---

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: June 30, 2000 | Class: Common Stock, par value $.01 per share
|------------------- | ---------------------------------------------
|                    | Shares Outstanding: 1,409,272                

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

---

DERMA SCIENCES, INC.
                               FORM 10-QSB
                                   INDEX

|Description |                                                                                                   | Page
|----------- | ------------------------------------------------------------------------------------------------- | ----
|            |                                                                                                   |     
|Item 1.     | Consolidated Financial Statements                                                                 |     
|            |                                                                                                   |     
|            | Balance Sheet - June 30,
     2000                                                                | 2   
|            |                                                                                                   |     
|            | Statements of
     Operations - Three months ended June 30, 2000
     and June 30, 1999           | 3   
|            |                                                                                                   |     
|            | Statements of
     Operations - Six months ended June 30, 2000
     and June 30, 1999             | 4   
|            |                                                                                                   |     
|            | Statements of Cash Flows - Six months
     ended June 30, 2000
     and June 30, 1999             | 5   
|            |                                                                                                   |     
|            | Notes to Consolidated Financial
     Statements                                                   | 6   
|            |                                                                                                   |     
|Item 2.     | Management's Discussion and Analysis of
     Financial Condition
       and Results of Operations | 11  
|            |                                                                                                   |     

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

1

---

DERMA SCIENCES, INC.Consolidated Balance Sheets

`===========================================================================================================
                                                                          June 30,          December 31,
ASSETS                                                                      2000                1999
-----------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents                                                 $ 870,511          $ 1,221,691
Accounts receivable, net                                                  1,867,298            2,041,099
Inventories                                                               1,299,750            1,289,138
Current portion of officers' notes receivable                                19,330               19,330
  Prepaid expenses and other current assets                                 420,427              223,120
-----------------------------------------------------------------------------------------------------------
Total current assets                                                      4,477,316            4,794,378

Property and equipment, net                                                 330,637              382,542

Other Assets
Officers' notes receivable                                                   76,034               76,034
Goodwill and other intangibles, net                                       1,485,601            1,548,246
  Sundry                                                                          -                  838
-----------------------------------------------------------------------------------------------------------
Total Assets                                                            $ 6,369,588          $ 6,802,038
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------
Current Liabilities
Bank line of credit                                                         950,000          $   650,000
Accounts payable                                                          1,038,258            1,261,620
  Accrued expenses and other current liabilities                            413,496              493,964
-----------------------------------------------------------------------------------------------------------
Total current liabilities                                                 2,401,754            2,405,584
-----------------------------------------------------------------------------------------------------------
Long-Term Liabilities
  Convertible bonds                                                         850,000            1,325,000
-----------------------------------------------------------------------------------------------------------
Total liabilities                                                         3,251,754            3,730,584
-----------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value, 30,000,000 share
authorized;                                                             $    14,092         $     13,259
  issued and outstanding: 1,409,272 and 1,325,938 shares in 2000 and
  1999, respectively
Convertible preferred stock, $.01 par value; 11,750,000
shares
  authorized; issued and outstanding: 1,511,179 and 1,014,180 in 2000        14,809                9,392
  and 1999, respectively

Additional paid-in capital                                               11,416,947           10,798,197
Accumulated deficit                                                      (8,328,014)          (7,749,394)
-----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                                3,117,834            3,071,454
-----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity                              $ 6,369,588          $ 6,802,038
===========================================================================================================`

See notes to consolidated financial statements.

2

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DERMA SCIENCES, INC.Consolidated Statement of Operations

`=========================================================================================================
                                                                               Three months ended
                                                                                    June 30,
                                                                             2000              1999
---------------------------------------------------------------------------------------------------------
Net sales                                                               $ 2,263,174       $ 2,452,722

Cost of sales                                                             1,002,592         1,017,518
---------------------------------------------------------------------------------------------------------
Gross Profit                                                              1,260,582         1,435,204
---------------------------------------------------------------------------------------------------------
Operating expenses                                                        1,478,503         2,489,502
Other income and (expense), net                                             (32,280)            8,356
---------------------------------------------------------------------------------------------------------
Net Loss                                                                $  (250,201)      $(1,045,942)
---------------------------------------------------------------------------------------------------------
Loss per common share basic and diluted                                 $     (0.18)      $     (0.79)
---------------------------------------------------------------------------------------------------------
Shares used in computing loss per common share                            1,409,272         1,324,678
=========================================================================================================`

See notes to consolidated financial statements.

3

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DERMA SCIENCES, INC.Consolidated Statement of Operations

`=========================================================================================================
                                                                               Six months ended
                                                                                   June 30,
                                                                             2000              1999
--------------------------------------------------------------------------------------------------------
Net sales                                                               $ 4,419,793        $ 5,036,540

Cost of sales                                                             1,972,106          1,916,480
--------------------------------------------------------------------------------------------------------
Gross Profit                                                              2,447,687          3,120,060
--------------------------------------------------------------------------------------------------------
Operating expenses                                                        2,966,105          4,652,885
Other income and (expense), net                                             (60,203)            17,942
--------------------------------------------------------------------------------------------------------
Net Loss                                                                $  (578,621)      $ (1,514,883)
--------------------------------------------------------------------------------------------------------
Loss per common share basic and diluted                                 $     (0.41)      $      (1.18)
--------------------------------------------------------------------------------------------------------
Shares used in computing loss per common share                            1,409,272          1,285,918
=========================================================================================================`

See notes to consolidated financial statements.

4

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DERMA SCIENCES, INC.Consolidated Statement of Cash Flows

`===========================================================================================================
                                                                                  Six months ended
                                                                                      June 30,
                                                                              2000               1999
-----------------------------------------------------------------------------------------------------------
Operating Activities
  Net loss                                                              $  (578,621)       $ (1,514,883)
  Adjustments to reconcile net loss to
    net cash used in operating activities
     Depreciation and amortization                                          122,544             156,826
     Medicaid rebate adjustments                                                  0                   0
     Provision for bad debts                                                 60,000              26,400
     Changes in operating assets and
       liabilities, net of effects
       of purchased business
         Accounts receivable                                                113,802            (664,736)
         Inventories                                                        (10,612)            193,405
         Prepaid expenses and other current assets                         (197,307)           (132,685)
         Other assets                                                           838               2,731
         Accounts payable                                                  (223,362)            321,129
         Accrued expenses and other current liabilities                     (80,468)            (18,677)
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                       (793,186)        (1,630,490)
-----------------------------------------------------------------------------------------------------------
Investing Activities
  Purchases of property and equipment, net                                   (7,994)            (39,553)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                        (7,994)            (39,553)
-----------------------------------------------------------------------------------------------------------
Financing Activities
  Proceeds from increase in bank line of credit                             300,000             700,000
  Proceeds from issuance of bonds                                           150,000                   0
  Purchase and retirement of treasury stock                                       0              (1,018)

  Proceeds from exercise of stock options,                                        0              11,809
  net
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                   450,000             710,791
-----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                  (351,180)           (959,252)

Cash and cash equivalents
  Beginning of period                                                     1,221,691           2,338,552
-----------------------------------------------------------------------------------------------------------
   End of period                                                            870,511           1,379,300
-----------------------------------------------------------------------------------------------------------

Supplemental information not affecting cash flow
   Conversion of bonds payable to preferred stock                       $   625,000        $          0
===========================================================================================================`

See notes to consolidated financial statements.

5

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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 generally accepted
accounting principles 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.

6

---

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

## Note 3 - Basis of Presentation

The accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended June 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.

## Note 4  Goodwill and Other Intangibles

`As of June 30, 2000
                           ---------------------------------------------------
                                               Accumulated
                           Cost Basis          Amortization             Net
                           ----------          ------------             ---

Goodwill                   $1,497,365            $196,305           $1,301,060
Other Intangibles             444,067             259,526              184,541
                           ----------            --------           ----------

         Totals            $1,941,432            $455,831           $1,485,601
                           ==========            ========           ==========`

## 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.

7

---

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

## 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. Series C Bonds may be converted, at the option of the bondholder, into
795,455 units (Series C Units) each consisting of one share of
Series C Convertible Preferred Stock (Series C Preferred Stock)
convertible into one share of Common Stock and one warrant to purchase one share
of Common Stock at a price of $1.10. In March 2000, bondholders owning $475,000
in aggregate principal amount of the Series C Bonds converted the principal and
accrued interest of their Series C Bonds into Series C Units.

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 $450,000 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. Series D Bonds may be converted, at the option of the
bondholder, into 444,444 units (Series D Units) each consisting of
one share of Series D Convertible Preferred Stock (Series D Preferred
Stock) convertible into one share of Common Stock and one warrant to
purchase one share of Common Stock at a price of $1.0125. In March 2000,
bondholders owning $150,000 in aggregate principal amount of the Series D Bonds
converted the principal and accrued interest of their Series D Bonds into Series
D Units.

8

---

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

## 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 and there are no conversion price reset or
anti-dilution provisions.

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 666,880 Series B Units (described above under
Series B Convertible Bonds). The Series B Preferred bears no dividend and there
are no conversion price reset or anti-dilution provisions.

During the first
quarter of 2000, 83,334 shares of Series A 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.

Stock
Purchase Warrants

At June 30,
2000, the Company had 2,532,728 warrants outstanding to purchase the Company's
common stock, all of which are currently exercisable at prices ranging from
$1.01 to $6.75 and expiring 1999 through 2009.

9

---

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

## 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.

## Note 9 - Subsequent Events

Equity
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.

The NASDAQ
Stock Market Listing

The Nasdaq
Listing Qualifications Panel (the Panel), by its decision dated July
25, 2000, had de-listed the Companys common stock from Nasdaq by virtue of
the Companys failure to comply with the Panels July 7, 2000 decision
granting the Company until July 17, 2000 to evidence net tangible assets of not
less then $2.5 million.

The Company, on
July 26, 2000, provided the Panel with evidence of the Company's receipt of
$400,000 in equity investments and the conversion into equity of $375,000 of the
Company's convertible bonds. See Equity Financing above.

As a result, the
Panel determined that: 1) the Company complied as of July 26, 2000 with the
Panel's $2.5 million threshold, and 2) despite the Company's failure to meet the
original July 17, 2000 deadline for achieving the $2.5 million net tangible
assets threshold, the Company's common stock would be re-listed on Nasdaq
effective with the open of business on August 1, 2000.

The Panels
July 28, 2000 decision also reaffirmed the Panels July 7, 2000 decision
granting the Company until Sept. 15, 2000 to achieve a minimum closing bid price
of at least $1.00, and immediately thereafter, to evidence a closing bid price
of at least $1.00 for a minimum of 10 consecutive trading days. For the duration
of the foregoing temporary exception, the Companys Nasdaq symbol will be
DSCIC. If the Company meets the terms of the exception, its common stock will
continue to be listed on Nasdaq.

The Company is
taking steps which it believes will enable it to meet the terms of the above
described exception. However, there can be no assurance that the Company will
meet these terms. If the Companys common stock should cease to be listed
on the Nasdaq SmallCap Market, the common stock will be eligible to trade on the
OTC-Bulletin Board.

10

---

## DERMA SCIENCES, INC.

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

## Results of Operations

Net Sales and Gross Profit

Net sales for
the second quarter of 2000 decreased $189,548, or 8%, to $2,263,174 from
$2,452,722 in the second quarter, 1999. The decrease in net sales is the result
of an increase in Sunshine Products net sales of $109,161 offset by decreases in
Derma Sciences net sales of $298,709.

Medicaid rebates
incurred by the Company are reflected as a reduction to sales. The quarters
ended June 30, 2000 and June 30, 1999 included Medicaid rebates of $20,300 and
$23,000, respectively.

Cost of sales,
expressed as a percentage of net sales, increased from 42% in the second
quarter, 1999 to 44% in the second quarter, 2000. Aggregate cost of sales
decreased $14,926, or 2%, to $1,002,592 in the second quarter, 2000 from
$1,017,518 in the second quarter of 1999. This decrease is attributable to the
sales mix, primarily the addition of the Sunshine Products skin care line, which
has a higher cost of sales.

Gross profit,
expressed as a percentage of net sales, decreased from 58% in the second
quarter, 1999 to 56% in the second quarter, 2000. This decrease is attributable
to the sales mix, primarily the addition of the Sunshine Products skin care
line, which has a higher cost of sales. Aggregate gross profit decreased
$174,622, or 12%, to $1,260,582 in the second quarter, 2000 from $1,435,204 in
the second quarter, 1999. The decrease in the aggregate gross profit is the net
result of the previously mentioned increase in net sales offset by the higher
cost of sales of the Sunshine Product skin care line.

Operating Expenses

Operating
expenses decreased $1,010,999, or 41%, from $2,489,502 in the second quarter,
1999 to $1,478,503 in the second quarter, 2000. This decrease is primarily
attributable to the reduction in direct sales representatives, which decreased
wages and travel costs and reduction in legal expenses related to settled Patent
infringement lawsuits.

Net Loss

The Company
generated a loss of $250,201, or $0.18 per share, for the second quarter, 2000
compared to a net loss of $1,045,942, or $0.79 per share, for the second
quarter, 1999.

11

---

## SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX
MONTHS ENDED JUNE 30, 1999

## Results of Operations

Net Sales and Gross Profit

Net sales for
the six months ended June 30, 2000 decreased $616,747, or 12 %, to $4,419,793
from $5,036,540 in the six months ended June 30, 1999. The decrease in net sales
is the result of an increase in Sunshine Products net sales of $197,868 offset
by decreases in Derma Sciences net sales of $814,615.

Medicaid rebates
incurred by the Company are reflected as a reduction to sales. The six months
ended June 30, 2000 and June 30, 1999 included Medicaid rebates of $43,247 and
$87,042, respectively.

Cost of sales,
expressed as a percentage of net sales, increased from 38% in the six months
ended June 30, 1999 to 45% in the six months ended June 30, 2000. Aggregate cost
of sales increased $55,626, or 3%, to $1,972,106 in the six months ended June
30, 2000 from $1,916,480 in the six months ended June 30, 1999. This increase is
attributable to the sales mix, primarily the addition of the Sunshine Products
skin care line, which has a higher cost of sales.

Gross profit,
expressed as a percentage of net sales, decreased from 62% in the six months
ended June 30, 1999 to 55% in the six months ended June 30, 2000. This decrease
is attributable to the sales mix, primarily the addition of the Sunshine
Products skin care line, which has a higher cost of sales. Aggregate gross
profit decreased $672,373, or 22%, to $2,447,687 in the six months ended June
30, 2000 from $3,120,060 in the six months ended June 30, 1999. The decrease in
the aggregate gross profit is the net result of the previously mentioned
increase in net sales offset by the higher cost of sales of the Sunshine Product
skin care line.

Operating Expenses

Operating
expenses decreased $1,686,780, or 36%, from $4,652,885 in the six months ended
June 30, 1999 to $2,966,105 in the six months ended June 30, 2000. This decrease
is primarily attributable to the reduction in direct sales representatives,
which decreased wages and travel costs and reduction in legal expenses related
to settled patent infringement lawsuits.

Net Loss

The Company
generated a loss of $578,621, or $0.41 per share, for the six months ended June
30, 2000 compared to a net loss of $1,514,883, or $1.18 per share, for the six
months ended June 30, 1999.

## Liquidity and Capital Resources

The
Companys cash and cash equivalents at June 30, 2000 decreased $508,789, or
37%, to $870,511 from $1,379,300 at June 30, 1999. The Companys working
capital at June 30, 2000 increased $166,134, or 9%, to $2,075,562 from
$1,909,428 at June 30, 1999.

The Company has
a short-term line of credit facility for $1,000,000, of which $950,000 was
outstanding at June 30, 2000, at a fluctuating rate per annum equal to the prime
rate minus 1%, (8.5% June 30, 2000). This line of credit is secured by cash on
deposit with the bank.

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.

12

---

## Subsequent Events

Equity 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.

The NASDAQ Stock Market Listing

The Nasdaq
Listing Qualifications Panel (the Panel), by its decision dated July
25, 2000, had de-listed the Companys common stock from Nasdaq by virtue of
the Companys failure to comply with the Panels July 7, 2000 decision
granting the Company until July 17, 2000 to evidence net tangible assets of not
less then $2.5 million.

The Company, on
July 26, 2000, provided the Panel with evidence of the Company's receipt of
$400,000 in equity investments and the conversion into equity of $375,000 of the
Company's convertible bonds. See Equity Financing above.

As a result, the
Panel determined that: 1) the Company complied as of July 26, 2000 with the
Panel's $2.5 million threshold, and 2) despite the Company's failure to meet the
original July 17, 2000 deadline for achieving the $2.5 million net tangible
assets threshold, the Company's common stock would be re-listed on Nasdaq
effective with the open of business on August 1, 2000.

The Panels
July 28, 2000 decision also reaffirmed the Panels July 7, 2000 decision
granting the Company until Sept. 15, 2000 to achieve a minimum closing bid price
of at least $1.00, and immediately thereafter, to evidence a closing bid price
of at least $1.00 for a minimum of 10 consecutive trading days. For the duration
of the foregoing temporary exception, the Companys Nasdaq symbol will be
DSCIC. If the Company meets the terms of the exception, its common stock will
continue to be listed on Nasdaq.

The Company is
taking steps which it believes will enable it to meet the terms of the above
described exception. However, there can be no assurance that the Company will
meet these terms. If the Companys common stock should cease to be listed
on the Nasdaq SmallCap Market, the common stock will be eligible to trade on the
OTC-Bulletin Board.

## 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.

# Part II - Other Information

## Item 1. Legal Proceedings

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## 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. On April 24, 2000 the Company
filed a current report on Form 8-K disclosing a restructuring involving its
sales and executive personnel. On May 19, 2000 the Company filed a current
report on Form 8-K disclosing further modifications of its selling strategy and
restructuring of its sales force. On May 31, 2000 the Company filed an amended
current report on Form 8-K relative to the further modifications of its selling
strategy and restructuring of its sales force. On June 14, 2000 the Company
filed a current report on Form 8-K disclosing the Chairman and CEO had agreed to
devote his full time to his positions with the Company.

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: August 14, 2000 |  | /s/ Stephen T. Wills
     Stephen T. Wills, CPA, MST
     Vice President and Chief Financial
     Officer

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