---

U.S. SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-QSB  (Mark One) [X]
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934       [  ]
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934        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(Address of principal executive
     offices)
     (Zip Code)  (609) 514-4744(Issuer's telephone
number)


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, 2000 | Class: Common Stock, par value $.01 per share
|------------------------ | ---------------------------------------------
|                         | Shares Outstanding: 2,120,940                

Transitional Small Business Disclosure Format:
  Yes [  ]    No [X]

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

|Description |                                                                                                   | Page
|----------- | ------------------------------------------------------------------------------------------------- | ----
|            |                                                                                                   |     
|Item 1.     | Consolidated Financial Statements                                                                 |     
|            |                                                                                                   |     
|            | Balance Sheet - September 30,
     2000                                                           | 2   
|            |                                                                                                   |     
|            | Statements of
     Operations - Three months ended September 30, 2000
     and September 30, 1999 | 3   
|            |                                                                                                   |     
|            | Statements of
     Operations - Nine months ended September 30, 2000
     and September 30, 1999  | 4   
|            |                                                                                                   |     
|            | Statements of Cash Flows - Nine months
     ended September 30, 2000
     and September 30, 1999  | 5   
|            |                                                                                                   |     
|            | Notes to Consolidated Financial
     Statements                                                   | 6   
|            |                                                                                                   |     
|Item 2.     | Management's Discussion and Analysis of
     Financial Condition
       and Results of Operations | 10  
|            |                                                                                                   |     

|Item 1. | Legal Proceedings                | 13
|------- | -------------------------------- | --
|        |                                  |   
|Item 6. | Exhibits and Reports on Form 8-K | 13
|        |                                  |   

1

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DERMA SCIENCES, INC.Consolidated Balance Sheets

`======================================================================================================================
                                                                                 September 30,          December 31,
ASSETS                                                                                2000                  1999
----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents                                                         $ 1,178,548          $ 1,221,691
Accounts receivable, net                                                            1,767,400            2,041,099
Inventories                                                                         1,155,782            1,289,138
Current portion of officers' notes receivable                                          19,330               19,330
  Prepaid expenses and other current assets                                           421,725              223,120
----------------------------------------------------------------------------------------------------------------------
Total current assets                                                                4,542,785            4,794,378

Property and equipment, net                                                           305,365              382,542

Other Assets
Officers' notes receivable                                                             76,034               76,034
Goodwill and other intangibles, net                                                 1,423,503            1,548,246
  Sundry                                                                                    -                  838
----------------------------------------------------------------------------------------------------------------------
Total Assets                                                                      $ 6,347,687          $ 6,802,038
======================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Bank line of credit                                                               $   640,000          $   650,000
Accounts payable                                                                      889,930            1,261,620
  Accrued expenses and other current liabilities                                      664,672              493,964
  Convertible bonds                                                                   475,000                    0
----------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                           2,669,602            2,405,584
----------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
  Convertible bonds                                                                         0            1,325,000
----------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                   2,669,602            3,730,584
----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 share
authorized;                                                                       $    21,209          $    13,259
  issued and outstanding: 2,120,940 and 1,325,938 shares in 2000 and
  1999, respectively
Convertible preferred stock, $.01 par value; 11,750,000
shares
  authorized; issued and outstanding: 2,189,178 and 939,176 in 2000    and             21,892                9,392
1999, respectively
Additional paid-in capital                                                         12,204,143           10,798,197
Accumulated deficit                                                                (8,569,159)          (7,749,394)
----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                                          3,678,085            3,071,454
----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                                        $ 6,347,687          $ 6,802,038
======================================================================================================================`

See notes to consolidated financial statements.

2

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DERMA SCIENCES, INC.Consolidated Statement of Operations

`======================================================================================================================
                                                                                         Three months ended
                                                                                            September 30,
                                                                                      2000                1999
----------------------------------------------------------------------------------------------------------------------
Net sales                                                                           $ 2,250,005        $ 2,351,765

Cost of sales                                                                         1,090,405          1,041,208
----------------------------------------------------------------------------------------------------------------------
Gross Profit                                                                          1,159,600          1,310,557
----------------------------------------------------------------------------------------------------------------------
Operating expenses                                                                    1,389,206          2,077,726
Other income and (expense), net                                                         (11,538)           (10,669)
----------------------------------------------------------------------------------------------------------------------
Net Loss                                                                            $  (241,144)       $  (777,838)
----------------------------------------------------------------------------------------------------------------------
Loss per common share basic and diluted                                             $     (0.12)       $     (0.59)
----------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing loss per common share                       2,075,940          1,325,938
======================================================================================================================`

See notes to consolidated financial statements.

3

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DERMA SCIENCES, INC.Consolidated Statement of Operations

`======================================================================================================================
                                                                                          Nine months ended
                                                                                            September 30,
                                                                                       2000               1999
----------------------------------------------------------------------------------------------------------------------
Net sales                                                                           $ 6,669,798         $ 7,388,305

Cost of sales                                                                         3,062,511           2,957,689
----------------------------------------------------------------------------------------------------------------------
Gross Profit                                                                          3,607,287           4,430,616
----------------------------------------------------------------------------------------------------------------------
Operating expenses                                                                    4,355,309           6,730,611
Other income and (expense), net                                                         (71,742)              7,273
----------------------------------------------------------------------------------------------------------------------
Net Loss                                                                            $  (819,764)       $ (2,292,722)
----------------------------------------------------------------------------------------------------------------------
Loss per common share basic and diluted                                             $     (0.51)       $      (1.73)
----------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing loss per common share                       1,612,976           1,325,938
======================================================================================================================`

See notes to consolidated financial statements.

4

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DERMA SCIENCES, INC.Consolidated Statement of Cash Flows

`======================================================================================================================
                                                                                          Nine months ended
                                                                                            September 30,
                                                                                       2000               1999
----------------------------------------------------------------------------------------------------------------------
Operating Activities
  Net loss                                                                         $  (819,764)      $  (2,292,722)
  Adjustments to reconcile net loss to
    net cash used in operating activities
     Depreciation and amortization                                                     214,683             235,239
     Accounts payable adjustments                                                     (135,881)                  0
     Provision for bad debts                                                           100,000              43,400
     Changes in operating assets and
       liabilities, net of effects
       of purchased business
         Accounts receivable                                                           173,699            (805,046)
         Inventories                                                                   133,356             372,475
         Prepaid expenses and other current assets                                    (198,605)           (201,357)
         Other assets                                                                      838               2,731
         Accounts payable                                                             (190,809)            290,642
         Accrued expenses and other current liabilities                                170,708            (199,819)
----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                                 (551,775)        (2,554,457)
----------------------------------------------------------------------------------------------------------------------
Investing Activities
  Purchases of property and equipment, net                                             (12,764)            (57,391)
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                  (12,764)            (57,391)
----------------------------------------------------------------------------------------------------------------------
Financing Activities
  Proceeds from (repayments to) bank line of credit                                    (10,000)            600,000
  Proceeds from issuance of convertible bonds                                          150,000             800,000
  Purchase and retirement of treasury stock                                                  0              (1,018)
  Proceeds from exercise of stock options, net                                               0              11,809
  Proceeds from the issuance of stock, net of issuance                                 381,396                   0
  costs
----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                              521,396           1,410,791
----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                              (43,143)         (1,201,057)

Cash and cash equivalents
  Beginning of period                                                                1,221,691           2,338,552
----------------------------------------------------------------------------------------------------------------------
   End of period                                                                  $  1,178,548       $   1,137,495
----------------------------------------------------------------------------------------------------------------------

Supplemental information not affecting cash flow
   Conversion of bonds payable to preferred stock                                 $  1,000,000       $           0
   Conversion of accounts payable to common stock                                       45,000                   0
======================================================================================================================`

See notes to consolidated financial statements.

5

---

DERMA SCIENCES, INC.Notes To Consolidated Financial Statements (Unaudited)
____________________________________________________________________________

## Note 1  The Company

Derma Sciences,
Inc., and its subsidiary (the Company), is a full line provider of
advanced wound 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.
Genetic Labs markets proprietary wound care products, primarily wound closure
strips, specialty fasteners and net dressings. Sales are made primarily to
medical supply distributors throughout the United States and in foreign
countries, mainly Europe, utilizing independent sales representatives. 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.

On October 29,
1998, the Company acquired all of the issued and outstanding stock of Sunshine
Products, Inc. (Sunshine Products), in a business combination
accounted for as a purchase. Sunshine Products is a manufacturer of general
purpose and specialized skincare products for hospitals, nursing homes and other
institutional facilities.

## Note 2  Summary of Significant Accounting
Policies

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 upon consolidation.

The preparation
of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

For purposes of
presenting cash flows, 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.

## Note 3  Basis of Presentation

The accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 2000, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 1999, included in Form 10-KSB, as amended, filed
with the Securities and Exchange Commission.

6

---

DERMA SCIENCES, INC.Notes To Consolidated Financial Statements (Unaudited)
____________________________________________________________________________

## Note 4  Goodwill and Other
Intangibles

`As of September 30, 2000
                                             ------------------------

                                   Cost Basis          Accumulated                   Net
                                   ----------          Amortization                  ---
                                                       ------------


Goodwill                           $1,497,365              $253,898           $1,243,467
Other Intangibles                     444,067               264,031              180,036
                                      -------               -------              -------

         Totals                    $1,941,432              $517,929           $1,423,503
                                   ==========              ========           ==========`

## Note 5  Income Taxes

At December 31,
1999, the Company has net operating loss carryforwards of approximately
$6,200,000 for federal tax purposes that begin to expire in years 2012 through
2019. For state tax purposes, the Company has net operating loss carryforwards
of $4,100,000 that expire in years 2004 through 2009. During 1998, the Company
had a change in control as defined by the Internal Revenue Code Section 382.
Consequently, certain limitations may apply to limit the timing and amount of
such net operating loss carryforwards.

## Note 6  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 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 one share of Series A Preferred Stock convertible
into one share of Common Stock and 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 of
$6.00 per Series B Unit. Each Series B Unit consists of one share of Series B
Preferred Stock convertible into one share of Common Stock and 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 the bondholders extended the maturity of the Series C Bonds until January
7, 2001. The Series C Bonds pay interest only, at New York prime, until
maturity. 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. In July 2000, bondholders owning $375,000 in aggregate
principal amount of the Series C Bonds

7

---

DERMA SCIENCES, INC.Notes To Consolidated Financial Statements (Unaudited)
____________________________________________________________________________

## Note 6  Convertible Bonds
(Continued)

converted the principal of their Series C Bonds into
modified Series E Units at the rate $0.75 per Unit. 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. Investors who
converted their bonds in March 2000 have had their conversions recast so as to
receive conversion terms equal to those of the August 2000 conversion.

Series D

On December 29,
1999, the Company completed a private placement of its Series D Convertible
Bonds (Series D Bonds) in which an aggregate of $600,000 was raised.
The Series D Bonds originally matured on December 31, 2000. However, in March of
2000 the bondholders extended the maturity of the Series D Bonds until January
7, 2001. The Series D Bonds pay interest only, at the prime rate, as defined,
until maturity. 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 modified Series E Units, discussed above, at the rate of
$0.75 per Unit. Investors who converted their bonds in March 2000 have had their
conversions recast so as to receive conversion terms equal to those of the July
2000 conversion of Series C Bonds.

## Note 7  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. Fractional shares resulting from the reverse split
were rounded to the next higher number of whole shares. 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) with the
above and below described rights and preferences. 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
Series A Convertible Bonds) effective as of December 31, 1997. The Series A
Preferred bears no dividend.

8

---

DERMA SCIENCES, INC.Notes To Consolidated Financial Statements (Unaudited)
____________________________________________________________________________

## Note 7  Shareholders Equity
(Continued)

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) with the above and
below designated rights and preferences. Upon authorization of the Series B
Preferred, the $4,000,000 of the outstanding Series B Convertible Bonds were
automatically converted into 666,680 Series B Units (described above under
Series B Convertible Bonds). The Series B Preferred bears no dividend.

During the first
quarter of 2000, 83,334 shares of Series B Preferred Stock were converted into
83,334 shares of Common Stock. Also, $625,000 of Convertible Bonds were
converted into 431,818 shares of Series C Preferred Stock and 148,515 shares of
Series D Preferred Stock as of March 31, 2000. During the third quarter of 2000,
$375,000 of convertible bonds were converted into 500,001 shares of Series C
Preferred 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) warrants to purchase one share
of Common Sock at $0.85 per share (Warrant(s)). The Warrants will
expire at the close of business 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 Warrants.

Stock
Purchase Warrants

At September 30,
2000, the Company had 3,327,223 warrants outstanding to purchase the Company's
common stock, all of which are currently exercisable at prices ranging from
$0.85 to $6.75 and expiring 2001 through 2009.

## Note 8  Loss Per Common Share

Basic earnings
per share is calculated by dividing net income (loss) by the weighted average
common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income (loss) by the weighted average common shares
outstanding for the period plus the dilutive effect of equity instruments. No
exercise of stock options, purchase rights, stock purchase warrants, or the
conversion of preferred stock and cumulative preferred dividends was assumed
during fiscal 2000 or 1999 because the assumed exercise of these securities
would be antidilutive.

9

---

## DERMA SCIENCES,
INC.

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

## QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1999

## Results of Operations

Net Sales and Gross Profit

Net sales for
the third quarter of 2000 decreased $101,760, or 4%, to $2,250,005 from
$2,351,765 in the third quarter, 1999. Components of this decrease were a
decrease in skin care products net sales of $34,802 and a decrease in wound care
products net sales of $66,958.

Medicaid rebates
incurred by the Company are reflected as a reduction to sales. The quarters
ended September 30, 2000 and September 30, 1999 included Medicaid rebates of
$20,100 and $27,000, respectively.

Cost of sales,
expressed as a percentage of net sales, increased from 44% in the third quarter,
1999 to 48% in the third quarter, 2000. Aggregate cost of sales increased
$49,197, or 5%, to $1,090,405 in the third quarter, 2000 from $1,041,208 in the
third quarter of 1999. This increase is attributable to the sales mix, primarily
the increase in sales of the skin care line which has a higher cost of sales.

Gross profit,
expressed as a percentage of net sales, decreased from 56% in the third quarter,
1999 to 51% in the third quarter, 2000. This decrease is attributable to the
sales mix discussed above. Aggregate gross profit decreased $150,957, or 12%, to
$1,159,600 in the third quarter, 2000 from $1,310,557 in the third quarter,
1999. The decrease in the aggregate gross profit is the net result of the
previously mentioned decrease in net sales coupled with the higher cost of sales
of the skin care line.

Operating Expenses

Operating
expenses decreased $688,520, or 33%, from $2,077,726 in the third quarter, 1999
to $1,389,206 in the third quarter, 2000. This decrease is primarily
attributable to the reduction in direct sales representatives which reduced
wages and travel costs and a reduction in legal expenses related to settled
patent infringement lawsuits.

Net Loss

The Company
generated a loss of $241,144, or $0.12 per share, for the third quarter, 2000
compared to a net loss of $777,838, or $0.59 per share, for the third quarter,
1999.

## NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999

## Results of Operations

Net Sales and Gross Profit

Net sales for
the nine months ended September 30, 2000 decreased $718,507, or 10 %, to
$6,669,798 from $7,388,305 in the nine months ended September 30, 1999.
Components of this decrease were an increase in skin care products net sales of
$146,060 offset by decreases in wound care products net sales of $864,567.

Medicaid rebates
incurred by the Company are reflected as a reduction to sales. The nine months
ended September 30, 2000 and September 30, 1999 included Medicaid rebates of
$63,347 and $110,042, respectively.

10

---

Cost of sales,
expressed as a percentage of net sales, increased from 40% in the nine months
ended September 30, 1999 to 46% in the nine months ended September 30, 2000.
Aggregate cost of sales increased $104,822, or 4%, to $3,062,511 in the nine
months ended September 30, 2000 from $2,957,689 in the nine months ended
September 30, 1999. This increase is attributable to the sales mix, primarily
due to the increase of sales of the skin care line which has a higher cost of
sales.

Gross profit,
expressed as a percentage of net sales, decreased from 60% in the nine months
ended September 30, 1999 to 54% in the nine months ended September 30, 2000.
This decrease is attributable to the sales mix discussed above. Aggregate gross
profit decreased $823,329, or 19%, to $3,607,287 in the nine months ended
September 30, 2000 from $4,430,616 in the nine months ended September 30, 1999.
The decrease in the aggregate gross profit is the net result of the previously
mentioned decrease in net sales coupled with the higher cost of sales of the
skin care line.

Operating Expenses

Operating
expenses decreased $2,375,302, or 35%, from $6,730,611 in the nine months ended
September 30, 1999 to $4,355,309 in the nine months ended September 30, 2000.
This decrease is primarily attributable to the reduction in direct sales
representatives which reduced wages and travel costs and a reduction in legal
expenses related to settled patent infringement lawsuits.

Net Loss

The Company
generated a loss of $819,764, or $0.51 per share, for the nine months ended
September 30, 2000 compared to a net loss of $2,292,722, or $1.73 per share, for
the nine months ended September 30, 1999.

## Liquidity and Capital Resources

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) warrants to purchase one share
of Common Sock at $0.85 per share (Warrant(s)). The Warrants will
expire at the close of business 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 Warrants.

Bond Conversions

On July 27,
2000, bondholders converted $375,000 in principal amount of the Companys
Series C Bonds into modified Series E Units at the rate of $0.75 per
Unit. 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.

Bond Maturities

On January 7,
2001, $25,000 and $450,000 of the Companys Series C and Series D Bonds,
respectively, will mature. The Company is in the process of negotiating an
extension of the maturities of these bonds and believes that these negotiations
will be successful.

Cash and Cash Equivalents

The
Companys cash and cash equivalents at September 30, 2000 increased
$41,053, or 4%, to $1,178,548 from $1,137,495 at September 30, 1999. The
Companys working capital at September 30, 2000 increased $681,019, or 57%,
to $1,873,183 from $1,192,164 at September 30, 1999.

11

---

Line of Credit

The Company has
a short-term line of credit facility for $1,000,000, of which $640,000 was
outstanding at September 30, 2000, at a fluctuating rate per annum equal to the
prime rate minus 1% (8.5% September 30, 2000). This line of credit is secured by
cash on deposit with the bank.

Additional Financing

The Company is
presently investigating several sources of investment capital relative to the
financing of its growth strategies. Although there can be no assurance that
these efforts will be successful, the Company believes that it will be able to
secure financing in the amounts, and upon terms, that are acceptable.

## Subsequent Events

NASDAQ Stock Market Delisting

The
Companys Common Stock was delisted from the Nasdaq SmallCap Market
effective with the close of business on October 3, 2000, for failure to maintain
a $1.00 minimum closing bid price for a prescribed 10-day trading period. The
Company is in the process of appealing the Nasdaq delisting decision.

OTC Bulletin Board Listing

Effective
October 4, 2000, the Company's Common Stock has commenced trading on the OTC
Bulletin Board under the symbol DSCI.OB.

## Forward Looking Statements

Statements that
are not historical facts, including statements about the Companys
confidence and strategies, and expectations about new or existing products,
technologies and 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 risks, impact of competitive products and prices, product
development, commercialization or technological delays or difficulties, and
trade, legal, social, financial and economic risks.

12

---

## Part II - Other Information

## Item 1. Legal Proceedings

None

## Item 6. Exhibits and Reports on
Form 8-K

(a) Exhibits.With the exception of the following, all
exhibits required by Item 601 of Regulation S-B and required hereunder, as filed
with the Securities and Exchange Commission on Form 10-KSB on March 30, 2000,
are incorporated herein by reference.

|Item | Description                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------
|     |                                                                                                           
|27   | Financial Data Schedule (filed electronically
     with the U. S. Securities and Exchange Commission only)

(b) Reports on Form 8-K.  Forms 8-K were filed on
July 27, 2000 and August 14, 2000 relative to the Series E Unit financing and on
August 1, 2000 relative to the execution of a four-year distribution agreement
with Merit Medical Systems.

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.                                                                                
|----------------------- |  | ----------------------------------------------------------------------------------------------------
|                        |  |                                                                                                     
|                        |  |                                                                                                     
|                        |  |                                                                                                     
|Date: November 13, 2000 |  | /s/ John E. Yetter
     John E. Yetter, CPA
     Chief Financial Officer
     (authorized signatory)

13

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