                                                                                                                | --
|10.31  | Stock Option Agreement, dated August 28, 2000,
     between the Company and John E. Yetter, CPA.                                                                                                                                                                                                                                 | --
|10.32  | Purchase Agreement, dated July 18, 2000, between
     the Company and Edward J. Quilty, Kennsington 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, Kennsington 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, Kennsington 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).                                                                                                | --
|21     | Information relative to
     subsidiaries.                                                                                                                                                                                                                                                                                       | --
|23.1   | Consent of Ernst & Young
     LLP.                                                                                                                                                                                                                                                                                               | --
|23.2   | Consent of Ernst & Young
     LLP.                                                                                                                                                                                                                                                                                               | --

______________________________
*  Management contract or compensatory plan.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter,
2000.

45

---

SIGNATURES

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

|               | DERMA SCIENCES, INC.                                
|-------------- | ----------------------------------------------------
|               |                                                     
|               |                                                     
|August 9, 2001 | By: /s/ Edward J. Quilty                            
|               | Edward J.
     Quilty                               
|               | Chairman,
     President and Chief Executive Officer

In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

|Signatures                 | Titles                                           
|-------------------------- | -------------------------------------------------
|                           |                                                  
|/s/ Edward J. Quilty       | President, Chief Executive Officer and           
|Edward J. Quilty           | Chairman of the Board
     of Directors          
|                           | (Principal Executive Officer)                    
|                           |                                                  
|/s/ John E. Yetter         | 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           |                                                  
|                           |                                                  

46