---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934   For Quarter Ended
     
     September 30, 2003Commission File Number
     
     1-31070    Derma Sciences, Inc.(Exact name of small business issuer as specified in its charter)   Pennsylvania
     23-2328753(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)  214 Carnegie Center, Suite 100Princeton, New Jersey
08540(609) 514-4744(Address including zip code and
telephonenumber, of principal executive offices)


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

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

|Date: September 30, 2003 | Class: Common Stock, par value $.01 per share
|------------------------ | ---------------------------------------------
|                         | Shares Outstanding: 7,462,695                

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

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

Part I - Financial Information

|        |                                                                                                          |   
|------- | -------------------------------------------------------------------------------------------------------- | --
|Item 1. | Consolidated Financial Statements                                                                        |   
|        |                                                                                                          |   
|        | Consolidated Balance Sheets - September 30, 2003 and December 31, 2002                                   | 3 
|        |                                                                                                          |   
|        | Consolidated Statements of Operations - Three months ended September 30, 2003and
     September 30, 2002 | 4 
|        |                                                                                                          |   
|        | Consolidated Statements of Operations - Nine months ended September 30, 2003and
     September 30, 2002  | 5 
|        |                                                                                                          |   
|        | Consolidated Statements of Cash Flows -
     Nine months ended September 30, 2003and September 30, 2002  | 6 
|        |                                                                                                          |   
|        | Notes to Consolidated Financial
     Statements                                                          | 7 
|        |                                                                                                          |   
|Item 2. | Management's Discussion and Analysis of Financial Condition
     and Results of Operations               | 17
|        |                                                                                                          |   
|Item 3. | Controls and Procedures                                                                                  | 22

Part II - Other Information

|Item 1. | Legal Proceedings                | 23
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 23
|        |                                  |   

Forward Looking Statements

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

1

---

Part I - Financial Information

Item 1.  FINANCIAL STATEMENTS

2

---

DERMA SCIENCES, INC.Consolidated Balance Sheets

`====================================================================================================
                                                                     September 30,      December 31,
                                                                          2003              2002
                                                                      (Unaudited)
ASSETS
----------------------------------------------------------------------------------------------------

Current Assets
Cash and cash equivalents                                            $  1,114,880      $  1,496,357
Accounts receivable, net                                                2,184,374         1,975,993
Inventories                                                             3,769,448         2,875,755
Prepaid expenses and other current assets                                 337,162           281,066
----------------------------------------------------------------------------------------------------
Total current assets                                                    7,405,864         6,629,171
Property and equipment, net                                             1,099,201           987,891
Goodwill                                                                1,110,967         1,110,967
Patents and trademarks, net                                               127,784           140,378
Other assets, net                                                         186,574           220,177
----------------------------------------------------------------------------------------------------
Total Assets                                                         $  9,930,390      $  9,088,584
----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------
Current Liabilities
Line of credit                                                       $  1,162,136      $  1,962,627
Current maturities of long-term debt                                      172,635           173,493
Accounts payable                                                        1,133,080           692,259
Accrued expenses and other current liabilities                            266,758           445,791
----------------------------------------------------------------------------------------------------
Total current liabilities                                               2,734,609         3,274,170
----------------------------------------------------------------------------------------------------
Long-term debt                                                            858,582           845,455
----------------------------------------------------------------------------------------------------
Total Liabilities                                                       3,593,191         4,119,625
----------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding: 7,462,695 shares at September 30, 2003 and
4,631,276 shares at December 31, 2002                                      74,627            46,313
Convertible preferred stock, $.01 par value; 11,750,000 shares
authorized; issued and outstanding: 2,284,574 shares at September 30,
2003 (liquidation preference of $4,235,233) and 2,526,242 shares at
December 31, 2002 (liquidation preference of $4,460,237)                   22,846            25,262
Additional paid-in capital                                             16,691,598        15,588,698
Accumulated other comprehensive income (loss)                             224,006           (21,736)
Accumulated deficit                                                   (10,675,878)      (10,669,578)
----------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                              6,337,199         4,968,959
----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                           $  9,930,390      $  9,088,584
====================================================================================================`

See accompanying notes.

3

---

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

`=================================================================================================
                                                                           Three months ended
                                                                               September 30,
                                                                           2003            2002
-------------------------------------------------------------------------------------------------
Net sales                                                              $4,212,619      $3,159,598

Cost of sales                                                           2,812,161       1,745,272

-------------------------------------------------------------------------------------------------
Gross Profit                                                            1,400,458       1,414,326
-------------------------------------------------------------------------------------------------
Operating expenses                                                      1,469,362       1,168,931
Interest expense, net                                                      44,750          35,488
Other (income)/expense, net                                               (17,917)         22,459
-------------------------------------------------------------------------------------------------
Total Expenses                                                          1,496,195       1,226,878
-------------------------------------------------------------------------------------------------
(Loss) income before provision for income taxes                           (95,737)        187,448
Provision for income taxes                                                   -               -
-------------------------------------------------------------------------------------------------
Net (Loss) Income                                                      $  (95,737)     $  187,448
-------------------------------------------------------------------------------------------------
(Loss) income per common share - basic                                 $    (0.01)     $     0.04
-------------------------------------------------------------------------------------------------
(Loss) income per common share - diluted                               $    (0.01)     $     0.03
-------------------------------------------------------------------------------------------------
Shares used in computing (loss) income per common share - basic         7,338,682       4,331,276
-------------------------------------------------------------------------------------------------
Shares used in computing (loss) income per common share - diluted       7,338,682       7,043,889
=================================================================================================`

See accompanying notes.

4

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

`==================================================================================================
                                                                           Nine months ended
                                                                             September 30,
                                                                       2003                2002
--------------------------------------------------------------------------------------------------
Net sales                                                             $13,065,047       $7,402,262

Cost of sales                                                           8,451,050        3,647,353
--------------------------------------------------------------------------------------------------
Gross Profit                                                            4,613,997        3,754,909
--------------------------------------------------------------------------------------------------
Operating expenses                                                      4,470,354        3,226,144
Interest expense, net                                                     215,236          166,585
Other (income)/expense, net                                               (65,293)         102,130
--------------------------------------------------------------------------------------------------
Total Expenses                                                          4,620,297        3,494,859
--------------------------------------------------------------------------------------------------
(Loss) income before provision for income taxes                            (6,300)         260,050
Provision for income taxes                                                   -                -
--------------------------------------------------------------------------------------------------
Net (Loss) Income                                                     $    (6,300)      $  260,050
--------------------------------------------------------------------------------------------------
(Loss) income per common share - basic                                $      0.00       $     0.07
--------------------------------------------------------------------------------------------------
(Loss) income per common share - diluted                              $      0.00       $     0.04
--------------------------------------------------------------------------------------------------
Shares used in computing (loss) income per common share - basic         5,656,822        3,736,405
--------------------------------------------------------------------------------------------------
Shares used in computing (loss) income per common share - diluted       5,656,822        6,890,805
==================================================================================================`

See accompanying notes.

5

---

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

`======================================================================================================
                                                                                Nine months ended
                                                                                    September 30,
                                                                              2003            2002
------------------------------------------------------------------------------------------------------
Operating Activities
    Net (loss) income                                                     $   (6,300)     $   260,050
    Adjustments to reconcile net (loss) income to
      net cash (used in) provided by operating activities:
       Depreciation                                                          115,532           58,720
       Amortization                                                          116,979           48,981
       Amortization of deferred financing costs                               15,000          120,200
       Provision for doubtful accounts and trade rebates                       6,871           12,525
       Provision for inventory obsolescence                                   16,072           37,297
       Loss on disposal of property and equipment                              2,132             -
       Changes in operating assets and liabilities:
           Accounts receivable                                               (21,815)        (165,962)
           Inventories                                                      (576,674)         267,537
           Prepaid expenses and other current assets                         (32,916)        (137,487)
           Other assets                                                       10,138           (9,760)
           Accounts payable                                                  408,370           53,377
           Accrued expenses and other current liabilities                   (212,291)          30,002
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                         (158,902)         575,480
------------------------------------------------------------------------------------------------------
Investing Activities
    Purchase of inventory and product rights                                (114,691)            -
    Purchases of property and equipment                                      (98,885)         (69,498)
    Acquisition of business assets, net of cash acquired                        -          (1,016,537)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                       (213,576)      (1,086,035)
------------------------------------------------------------------------------------------------------
Financing Activities
    Net change in bank line of credit                                       (964,930)         725,794
    Deferred financing costs                                                 (29,423)         (85,297)
    Long-term debt repayments                                               (150,734)          (8,415)
    Proceeds from issuance of stock, net of issuance costs                 1,128,798          618,986
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities                          (16,289)       1,251,068
------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                        7,290             (122)
------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                        (381,477)         740,391

Cash and cash equivalents
  Beginning of period                                                      1,496,357          524,783
------------------------------------------------------------------------------------------------------
  End of period                                                           $1,114,880      $ 1,265,174
------------------------------------------------------------------------------------------------------

Supplemental cash flow information
  Conversion of bonds payable and accrued interest to preferred stock     $     -            $595,200
  Common stock and warrants issued for debt conversion/extension          $     -            $120,200
  Bond conversion reset provision charge to paid-in capital               $     -             $45,000
  Stock options granted in connection with acquisition                    $     -            $115,000
======================================================================================================`

See accompanying notes.

6

---

DERMA SCIENCES, INC.
Notes To Consolidated Financial Statements

---

1. Organization and
Summary of Significant Accounting Policies

Derma
Sciences, Inc. and its subsidiaries (the Company) are full line providers of
wound care, wound closure-fasteners and skin care products. The Company markets its
products principally through independent distributors servicing the long-term care, home
health and acute care markets in the United States, Canada and other select international
markets. The Companys principal manufacturing and distribution facilities are
located in St. Louis, Missouri and Toronto, Canada. The Company also has a manufacturing
facility in Nantong, China.

Basis
of Presentation

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

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 2003, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2002, included in Form 10-KSB filed with the Securities and
Exchange Commission.

Summary
of Significant Accounting Policies:

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

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

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

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

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

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

7

---

Property
and Equipment  Property and equipment are stated at cost and are depreciated
principally by the straight-line method over the estimated useful lives of the assets
ranging from three to ten years. Leasehold improvements are depreciated over the lesser of
their useful lives or the remaining lease term.

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

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

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

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

`Three Months Ended             Nine Months Ended
                                                    September 30,                 September 30,
                                                    -------------                 -------------
                                                 2003          2002            2003          2002
                                                ------        ------          ------        ------

Net (loss) income - as reported              $ (95,737)     $187,448       $  (6,300)     $260,050
Pro forma compensation expense                (185,879)      (50,015)       (587,461)      (99,552)
                                              --------       -------        --------       -------

Pro forma net (loss) income                  $(281,616)     $137,433       $(593,761)     $160,498
                                              ========       =======        ========       =======

(Loss) income per common share - basic
    As reported                                $(0.01)        $0.04           $0.00         $0.07
    Pro forma                                  $(0.04)        $0.03          $(0.10)        $0.04

(Loss) income per common share - diluted
    As reported                                $(0.01)        $0.03           $0.00         $0.04
    Pro forma                                  $(0.04)        $0.02          $(0.10)        $0.02`

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

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

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

8

---

2. Dumex Medical Inc.
Acquisition

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

3. Accounts Receivable

Accounts
receivable include the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Trade accounts receivable                  $2,296,691      $1,943,674
        Less:  Allowance for doubtful accounts        (27,871)        (40,000)
               Allowance for trade rebates           (115,000)        (96,000)
                                                    ---------       ---------
           Net trade receivables                    2,153,820       1,807,674
        Other receivables                              30,554         168,319
                                                    ---------       ---------

           Total receivables                       $2,184,374      $1,975,993
                                                    =========       =========`

4. Inventories

Inventories
include the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Finished goods                             $2,706,928       $2,111,546
        Work in process                               132,852           91,788
        Packaging materials                           350,426          287,903
        Raw materials                                 579,242          384,518
                                                    ---------       ---------

             Total inventory                       $3,769,448       $2,875,755
                                                    =========       =========`

5. Property and Equipment

Property
and equipment include the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Machinery and equipment                    $1,256,854      $1,043,383
        Furniture and fixtures                        181,267         165,858
        Leasehold improvements                         47,581          40,714
                                                    ---------       ---------
             Gross property and equipment           1,485,702       1,249,955

        Less:  Accumulated depreciation              (386,501)       (262,064)
                                                    ---------       ---------

             Net property and equipment            $1,099,201      $  987,891
                                                    =========       =========`

9

---

6. Goodwill

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

7. Patents and Trademarks

Patents
and trademarks include the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Patents and trademarks                      $ 444,067       $ 444,067
        Less:   Accumulated amortization             (316,283)       (303,689)
                                                     --------        --------

             Net patents and trademarks             $ 127,784       $ 140,378
                                                     ========        ========`

8. Other Assets

Other assets include the
 following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Deferred financing costs, net                $ 79,422        $162,314
        Deposits                                       67,827          57,863
        Intangible assets-product rights, net          38,313            -
        Other                                           1,012            -
                                                      -------         -------

             Total other assets                      $186,574        $220,177
                                                      =======         =======`

9. Short Term Borrowings

Short
term borrowings include the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Canadian line of credit                    $1,162,136      $  962,627
        U.S. line of credit                               -         1,000,000
                                                    ---------       ---------

             Total short term borrowings           $1,162,136      $1,962,627
                                                    =========       =========`

Canadian
Line of Credit

Effective
August 26, 2002, in connection with the acquisition of Dumex Medical Inc., the Company
entered into a sixteen month revolving credit facility agreement (the Dumex
Agreement) for a maximum principal amount of $1,630,000 with a Canadian bank. The
Companys wholly owned Canadian subsidiary, Dumex Medical Canada Inc., may request
advances under the Dumex Agreement up to the value of seventy-five percent (75%) of its
eligible receivables (as defined) and fifty percent (50%) of its eligible inventory (as
defined) up to a maximum of $704,000. Interest on outstanding advances is payable monthly
at the Canadian prime rate (as defined) plus 1.0%, or 5.5% for advances outstanding at
September 30, 2003. Outstanding advances are secured by all tangible and intangible assets
of Dumex Medical Canada Inc. In addition, the Canadian bank has a second lien security
interest in the assets of the Companys U.S. operations. The Company has also
guaranteed payment of amounts due under the Dumex Agreement.

10

---

Over
the term of the Dumex Agreement, the Company has agreed to comply with a number of
financial covenants governing minimum working capital, current ratios, tangible net worth,
interest coverage, total indebtedness to tangible net worth and total indebtedness to
adjusted pre-tax earnings. These covenants are measured at the end of each month.
Additional covenants governing permitted indebtedness, liens, payments of dividends and
protection of collateral are included in the Dumex Agreement. In the event of a margin
deficiency (as defined) or covenant violation, the Company is required to advance up to an
additional $370,000 of working capital to Dumex Medical Canada Inc. in order to correct
the deficiency. This additional working capital may be repaid to the Company 45 days after
the margin deficiency or covenant violation has been cured upon the condition that such
repayment not result in a margin deficiency, covenant violation or any other event of
default.

U.S.
Line of Credit

In
March, 2003 the Company entered into a new one year line of credit agreement (subject to
annual renewal) with a U.S. lender (the Agreement) for a maximum principal
amount of $2,000,000. No funds have been drawn against the line to date. Estimated maximum
potential advances under the Agreement at September 30, 2003 were $1,680,000, less any
outstanding standby letters of credit. Advances will be utilized to fund strategic
initiatives and for general working capital purposes. The Company terminated its prior
U.S. line of credit on February 28, 2003 by repaying the $1,000,000 outstanding
indebtedness and paying a $50,000 early termination fee. In addition, the Company charged
$66,342 to interest expense for deferred financing costs associated with the prior U.S.
line of credit.

The
Company may request advances under the Agreement up to the value of 80% of eligible U.S.
receivables (as defined) and 50% of eligible U.S. inventory (as defined), excluding
work-in-process inventory. Interest on outstanding advances is payable monthly in arrears
at the one month LIBOR rate (as published in The Wall Street Journal), plus
3.0%, or 4.1% on September 30, 2003. In addition, the Company will pay an annual line fee
of $20,000. This line fee and any one-time lender or legal costs associated with securing
the line of credit will be deferred and amortized to interest expense over the line term
of one year.

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

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

10. Convertible Bonds

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

11

---

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

11. Long-Term Debt

Long-term
debt includes the following:

`September 30,   December 31,
                                                        2003            2002
                                                        ----            ----

        Canadian term loan                         $1,027,483      $   987,576
        Capital lease obligations                       3,734           31,372
                                                    ---------       ---------

             Total debt                             1,031,217        1,018,948
        Less:  current maturities                     172,635          173,493
                                                    ---------       ---------

             Long-term debt                        $  858,582      $   845,455
                                                    =========       ==========`

Effective August
26, 2002, in connection with the acquisition of substantially all the assets of Dumex
Medical Inc., the Company entered into a five-year term loan agreement with a Canadian
Bank. The loan is repayable in monthly payments consisting of principal and interest
commencing October 1, 2002. Interest on the outstanding principal balance is payable
monthly at the banks prime rate (as defined) plus 1.25%, or 5.75% at September 30,
2003. The term loan is secured by all tangible and intangible assets of Dumex Medical
Canada Inc. and is subject to the same financial covenants applicable to the operating
line of credit (Note 9).

12. Shareholders
Equity

Preferred
Stock

There
are 150,003 shares of series A convertible preferred stock outstanding. The series A
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference of $4.00 per share, votes as a class on
matters affecting the series A preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 444,170 shares of series B convertible preferred stock outstanding. The series B
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference of $6.00 per share, votes as a class on
matters affecting the series B preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 619,055 shares of series C convertible preferred stock outstanding. The series C
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference averaging $0.70 per share, votes as a class
on matters affecting the series C preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 1,071,346 shares of series D convertible preferred stock outstanding. The series D
preferred stock is convertible into common stock on a one-for-one basis, bears no
dividend, maintains a liquidation preference of $0.50 per share, votes as a class on
matters affecting the series D preferred stock and maintains voting rights identical to
the common stock on all other matters.

12

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Stock
Purchase Warrants

At
September 30, 2003, the Company had warrants outstanding to purchase the Companys
common stock as outlined below:

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

             E               1,870,007               $0.85       July 18, 2005
             F               1,309,441               $0.57       January 6, 2007`

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

Other
Equity Transactions

In
June 2003, the Company closed a private offering of 4,000,000 shares of its common stock
at a price of $0.50 per share initiated in January 2002. Offering proceeds are being used
to fund strategic initiatives and for general working capital purposes. From January 2002
through September 30, 2003, 4,000,000 shares of common stock were issued pursuant to the
offering and offering proceeds of $1,882,118, net of $117,882 in offering expenses, have
been received.

In
July 2003, a total of 241,668 shares of Series B, C and D preferred stock were converted
into 241,668 shares of common stock. In addition, in July 2003 there was a cashless
exercise of 330,002 Series E warrants into 189,751 shares of common stock.

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

13. Comprehensive Income

The
Companys total comprehensive income was as follows:

`Nine Months Ended
                                                                 September 30,
                                                             2003            2002
                                                            ------          ------

         Net (loss) income - as reported                  $ (6,300)       $260,050
         Other comprehensive income (loss):
             Foreign currency translation adjustment       245,742         (32,349)
                                                           -------          ------

         Comprehensive income                             $239,442        $227,701
                                                           =======         =======`

14. Promissory Note

On
January 9, 2003 the Company loaned $50,000 to a supplier pursuant to a secured promissory
note. The stated maturity date of the note is December 31, 2003. The note may be prepaid
without penalty, bears interest at the annual rate of 5% and is secured by the tangible
and intangible property of the supplier. The funds advanced are to be used by the supplier
for general working capital purposes in the ordinary course of business. The promissory
note, together with accrued interest of $1,838, is included in prepaid expenses and other
current assets.

13

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15. Income taxes

No
provision for income taxes has been provided for in the three or the nine months ended
September 30, 2003 or 2002 given the Companys available net operating loss
carryforwards.

At
December 31, 2002, the Company had net operating loss carryforwards of approximately
$6,855,000 for federal income tax purposes that begin to expire in years 2012 through
2020. For state income tax purposes, the Company has net operating loss carryforwards of
approximately $6,855,000 that expire in years 2004 through 2010. As of December 31, 2002,
the Company has foreign net operating loss carryforwards of approximately $182,000 which
begin to expire in 2009.

16. Operating Segments

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

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

Segment
sales and gross profit for the three months and nine months ended September 30, 2003 and
2002 are as follows:

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

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

Net sales                 $3,059,851           $651,924        $500,844            -         $ 4,212,619
                           ---------            -------         -------         -------       ----------

Gross profit                 941,038            326,826         132,594            -           1,400,458
Total expenses                  -                 -                -        $(1,496,195)      (1,496,195)
                                                                                              ----------
Net loss                                                                                     $   (95,737)
                                                                                              ==========
Net long-lived assets     $1,017,710              -          $1,327,829         $30,726      $ 2,376,265
                           =========            =======       =========          ======       ==========`

14

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

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

Net sales                 $1,586,916          $908,480          $664,202            -         $3,159,598
                           ---------           -------           -------         -------       ---------

Gross profit                 746,361           444,527           223,438            -          1,414,326
Total expenses                 -                 -                 -         $(1,226,878)     (1,226,878)
                                                                                               ---------
Net income                                                                                    $  187,448
                                                                                               =========
Net long-lived assets     $1,000,392              $132        $1,245,861          $46,320     $2,292,705
                           =========               ===         =========           ======      =========




                                      Nine Months Ended September 30, 2003
                                     -------------------------------------

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

Net sales                 $9,266,229        $2,220,288        $1,578,530            -        $13,065,047
                           ---------         ---------         ---------         -------      ----------

Gross profit               3,093,372         1,075,701           444,924            -          4,613,997
Total expenses                  -                -                  -        $(4,620,297)     (4,620,297)
                                                                                               ---------
Net loss                                                                                     $    (6,300)
                                                                                              ==========
Net long-lived assets     $1,017,710             -            $1,327,829         $30,726     $ 2,376,265
                           =========             =====         =========          ======      ==========




                                      Nine Months Ended September 30, 2002
                                     -------------------------------------

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

Net sales                 $3,123,812        $2,340,372        $1,938,078            -         $7,402,262
                           ---------         ---------         ---------         -------       ---------

Gross profit               1,934,220         1,161,663           659,026            -          3,754,909
Total expenses                 -                 -                 -          $(3,494,859)    (3,494,859)
                                                                                               ---------
Net income                                                                                    $  260,050
                                                                                               =========
Net long-lived assets      $1,000,392             $132         $1,245,861        $46,320      $2,292,705
                            =========              ===          =========         ======       =========`

Long-lived
assets consist of property and equipment, patents and trademarks and goodwill. Wound care
long-lived assets consist principally of Dumex Medical Canada Inc. property and equipment
in the three and nine months ended September 30, 2003 and 2002. Wound closure-fastener
products are for the most part outsourced, and accordingly, are not appreciably supported
internally by long-lived assets. Skin care long-lived assets consist of goodwill
associated with the acquisition of Sunshine Products, Inc. and associated property and
equipment.

International
sales (excluding Canada) were $582,087 and $482,619 in 2003 and 2002, respectively. Wound
closure-fasteners sales represent the majority of international sales.

15

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17. Product Rights
Purchase

On
August 5, 2003, the Company purchased for cash all right, title and interest to Genesis
Ointment for $114,691 from Gericare Providers, Inc. Genesis Ointment is a vitamin enriched
moisture barrier and skin protectant that both competes with and complements the
Companys existing wound care product line.

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

The
purchase price of $114,691, including transaction related costs, has been recorded as
inventory at estimated fair market value less selling costs of $74,124 and intangible
assets of $40,567. The intangible assets are being amortized to operating expense over
three years.

18. New Lease Agreement

On
August 22, 2003, as part of the rationalization of its U.S. distribution network the
Company entered into a five year lease for a 42,400 square foot facility in Fenton,
Missouri. The facility will serve as the primary U.S. distribution center for the
Companys products. Lease payments will commence on or about December 15, 2003. First
year lease payments are $143,417, increasing to $270,710 in year five. Minimum lease
payments over the term of the lease are $1,035,000.

16

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

Quarter Ended September 30, 2003
Compared to Quarter Ended September 30, 2002.

Results of Operations

The
following table highlights the third quarter of 2003 and 2002 operating results:

`Three Months Ended September 30,
                                             --------------------------------
                                                2003              2002                 Variance
                                                ----              ----                 --------

Net sales                                    $4,212,619       $3,159,598         $1,053,021      33%
Gross profit                                  1,400,458        1,414,326            (13,868)    (1)%
Operating expenses                            1,469,362        1,168,931            300,431      26%
Interest expense, net                            44,750           35,488              9,262      26%
Other (income) expense, net                     (17,917)          22,459            (40,376)      -
Total expenses                                1,496,195        1,226,878            269,317      22%
(Loss) income before income taxes               (95,737)         187,448           (283,185)      -
Provision for income taxes                         -                -                  -          -
                                              ---------        ---------          ---------

Net (loss) income                            $  (95,737)      $  187,448         $ (283,185)
                                              =========        =========          =========`

Net sales
increased $1,053,021, or 33%, to $4,212,619 in the third quarter 2003 from $3,159,598 in
the third quarter 2002. The increase is due to inclusion of the Dumex Business for the
entire three month period ended September 2003 versus the shorter period in the same
quarter of the prior year from the August 26, 2002 acquisition date to the end of
September 2002. Dumex sales for the quarter ended September 2003 were slightly below
expectation due to a significant shortfall in private label sales. Institutional sales
were in line with expectations. Dumex sales in the U.S. were off slightly in the quarter
due to temporary product supply issues associated with the integration of the U.S.
distribution network. Derma sales were 18% lower versus the third quarter 2002. This
decrease is principally attributable to competitive pressures in the wound-closure
fasteners and skin care businesses. Higher sales of a wound-closure product in 2002 due to
an inventory adjustment by a customer, coupled with the return to a normal ordering
pattern in 2003, also contributed. Sales of Derma wound care products increased slightly
in the third quarter 2003 versus 2002.

Gross
profit decreased $13,868, or 1%, to $1,400,458 in the third quarter 2003 from $1,414,326
in the third quarter 2002. Despite a significant sales increase, gross profit dollars
declined compared to the third quarter 2002 due to an adverse sales mix towards a higher
concentration of lower margin Dumex sales as a percentage of total sales, coupled with
gross profit erosion due to pricing and product cost pressures. The gross profit
percentages for the third quarter 2003 and 2002 were 33% and 45%, respectively. Dumex
margins deteriorated in 2003 as a result of lower sales prices due to competitive
pressure, higher raw material (cotton) costs for traditional wound care products and
unfavorable fixed overhead absorption attributable to outsourcing of a portion of
Dumexs production to China. Dermas margins in the third quarter of 2003
compared to 2002 were lower in the wound care and wound-closure fasteners lines due to
pricing pressures. Skin care margins were significantly lower compared with the prior year
because of lower sales volumes and its adverse impact on operational efficiency and fixed
overhead absorption.

Operating
expenses increased $300,431, or 26%, to $1,469,362 in the third quarter 2003 from
$1,168,931 in the third quarter 2002. The increase is primarily attributable to the
inclusion of Dumex expenses for the entire third quarter 2003 versus five weeks of the
third quarter 2002. Dumex operating expenses met expectations on a local currency basis
but were adversely impacted by the strengthening Canadian dollar. Derma expenses in the
third quarter 2003 increased 6% over the third quarter 2002. Derma selling expenses
increased as a result of the reorganization, expansion and upgrade of the sales force at
the beginning of 2003 which was partially offset by lower marketing expenses and
integration savings in the regulatory area.

17

---

Interest
expense, net increased $9,262 to $44,750 in the third quarter 2003 from $35,488 in the
third quarter of 2002. Interest expense, net in the third quarter 2003 is comprised of
Dumex interest expense of $37,648 related to its line of credit and long-term indebtedness
and $10,945 related to financing costs associated with the new U.S. line of credit,
partially offset by interest income of $3,879. Prior year interest expense, net of $35,488
primarily consisted of the Dumex interest expense of $12,894 related to its line of credit
and long-term indebtedness for a five week period and $19,816 for interest and
amortization of deferred financing costs related to its U.S. line of credit, partially
offset by interest income.

Other
income increased $40,376 to $17,917 income in the third quarter 2003 from $22,459 expense
in the third quarter 2002. The increase is primarily attributable to the sale and/or
conversion of previously reserved, discontinued and slow moving inventory of $28,000,
together with the non-recurrence of $22,300 in acquisition related costs in 2002,
partially offset by storage and demurrage costs of $8,500.

No
provision for income taxes has been provided for in the third quarter of 2003 and 2002 due
to the availability of net operating loss carry forwards.

The
Company generated a net loss of $95,737, or $(0.01) per share (basic and diluted), in the
third quarter of 2003 compared to net income of $187,448, or $0.04 per share (basic) and
$0.03 per share (diluted), in the third quarter 2002.

Nine Months Ended September 30, 2003
Compared to Nine Months Ended September 30, 2002.

Results of Operations

The
following table highlights the first nine months of 2003 and 2002 operating results:

`Nine Months Ended September 30,
                                             -------------------------------
                                                2003              2002                 Variance
                                                ----              ----                 --------

Net sales                                   $13,065,047       $7,402,262         $5,662,785      77%
Gross profit                                  4,613,997        3,754,909            859,088      23%
Operating expenses                            4,470,354        3,226,144          1,244,210      39%
Interest expense, net                           215,236          166,585             48,651      29%
Other (income) expense, net                     (65,293)         102,130           (167,423)      -
Total expenses                                4,620,297        3,494,859          1,125,438      32%
(Loss) income before income taxes                (6,300)         260,050           (266,350)      -
Provision for income taxes                         -                -                  -          -
                                             ----------        ---------          ---------

Net (loss) income                           $    (6,300)      $  260,050         $ (266,350)
                                             ==========        =========          =========`

Net sales
increased $5,662,785, or 77%, to $13,065,047 in the nine months ended September 30, 2003
from $7,402,262 in the nine months ended September 2002. The increase is attributable to
the inclusion of Dumex sales since the acquisition date of August 26, 2003. Dumex
institutional sales in Canada are growing in line with expectations on a local currency
basis and have benefited from a stronger Canadian dollar. Dumex was successful in renewing
and expanding its business with two large buying groups in 2003. Dumexs private
label business is down significantly versus historical levels due to the loss of several
customers. Dumex sales in the United States are growing modestly in response to a focused
sales effort. Derma sales are down 9% versus the prior year. This softer than expected
performance is due to competitive pressure across the entire Derma product line coupled
with the Companys decision to focus a significant portion of its sales and marketing
resources on expanding the U.S. Dumex business.

Gross
profit increased $859,088, or 23% in the first nine months of 2003 to $4,613,997 from
$3,754,909 in the first nine months of 2002 due to inclusion of the incremental Dumex
sales. Overall, gross margin percentages have decreased from 51% to 35%. This significant
decrease is attributable to the increasingly higher percentage of lower margin Dumex sales
as a percentage of total sales coupled with pricing and product cost pressures in certain
segments of the business. Dumex margins have deteriorated in 2003 due principally to
aggressive competitive pricing and higher raw material (cotton) costs for traditional
wound care products. Lower fixed overhead absorption associated with outsourcing products
to China versus in-house manufacture also contributed. Dermas margins are lower in
the wound care and wound-closure fastener line due to pricing pressures. Skin care line
margins are down significantly due to the adverse impact of lower sales volumes on
operational efficiency and fixed overhead absorption.

18

---

Operating
expenses increased $1,244,210, or 39%, in the first nine months of 2003 to $4,470,354 from
$3,226,144 in the first nine months of 2002 due principally to the inclusion of
incremental Dumex expenses. On a local currency basis, Dumex operating expenses are
slightly higher than expected due to higher insurance, accounting, health benefit and
travel costs. A planned increase in sales resources also contributed. In addition, Dumex
operating expenses were adversely impacted by the strengthening Canadian dollar. Derma
operating expenses increased 2% over the prior year. Marketing expense decreased
significantly due to a lower level of promotion activities as the focus was shifted to the
sales force and building the Dumex business. Sales expense has increased 10% consistent
with the plan initiated in January 2003 to reorganize and upgrade the sales team. General
administrative expenses are up 5% over the prior period. The increase is due to higher
occupancy, public relations, accounting, insurance and travel costs coupled with increased
costs associated with upgrading the finance and information technology resources in
response to the Dumex acquisition in August 2002. These increases have been partially
offset by integration savings in the regulatory area and lower bad debt, legal, consulting
and recruiting costs.

Interest
expense, net increased $48,651 to $215,236 in the first nine months of 2003 from $166,585
in the first nine months of 2002. Interest expense, net in the first nine months of 2003
is principally comprised of Dumex interest expense of $112,898 related to its line of
credit and long-term indebtedness, the February 28, 2003 termination of the Companys
previous U.S. line of credit facility resulting in the write-off of $66,342 of deferred
financing costs, $19,662 interest incurred on the U.S. line of credit prior to
termination, non-cash interest charges of $15,000 and $21,426 related to financing costs
associated with the new U.S. line of credit, partially offset by interest income of
$18,003. Prior year interest expense, net of $166,585 consisted of non-cash interest
charges of $142,700 associated with the conversion of the Companys Series C and D
bonds and accrued interest outstanding in January 2002 and five weeks worth of Dumex and
U.S. line of credit interest from the acquisition date.

Other
expense, net increased $167,423 to $65,293 income in the first nine months of 2003 from
$102,130 expense in 2002. Other income in 2003 is principally comprised of $88,000
resulting from the favorable settlement of an Internal Revenue Service claim and the sale
and/or conversion of previously reserved, discontinued and slow-moving inventory of
$115,100, partially offset by the payment of a $50,000 fee associated with the early
termination of the Companys previous U.S. line of credit, exchange losses of
$23,100, storage and demurrage for containers of $33,500 and one-time ISO consulting and
audit expenses of $18,100. Other expense, net in the first nine months of 2002 relates to
the write-off of deferred costs related to a cancelled acquisition initiative of $94,900.

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

The
Company generated a net loss of $6,300, or $0.00 per share (basic and diluted), in the
first nine months of 2003 compared to net income of $260,050, or $0.07 per share (basic)
and $0.04 per share (diluted), in 2002.

Liquidity and Capital
Resources

At
September 30, 2003 and December 31, 2002 the Company had cash and cash equivalents of
$1,114,880 and $1,496,357, respectively. The decrease in cash and cash equivalents is
attributable to cash used in operating activities of $158,902, cash used to purchase
product rights of $114,691, cash used for the purchase of equipment of $98,885 and cash
used in financing activities of $16,289. Cash used in operating activities was driven
principally by increases in inventory in support of existing and planned sales growth and
the pay down of accrued liabilities, partially offset by an increase in accounts payable.

19

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The
purchase of equipment reflects an orderly plan to upgrade the Companys manufacturing
and information technology equipment. Cash used in financing activities relates to net
proceeds of $1,128,798 from the sale of common stock and an increase in the borrowings on
Dumexs line of credit of $35,070, offset by repayment of Dermas previous U.S.
line of credit of $1,000,000 in February 2003 and scheduled long-term debt repayments.
Working capital increased $1,316,254 to $4,671,255 at September 30, 2003 from $3,355,001
at December 31, 2002.

In
connection with the Dumex acquisition, the Company entered into a sixteen month $1,630,000
revolving credit facility expiring December 31, 2003 to fund day-to-day operations.
Maximum potential advances under the agreement at September 30, 2003 were $1,365,000.
Advances outstanding against the credit facility were $1,162,136 at September 30, 2003,
leaving an additional $202,864 available for borrowing.

In
March 2003 the Company entered into a new one year line of credit agreement (subject to
annual renewal) with a U.S. lender (the Agreement) for a maximum principal
amount of $2,000,000. No funds have been drawn against the line to date. Estimated maximum
potential advances under the Agreement at September 30, 2003 were $1,680,000, less any
outstanding standby letters of credit. Advances will be utilized to fund strategic
initiatives and for general working capital purposes.

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

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

Among
the potential sources of capital the Company expects to utilize to finance its growth
plans are anticipated improved profitability and prudent utilization of available lines of
credit.

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

The
Common Stock of the Company is traded on the OTC Bulletin Board under the symbol
DSCI.OB. The Common Stock is also traded on the Boston and Pacific Stock
Exchanges under the symbol DMS. The Company has paid no cash dividends in
respect of its Common Stock and does not intend to pay cash dividends in the near future.

Critical Accounting
Policies

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

Revenue Recognition and
Allowance for Trade Rebates

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

20

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Inventory

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

Goodwill Impairment

At
September 30, 2003, the Companys skin care segment had $1,110,967 of goodwill. The
Company tests goodwill for impairment in the forth quarter of each year or when impairment
indicators are present. The process of evaluating the potential impairment of goodwill is
highly subjective and requires significant judgments at many points during the analysis.
In estimating the fair value of the skin care segment with recognized goodwill, the
Company makes estimates and judgments about the future cash flows of this segment. The
Companys cash flow forecasts are based on assumptions that are consistent with the
plans and estimates used to manage the underlying business. In addition, the Company makes
certain judgments about allocating shared assets to the balance sheet for this segment.
Changes in these estimates would cause the skin care segment to be valued differently in
the future.

21

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Item 3.  CONTROLS AND PROCEDURES

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

22

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Part II  Other
Information

Item 1. Legal Proceedings

None

Item 6. Exhibits and Reports on Form
8-K

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

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

(b)     
          Reports on Form 8-K. Forms 8-K were filed on August 19, 2003 relative to the
          Registrants financial results for the three months and six months ended
          June 30, 2003 and on August 29, 2003 relative to the Registrants purchase
          of the rights to a skin care product.

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

|                         |  | DERMA SCIENCES, INC.                                                                         
|------------------------ |  | ---------------------------------------------------------------------------------------------
|                         |  |                                                                                              
|                         |  |                                                                                              
|                         |  |                                                                                              
|Dated: November 13, 2003 |  | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

23

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