SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB


[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999

[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____ to ______

Commission file number: 1-31070


                              DERMA SCIENCES, INC.
             (Exact name of Registrant as specified in its charter)

    Pennsylvania                                                23-2328753
--------------------------------                            ------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

214 Carnegie Center, Suite 100, Princeton, New Jersey               08540
--------------------------------------------------------------  ---------------
(Address of principal executive offices)                         (Zip code)

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


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

     Title of each class              Name of each exchange on which registered

     Common Stock, $.01 par value                  Boston Stock Exchange
     Common Stock, $.01 par value                  Pacific Stock Exchange

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

                                 Title of Class

                          Common Stock, $.01 par value

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

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

         Issuer's revenues for its most recent fiscal year were $10,055,675.

         The aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average bid and asked prices of such stock as of
March 24, 1999, was approximately $2,471,034.

         The number of shares outstanding of each of the issuer's classes of
common equity, as of March 24, 2000, was 1,409,272.

         Documents Incorporated by Reference:  None


<PAGE>

                                     Part I
                                     ------

ITEM 1.  DESCRIPTION OF BUSINESS

Overview
--------

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

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

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

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

The Company's Markets
---------------------

CHRONIC WOUND CARE

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

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

WOUND CLOSURE STRIPS AND FASTENERS

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

         The Company's nasal tube and catheter fasteners  facilitate  attachment
of suction tubes,  feeding tubes,  urinary  catheters,  gastrostomy tubes, wound
drainage systems, IV's and chest tubes. These fasteners incorporate

                                       1

<PAGE>


dynamic tape-to-skin  adhesion which minimizes  irritation,  blistering and skin
shear.  Further,  the fasteners' single piece  construction  permits adoption of
rapid and standardized attachment procedures.

PERSONAL SKIN CARE

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

The Company's Products
----------------------

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

WOUND PREVENTION AND TREATMENT

ACCU-Cleanse                       Wound  irrigator that  provides an  even flow
                                   of irrigation  solution into  and around  the
                                   wound.

DermaCol                           Hydrocolloid  dressing sold in various sizes.
                                   Used as a primary or  secondary  dressing for
                                   the   management  of   moderately   exudating
                                   wounds.

DermaFilm                          Film dressing,  sold in various sizes, with a
                                   high moisture vapor transfer rate.  Used as a
                                   primary dressing on partial  thickness wounds
                                   and  secondary  dressing  on  full  thickness
                                   wounds with moderate to heavy exudate.

Dermagran Ointment                 Topical  ointment  with  a  lanolin
                                   odor, packaged in both jars and tubes. Active
                                   ingredient:  aluminum  hydroxide gel. Used to
                                   manage  stage I and II  pressure  and  venous
                                   ulcers,  incisions,   burns  and  other  skin
                                   irritations.

Dermagran Spray                    Colorless, odorless liquid, packaged in
                                   translucent  plastic  bottles with pump spray
                                   nozzles.  Active  ingredient:  zinc  acetate.
                                   Used to manage  stage I and II  pressure  and
                                   venous  ulcers,  incisions,  burns  and other
                                   skin irritations.

Dermagran Wet Dressing             Sterile 4" x 8", 12 ply
(Saline)                           gauze   dressing   saturated   with   sterile
                                   solution,  packaged  in foil  envelopes  with
                                   peel-down  tabs.  Used for the  management of
                                   pressure  sores,  venous  ulcers,  incisions,
                                   burns and skin irritations.

DermaSite                          Transparent,  vapor  permeable  film dressing
                                   sold in various sizes. Used as a dressing for
                                   partial  thickness  wounds  and as a fixation
                                   device.

DermaStat                          Calcium  alginate  dressing,   without  zinc,
                                   packaged  in  various  sizes.  Used  for  the
                                   management of moderately to heavily exudating
                                   wounds such as pressure ulcers, venous stasis
                                   ulcers and dermal lesions.

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

In Between                         Perineal spray skin cleanser. Used to
                                   remove dry fecal  matter  and odor  resulting
                                   from incontinence.

MPH Ointment                       Topical ointment,  packaged in pumps
                                   and jars,  containing allantoin and aloe vera
                                   gel. Used to provide protective, long lasting
                                   barrier ointment for perineal care associated
                                   with incontinency.


                                       2

<PAGE>


NutraCleanse                       Saline wound cleanser with  moisturizing  and
                                   lubricating  properties  packaged  in a  four
                                   ounce plastic bottle.  Used to cleanse dermal
                                   wounds and contribute to the maintenance of a
                                   mildly acidic wound environment.

NutraCol                           Hydrocolloid   dressing  with  zinc  sold  in
                                   various sizes. Used as a primary or secondary
                                   dressing  for the  management  of  moderately
                                   exudating wounds.

NutraDress                         Sterile  4"  x  8",  12  ply  gauze  dressing
                                   saturated  with  sterile  solution  and trace
                                   amounts of zinc,  packaged in foil  envelopes
                                   with peel-down  tabs. Used for the management
                                   of pressure sores, venous ulcers,  incisions,
                                   burns and skin irritations.

NutraFil                           Advanced zinc hydrogel  formulation  packaged
                                   in tubes.  Used for the  management of stages
                                   II  through  IV  pressure   sores,   diabetic
                                   ulcers,  venous stasis  ulcerations,  thermal
                                   burns,  surgical  incisions  and  superficial
                                   lacerations, cuts or abrasions.

NutraGauze                         Advanced    zinc     hydrogel     formulation
                                   impregnated  in gauze,  available  in various
                                   sizes.  Used for the  management of stages II
                                   through IV pressure sores,  diabetic  ulcers,
                                   venous  stasis  ulcerations,  thermal  burns,
                                   surgical     incisions    and     superficial
                                   lacerations, cuts or abrasions.

NutraShield Perineal Protectant    Topical ointment packaged
                                   in tubes.  Used to provide  protective,  long
                                   lasting  barrier  ointment for perineal  care
                                   associated with incontinency.

NutraStat                          Calcium alginate  dressing,  containing zinc,
                                   packaged  in  various  sizes.  Used  for  the
                                   management of moderately to heavily exudating
                                   wounds,  such  as  pressure  ulcers,   venous
                                   stasis ulcers and dermal lesions.

NutraVue                           Clear  hydrogel  packaged in tubes.  Used for
                                   the  management  of all  stages  of  pressure
                                   sores,  surgical  incisions,  thermal  burns,
                                   cuts  and   abrasions   and   venous   stasis
                                   ulcerations.

NutraWash                          Cleanser  packaged in an eight  ounce  opaque
                                   plastic bottle with a pump spray nozzle. Used
                                   to remove dry fecal matter and odor resulting
                                   from incontinence.

WOUND CLOSURE

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

Suture Strip                       Latex-free, water-resistant, economical
                                   wound  closure   strip.   Made  of  the  same
                                   non-woven  material as Suture  Strip(R) Plus.
                                   Used  in  various  surgical  and  wound  care
                                   procedures.

Suture Strip Plus(R)               Latex-free,   water-resistant
                                   wound  closure  strip.  Made of a macroporous
                                   non-woven   polyamide   with  skin   friendly
                                   adhesive.  Used for primary closure and early
                                   suture removal.

CATHETER FASTENERS

NG Strip                           Tube fastener made of flexible material
                                   designed to maximize  adhesion  and  minimize
                                   irritation,   blistering   and  skin   shear,
                                   packaged  in  various  sizes.  Used to secure
                                   nasal or feeding tubes to the nose.

                                       3

<PAGE>


Percu-Stay                         Sterile,  self-adhesive catheter fastener for
                                   percutaneous  drainage  catheters.  Made of a
                                   combination    of    a     moisture-absorbent
                                   hydrocolloid   surrounded   by   a   pressure
                                   sensitive  adhesive on a  non-woven  backing.
                                   Used   to   secure   percutaneous    drainage
                                   catheters.

UC Strip/Cath-Strip                Catheter  tubing  fastener
                                   made  of  a  flexible  material  designed  to
                                   maximize  adhesion and  minimize  irritation,
                                   blistering  and  skin  shear,   available  in
                                   various  packages.  Used for securing urinary
                                   and gastrostomy catheter tubing to the skin.

PERSONAL SKIN CARE

Antibacterial Soap                 Antibacterial  hand  soap with  glycerin  and
                                   aloe  vera. Active Ingredient: chloroxylenol.
                                   Used  as a hand soap for  protection  against
                                   both    gram-positive    and    gram-negative
                                   organisms as well as yeasts and fungi.

ApriVera                           Odor reducing,  non-alkaline lotion body and
                                   hair cleanser with aloe vera.

Bathe Away                         Body and hair cleanser containing  glycerin,
                                   coconut oil products and chamomile.

Hydro-Soft                         Concentrated  blend  of skin  emollients  and
                                   gentle skin  cleansers for  moisturizing  and
                                   conditioning  the skin. Used in any whirlpool
                                   and hydrotherapy unit.

Mysotrol                           Clear gel no-rinse hand sanitizer packaged in
                                   squeeze bottles.  Used as a hand sanitizer to
                                   provide germicidal and virucidal  protection.
                                   Meets   OSHA   protocol   for  a   healthcare
                                   handwash.

Optima                             Bath  additive  or   after-bath   moisturizer
                                   enhanced  with  acetylated  lanolin  alcohol.
                                   Used to lubricate and soften the skin.

Skin Care Lotion                   Lotion to moisturize and soften the skin.

Swash                              Body and hair cleanser.

Therabath                          Lotion type body and hair cleanser.

Three to One                       Economical   concentrated   body   and   hair
                                   cleanser.

Whirlpool/Hardsurface              Detergent  and  disinfectant.  Used  to clean
Disinfectant                       and  disinfect any whirlpool or  hardsurface.
                                   Effective   against   a   broad   range    of
                                   microorganisms.


Distribution and Sales
----------------------

DOMESTIC

         The Company employs a direct sales force and utilizes drug wholesalers,
specialty dealers and medical - surgical distributors to sell and distribute its
products in the  hospital,  home health,  nursing  home,  and  physician  office
markets.  The  Company's  direct sales force  consists of a Vice  President  for
Sales, a Vice President for National Accounts,  a Vice President for Distributor
Programs,  three regional managers,  twelve sales  representatives and forty-two
manufacturer's representatives.

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

                                       4

<PAGE>


INTERNATIONAL

         The   Company's   wound  care   products  are   distributed   and  sold
internationally pursuant to various licensing and distribution  agreements.  The
Company sells products in the following  countries:  Austria,  Belgium,  Canada,
Chile,  Columbia,   Costa  Rica,  Denmark,  Egypt,  Finland,   France,  Germany,
Guatemala,  Indonesia,  Israel, Italy, Netherlands, New Zealand, Norway, Panama,
Peru, Philippines,  Portugal, Puerto Rico, Spain, Sweden,  Switzerland,  Taiwan,
United Kingdom,  Uruguay and Venezuela.  Sales generated from foreign  countries
are payable in U.S. dollars and are not material.

eCOMMERCE

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

Competition
-----------

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

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

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

Product Sourcing
----------------

         The Company maintains manufacturing facilities solely for manufacturing
its skin care products. The manufacture of all other products is outsourced. The
principal  manufacturers of the Company's  products are: Applied Labs (Dermagran
Spray and  Nutrawash);  Advanced  Medical  Solutions Ltd.,  formerly  Innovative
Technologies,  Inc. (DermaCol,  NutraCol,  DermaStat,  NutraStat,  DermaSite and
DermaFilm);  Technol, Inc. (NutraFil gauze);  Topiderm, Inc. (Dermagran Ointment
and  NutraShield);  and TapeMark Company (LC Strip,  Suture Strip,  Suture Strip
Plus(R), NG Strip, Percu-Stay, UC Strip/Cath-Strip).

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

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

                                       5

<PAGE>


Patents, Proprietary and Non-Proprietary Technology
---------------------------------------------------

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

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

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

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

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

Government Regulation
---------------------

SCOPE OF REGULATION

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

MEDICAL DEVICES

         The following products are registered with the FDA as Class I "devices"
pursuant to the regulations  under Section 510(k) of the FDC Act:  Dermagran Wet
Dressing (Saline), Dermagran Zinc-Saline Wet Dressing, NutraCleanse,  DermaFilm,
DermaSite,  NutraCol,  DermaCol,  NutraFil,  NutraVue,  NutraGauze,  NutraDress,
NutraStat, DermaStat, Suture Strip, NG Strip, Cath-Strip and UC Strip.

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

                                       6

<PAGE>


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

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

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

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

         All of the devices currently marketed by the Company have been found by
the FDA to be substantially equivalent to a Preamendment Device.

OVER-THE-COUNTER DRUGS

         Prescription drugs may be dispensed only by or on the prescription of a
licensed  practitioner  and must be labeled:  "Caution:  Federal  law  prohibits
dispensing  without  prescription."  In  general,  a drug is  restricted  to the
prescription  class  if it  is  not  safe  for  use  except  under  professional
supervision.  All drugs having  characteristics that do not require prescription
dispensing are  considered to be  over-the-counter  ("OTC") drugs.  Those of the
Company's  products which are classified as  over-the-counter  drugs pursuant to
the FDC Act are: Dermagran Spray,  Dermagran Ointment,  Mysotrol,  Antibacterial
Soap and NutraShield Perineal Protectant.

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

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

                                       7

<PAGE>


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

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

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

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

FOREIGN REGULATORY AUTHORITIES

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

OTHER REGULATORY REQUIREMENTS

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

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

Third Party Reimbursement
-------------------------

         The Company sells its wound care products to nursing homes,  hospitals,
home  healthcare  agencies  and  similar  institutions.  The  patients  at these
institutions  for whose care the  Company's  products  are  purchased  often are
covered by medical insurance.  Accordingly,  the Company's  customers  routinely
seek reimbursement for the cost of

                                       8

<PAGE>


the  Company's  wound care  products  from third party  payors such as Medicare,
Medicaid,   health   maintenance   organizations  and  private   insurers.   The
availability  of  reimbursement  from such third party  payors is a  significant
factor in the Company's sales of wound care products.

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

         Medicaid  reimbursement  of the  Company's  products is dependent  upon
Company paid rebates to state Medicaid agencies.  Effective January 1, 1991, the
Omnibus Budget Reconciliation Act of 1990 requires pharmaceutical  companies, as
a condition of the  eligibility of its products for Medicaid  reimbursement,  to
enter into a rebate  agreement  with the federal  government.  Only drugs of the
pharmaceutical  companies  having  such rebate  agreements  are covered by state
Medicaid programs. Pharmaceutical companies participating in the Medicaid rebate
program  must remit to state  Medicaid  agencies a  formula-based  rebate  which
varies from quarter to quarter in accordance  with the  Company's  quarterly net
sales and the average  manufacturer price of the individual  products.  Prior to
1998,  Medicaid  rebates  ranged  between 3% and 5% of the  Company's net sales.
During  1998 and 1999,  Medicaid  rebates  represented  approximately  1% of net
sales.

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

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

         Federal  and  state  governments,  as well as  private  insurers,  will
continue  their  pursuit of  programs  designed to control or reduce the cost of
health  care.   These  cost  cutting   measures   may  include   reductions   in
reimbursements and/or increases in mandatory rebates for wound care products. As
such, there is uncertainty as to whether, and to what extent, reimbursements for
the  Company's  products  will  continue  to be  available.  Likewise,  there is
uncertainty as to the future extent of the Company's rebate obligations.

Product Development
-------------------

         The Company does not conduct  in-house product  development  activities
and relies for the expansion of its product lines upon the purchase or licensing
of products from outside sources.

Employees
---------

         The  Company  maintained  62  full-time  and 3 part-time  employees  at
December  31,  1999.  The  Company  considers  its  employee   relations  to  be
satisfactory.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's  executive offices are located in Princeton,  New Jersey.
The Company leases these offices on a month-to-month  basis at a price of $1,981
per  month.  The  Company  has a lease for  offices  located  in  Wilkes  Barre,
Pennsylvania,  at a rate of $3,088 per  month,  that  expires  June,  2000.  The
Company has a  month-to-month  lease for 8,200 square feet of warehouse space in
Old Forge, Pennsylvania,  at a rate of $1,750 per month. The Company has a lease
for 24,000 square feet of office and warehouse space in St. Louis,  Missouri, at
a rate $7,298 per month which expires in August, 2002 and a month-to-month lease
for 2,000 square feet of warehouse space, also in St. Louis, at a rate of $1,000
per month.

                                       9

<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party to any material litigation.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company did not submit any matter to a vote of shareholders  during
the fourth quarter, 1999.


                                     Part II
                                     -------

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         The Common  Stock of the  Company is traded on Nasdaq  under the symbol
"DSCI."  The  Common  Stock is also  traded  on the  Boston  and  Pacific  Stock
Exchanges under the symbol "DMS." The Company's  Common Stock commenced  trading
on May 13, 1994. The following  table sets forth the high and low bid prices for
the  Company's  Common  Stock as reported by Nasdaq and,  where  applicable,  as
adjusted for a 1:5 stock split implemented on August 2, 1999:

                    Quarter Ended                         High        Low
                    -------------                         ----        ---
                    March 31, 1998                       $10.63      $5.00

                    June 30, 1998                        $11.25      $7.50

                    September 30, 1998                    $8.13      $3.12

                    December 31, 1998                     $5.63      $3.13

                    March 31, 1999                        $3.75      $3.13

                    June 30, 1999                         $3.91      $2.03

                    September 30, 1999                    $1.38      $0.88

                    December 31, 1999                     $2.63      $1.94


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

         As of the close of business on March 24, 2000, there were 1,243 holders
of record of the Common Stock.

         The Company has paid no cash  dividends  in respect of its Common Stock
and does not intend to pay cash dividends in the near future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Introduction
------------

         Since its formation in September of 1984,  the Company has been engaged
in the development, marketing and sale of topical preparations for the treatment
of chronic,  non-healing  wounds.  In 1998 the Company  acquired two  companies,
Genetic  Laboratories  Wound Care, Inc. ("Genetic Labs"), and Sunshine Products,
Inc.,  ("Sunshine  Products"),  to become a full-line provider of advanced wound
and skin care products. Genetic Labs specializes in

                                       10

<PAGE>


wound closure, fastener, net dressings and specialty products. Sunshine Products
offers a complete line of skin care products.

         Management's Discussion and Analysis of Financial Condition and Results
of Operations  should be read in conjunction  with the  historical  consolidated
financial statements and notes of the Company.

         In 1999 and 1998,  the  Company  experienced  a 9%  increase  and a 40%
increase,  respectively,  in annual revenue.  The Company incurred a net loss of
$2,406,306 and $1,816,029 in 1999 and 1998, respectively. The Company's net loss
for 1999 was primarily attributable to: (1) litigation costs associated with the
Company's  defense of its Patent  related to  Dermagran  (R)  Ointment  totaling
$500,000  (discussed  below);  (2) pricing  disruption  and loss of customers on
certain  products   associated  with  the  Patent   litigation  issue,  and  (3)
restructuring  costs  associated with the  consolidation  and/or  elimination of
certain facilities and functions totaling $350,000.

Results of Operations
---------------------

         The following  table presents  selected  financial  information for the
periods indicated expressed as a percentage of net sales:
                                                 1999             1998
                                            -------------    -------------
Net sales ..........................            100.0%           100.0%
Cost of sales ......................             41.0             23.4
                                            -------------    -------------
                                            -------------    -------------
Gross profit .......................             59.0             76.6

Selling, general and administrative              82.8             97.2
Other income and expenses, net                    0.1             (1.1)
                                            -------------    -------------

Loss before income taxes............            (23.9)           (19.5)
Income taxes  ......................              0.0              0.2

                                            -------------    -------------
Net loss............................             (23.9%)          (19.7%)
                                            =============    =============

Sales Overview
--------------

         The Company's  net sales are comprised of chronic wound care  products,
wound closure strips and fasteners,  and skin care products.  Chronic wound care
sales  are  primarily  derived  from  Dermagran  Ointment,  Dermagran  Spray and
Dermagran  Hydrophilic  Wound Dressing.  Wound closure strips and fastener sales
are primarily  derived from the Suture  Strips,  Percu Stay,  NG Strip,  and Net
Dressings.  Skin care sales are  primarily  derived from Aprivera and other body
washes and shampoos, in addition to skin conditioners and moisturizers.

         The  following  table  presents  sales by product  line,  expressed  in
dollars and as a percentage of total increase in net sales:

                                       11

<PAGE>

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                                                                                        % of Total
      Product Line                       1999               1998             Variance    Variance
      ------------                       ----               ----             --------    --------
<S>                                 <C>                   <C>            <C>                <C>
      Chronic wound care            $  3,416,970          $5,534,254     $(2,117,284)       (249%)

      Wound closure strips
        and fasteners                  3,159,877           3,172,006         (12,129)        (1%)

      Skin care                        3,478,828             502,334        2,964,365        350%
                                     -----------          ----------       ----------        ----

      Total                          $10,055,675          $9,208,594      $   847,081        100%
                                      ==========           =========    =============        ====
</TABLE>

1999 Compared to 1998
---------------------

NET SALES AND GROSS PROFIT

         Net sales  increased in 1999 by $847,081,  or 9%, to  $10,055,675  from
$9,208,594 in 1998. The decrease in net sales for the chronic wound care product
line of 249% is composed of a  $1,512,671  net  decrease in product  sales and a
decrease of Medicaid rebates of $475,866.  The wound closure strips and fastener
net sales remained constant.  The increase of $2,964,365,  or 350%, of total net
sales, in the skin care product line is due to the Sunshine Products acquisition
on October 31, 1998. The net sales of $502,334 reported for 1998 reflected sales
for the final two months.

         Cost of sales expressed as a percentage of net sales increased from 23%
in 1998 to 41% in 1999.  This  increase is  attributable  primarily to the sales
mix. The skin care product line had the only  increase in sales and also had the
highest cost of sales as a percentage  of net sales.  Cost of sales for the skin
care line was 57% and 47% for 1999 and 1998, respectively. This increase in cost
of sales is  attributable  to  increased  sales in 1998 of high margin  products
coupled with the refund of Medicaid rebates previously discussed.  Cost of sales
as a percentage of net sales for the chronic wound care and wound closure strips
and fastener lines were 40% and 37% for 1999 and 1998,  respectively.  Aggregate
cost of sales  increased  $1,970,945 to  $4,126,780  in 1999 from  $2,155,835 in
1998. The increase in aggregate cost of sales is attributable to the increase in
net sales and the current year's sales mix discussed above.

         Gross profit  expressed as a percentage of net sales decreased from 77%
in 1998 to 59% in 1999. Aggregate gross profit decreased $1,123,864,  or 16%, to
$5,928,895  in 1999 from  $7,052,759  in 1998.  Both the  decreases in the gross
profit  percentage  and the  aggregate  gross  profit  are  attributable  to the
previously discussed increase in net sales and the current year's sales mix.

OPERATING EXPENSES

         Operating  expenses,  including  other  income and  expense,  decreased
$512,369,  or 6%, from  $8,847,570  in 1998 to  $8,335,201  in 1999.  Merger and
restructuring  costs  decreased  $498,024  to  $250,000  from  $748,024 in 1998.
Additionally the ABS Litigation  settlement of $819,353,  (discussed below), was
reflected in the 1998  expenses  while no  settlements  occurred  during 1999. A
partial  offset to these  reductions in operating  expenses  occurred due to the
addition  of  Sunshine  Products  and its  manufacturing  operations,  plus  the
increase to the direct sales force which increased wages and travel costs.

         Selling,   general  and  administrative   expense  for  1999  increased
$750,656, or 10%, to $8,072,991 from $7,322,335 in 1998 and remained constant as
a percentage  of sales at 80%. The increase is primarily  due to the addition of
Sunshine Products and its manufacturing  operations plus additions to the direct
sales force which increased wages and travel costs.

                                       12

<PAGE>


LITIGATION SETTLEMENT

         In June 1998 the  Company  commenced  an action  in the  United  States
District Court for the Middle District of Florida against Hyperion Medical, Inc.
for  infringement  of the  Company's  patent on its  Dermagran  Ointment.  Derma
further   alleged   that   Hyperion  had  engaged  in  unfair   competition   by
misappropriating  the formula for Dermagran Ointment.  Later in 1998 the Company
initiated actions against Medical Resources, Inc. and Corwood Laboratories, Inc.
for the same patent infringement and  misappropriation  causes of action brought
against Hyperion.

         During  1999  the  foregoing   actions  were  settled   pursuant  to  a
stipulation and judgement wherein Hyperion,  Medical Resources and Corwood admit
the validity and  enforceability of the Company's  Dermagran Ointment patent and
consent to an injunction  permanently  enjoining  them  infringing the Company's
patent.

         On June 8, 1998 the  Company  and ABS  LifeSciences,  Inc.  ("ABS"),  a
subsidiary  of  Integra  Life  Sciences,  Inc.  agreed  to  settlement  of their
respective   claims  and  counter  claims  asserted  in  the  civil  action  ABS
LifeSciences,  Inc. v. Derma  Sciences,  Inc.  (the  "Action").  The  settlement
provides  that the Company  pays ABS a total of  $550,000  and return all unsold
Chronicure  inventory.  The settlement further provides for the dismissal of all
claims and counter claims asserted in the action.  The settlement  resulted in a
charge to operations of $819,353 in the quarter ended June 30, 1998.

NET LOSS

         The  Company  incurred  net losses in 1999 and 1998 of  $2,406,306  and
$1,816,029, or $1.84 and $1.45 per share, respectively.

Liquidity and Capital Resources
-------------------------------

         At  December  31,  1999 and 1998 the  Company  had  working  capital of
$1,064,633 and $3,293,516, respectively.

         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 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.

         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 New York prime,
until  maturity.  Series  D  Bonds  may  be  converted,  at  the  option  of the
bondholder, into 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.

         The Company has a short-term  line of credit facility for $1,000,000 of
which $650,000 was  outstanding  at December 31, 1999 at a fluctuating  rate per
annum  equal to the prime  rate  minus 1%,  (7.5% at  December  31,  1999).  The
maturity  date of the line is October 31,  2000.  Cash on deposit  with the bank
secures this line of credit.  The Company  utilizes its line of credit primarily
for working capital.

                                       13

<PAGE>


         Statements that are not historical  facts,  including  statements about
the Company's  confidence  and  strategies,  expectations  about new or existing
products, technologies and opportunities, and 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 delay or difficulties,
and trade, legal, social and economic risks.

THE NASDAQ STOCK MARKET LISTING

     The Company was  notified  on December 3, 1999 by the NASDAQ  Stock  Market
("NASDAQ")  that it no longer met the minimum  $2,000,000  net  tangible  assets
requirement for continued listing on the NASDAQ SmallCap Market. On December 17,
1999 the Company  submitted its definitive  plan for achieving  compliance  with
this requirement. The NASDAQ staff granted an extension until March 31, 2000 for
the Company to provide evidence of such compliance.

         The Company has requested  and been granted an additional  extension of
the  March 31,  2000  deadline.  The  Company  believes  that it will be able to
provide  NASDAQ  with  evidence  of its timely  compliance  with the minimum net
tangible  assets  requirement  so as to avoid  delisting from the NASDQ SmallCap
Market.

         Ultimately,  the Company's failure to maintain the minimum net tangible
assets  requirement  would result in the Company's  common stock being  delisted
from the NASDAQ  SmallCap  Market.  Were this to occur,  the common  stock would
trade  exclusively on the NASDAQ Bulletin  Board,  the Boston Stock Exchange and
the Pacific  Exchange.  Delisting of the Company's  common stock from the NASDAQ
SmallCap  Market could make it difficult for the Company's  shareholders to sell
their  shares and could also make it more  difficult  for the  Company to secure
additional financing.

YEAR 2000 COMPATIBILITY

         In prior years,  the Company  discussed  the nature and progress of its
plans  to  become  Year  2000  ready.   As  a  result  of  those   planning  and
implementation  efforts,  the Company experienced no significant  disruptions in
mission-critical  information technology and non-information  technology systems
and believes those systems successfully  responded to the Year 2000 date change.
The  Company  is not aware of any  material  problems  resulting  from Year 2000
issues,  either with its internal systems, or the products and services of third
parties.  The Company  will  continue to monitor its  mission-critical  computer
applications and those of its suppliers and vendors  throughout the year 2000 to
ensure that any latent year 2000 matters that may arise are addressed promptly.

                                       14

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

                                      Index
                                      -----
Description                                                                 Page
-----------

Report of Independent Auditors...........................................     16

Balance Sheets...........................................................     17

Statements of Operations.................................................     18

Statements of Shareholders' Equity.......................................     19

Statements of Cash Flows.................................................     20

Notes to Financial Statements............................................     21

                                       15

<PAGE>


REPORT OF INDEPENDENT AUDITORS

Board of Directors
Derma Sciences, Inc.

         We have  audited the  accompanying  balance  sheets of Derma  Sciences,
Inc., as of December 31, 1999 and 1998 and the related statements of operations,
shareholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the financial  position of Derma  Sciences,
Inc., at December 31, 1999 and 1998,  and the results of its  operations and its
cash flows for the years then ended, in conformity  with  accounting  principles
generally accepted in the United States.


                                                       ERNST & YOUNG LLP


Philadelphia, Pennsylvania
March 27, 2000

                                       16

<PAGE>


DERMA SCIENCES, INC.

Consolidated Balance Sheets
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                                           December 31,
ASSETS                                             1999                  1998
--------------------------------------------------------------------------------
Current Assets
   Cash and cash equivalents                     $ 1,221,691        $ 2,338,552
   Accounts receivable, net of allowances of
     $151,400 in 1999 and $140,000 in 1998         2,041,099          1,378,219
   Inventories                                     1,289,138          1,645,556
   Current portion of officers' notes receivable      19,330             19,330
   Prepaid expenses and other current assets         223,120            216,461
--------------------------------------------------------------------------------
Total current assets                               4,794,378          5,598,118

Property and equipment, net                          382,542            409,938

Other Assets
   Officers' notes receivable                         76,034             76,034
   Goodwill and other intangibles, net             1,548,246          1,674,426
   Other                                                 838             13,055
--------------------------------------------------------------------------------
Total Assets                                     $ 6,802,038        $ 7,771,571
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Current Liabilities
   Bank line of credit                           $   650,000        $   300,000
   Accounts payable                                1,261,620          1,034,415
   Accrued expenses and other
     current liabilities                             493,964            970,187
--------------------------------------------------------------------------------
Total current liabilities                          2,405,584          2,304,602
--------------------------------------------------------------------------------
Long-Term Liabilities
   Convertible bonds                               1,325,000                -
--------------------------------------------------------------------------------
Total  liabilities                                 3,730,584          2,304,602
--------------------------------------------------------------------------------
Shareholders' Equity
   Common stock $.01 par value,
     30,000,000 shares authorized;
     issued and outstanding: 1,325,938
     shares in 1999; 1,247,158 in 1998                13,259             12,471
   Convertible preferred stock $.01 par
     value; 11,750,000 shares authorized;
     issued and outstanding: 939,188
     shares in 1999; 1,014,180 in 1998                 9,392             10,142
   Additional paid-in capital                     10,798,197         10,787,444
   Accumulated deficit                            (7,749,394)        (5,343,088)
--------------------------------------------------------------------------------
Total Shareholders' Equity                         3,071,454          5,466,969
--------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity       $ 6,802,038        $ 7,771,571
--------------------------------------------------------------------------------


See notes to consolidated financial statements.

                                       17

<PAGE>


DERMA SCIENCES, INC.

Consolidated Statements of Operations

--------------------------------------------------------------------------------
                                                     Year Ended December 31,
                                                    1999                 1998
--------------------------------------------------------------------------------
Net sales                                        $10,055,675        $ 9,208,594

Cost of sales                                      4,126,780          2,155,835
--------------------------------------------------------------------------------
Gross profit                                       5,928,895          7,052,759
--------------------------------------------------------------------------------
Operating expenses                                 8,322,991          8,946,515
Other (income) and expense, net                       12,210            (98,945)
--------------------------------------------------------------------------------
                                                   8,335,201          8,847,570

--------------------------------------------------------------------------------
Loss before provision for income taxes            (2,406,306)        (1,794,811)
Provision for income taxes                               -               21,218
--------------------------------------------------------------------------------
Net Loss                                         $(2,406,306)       $(1,816,029)
-------------------------------------------------------------------------------
Loss per common share basic and diluted          $     (1.84)       $     (1.45)
--------------------------------------------------------------------------------
Shares used in computing loss per common share     1,305,928          1,250,636
--------------------------------------------------------------------------------













See notes to consolidated financial statements.







                                       18

<PAGE>


DERMA SCIENCES, INC.

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                    Year Ended December 31,
                                                                                   1999                 1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                   <C>
Operating Activities
   Net loss                                                                    $(2,406,306)          $(1,816,029)
   Adjustments to reconcile net loss to
     net cash used in operating activities
       Depreciation and amortization                                               237,966               300,634
       Medicaid rebate adjustments                                                     -                (475,866)
       Provision for bad debts                                                     111,400                21,233
       Changes in operating assets and
         liabilities, net of effects
         of purchased business
           Accounts receivable                                                    (774,280)             (260,477)
           Inventories                                                             356,418              (200,434)
           Prepaid expenses and other current assets                                (6,659)               63,152
           Other assets                                                             12,217                50,002
           Accounts payable                                                        227,205              (235,683)
           Accrued expenses and other current liabilities                         (476,223)              359,950

-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                           (2,718,262)           (2,193,518)
-------------------------------------------------------------------------------------------------------------------
Investing Activities
   Purchases of property and equipment, net                                        (84,390)             (124,505)
   Increase in patents and trademarks                                                  -                  (3,826)
   Acquisition of business, net of cash acquired                                       -              (1,525,000)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                              (84,390)           (1,653,331)
-------------------------------------------------------------------------------------------------------------------
Financing Activities
   Net change in bank line of credit                                               350,000              (249,633)
   Proceeds from issuance of convertible
     securities, net of issuance costs                                           1,325,000             3,955,000
   Retirement of treasury stock                                                     (1,018)              (39,633)
   Proceeds from issuance of common stock                                              -                   9,514
   Collection of officers' notes receivable                                            -                  (4,407)
   Proceeds from exercise of stock options                                          11,809                   -
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                        1,685,791             3,670,841
-------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                       (1,116,861)             (176,008)

Cash and cash equivalents
   Beginning of year                                                             2,338,552             2,514,560
-------------------------------------------------------------------------------------------------------------------
   End of year                                                                 $ 1,221,691          $  2,338,552
-------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements.
</TABLE>

                                       19

<PAGE>


DERMA SCIENCES, INC.
<TABLE>
<CAPTION>

Consolidated Statements of Shareholders' Equity

-------------------------------------------------------------------------------------------------------------------
                                         Convertible                     Additional     Accumu-         Total
                                          Preferred     Common             Paid-In        lated      Shareholders'
                                            Stock          Stock           Capital       Deficit       Equity
-------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>          <C>              <C>             <C>
Balance, December 31, 1997                $ 17,500       $ 62,493     $  6,824,535     $(3,527,059)    $ 3,377,469

Tender of common shares by
   officers for payment of
   notes receivable                            -              (97)         (19,255)            -           (19,352)

Issuance convertible securities on
   $4,000,000 private placement,
   net of fees                              33,334            -          3,921,666             -         3,955,000

Conversion of convertible shares              (125)           125              -               -               -

Purchase and retirement of Treasury
   stock, at cost                              -             (370)         (39,263)            -           (39,633)

Other                                          -              206            9,308             -             9,514

Net loss                                       -              -                -        (1,816,029)     (1,816,029)
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998                  50,709         62,357       10,696,991      (5,343,088)      5,466,969

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

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

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

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

Net loss                                       -              -                -        (2,406,306)     (2,406,306)
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999               $   9,392       $ 13,259     $ 10,798,197     $(7,749,394)    $ 3,071,454
-------------------------------------------------------------------------------------------------------------------
</TABLE>


See notes to consolidated financial statements.

                                       20

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Derma Sciences, Inc., and its subsidiaries (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.

         Basis of Presentation

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

         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles  of  Consolidation  - In 1998,  the  consolidated  financial
statements  include the accounts of Derma  Sciences,  Inc., and its wholly owned
subsidiaries,  Genetic Laboratories Wound Care, Inc. and Sunshine Products, Inc.
In 1999,  Genetic  Labs was merged into Derma  Sciences  whereby  the  corporate
existence of Genetic  Labs ceased.  All  significant  intercompany  accounts and
transactions have been eliminated upon consolidation.

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

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

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

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

                                       21

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Reverse  Stock  Split  -  In  August,  1999,  the  Company  effected  a
one-for-five  reverse  split of its Common and  Preferred  Shares (Note 11). All
share and per share amounts for all periods presented have been adjusted for the
split.

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

         Goodwill and Other  Intangible  Assets - Goodwill and other  intangible
assets  are  stated on the  basis of cost and are  amortized,  principally  on a
straight-line basis, over the estimated future periods to be benefited. Goodwill
on the Sunshine Products acquisition is being amortized over 12 years.  Contract
rights are amortized over 15 years.

         Cash Flow  Information - Interest paid during 1999 and 1998 amounted to
$61,099  and  $54,638,  respectively.  Income  taxes paid  during  1999 and 1998
amounted to $37,534 and $20,000, respectively.

         Non-cash  transactions  in 1998  included  receipts of 1,935  shares of
common stock in repayment of officer's note receivable.

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

         Revenue  Recognition  - The  Company  operates  in one  segment and its
products are primarily sold to independent distributors. Sales are recorded when
product is shipped and title passes to our customers.

         Advertising  Costs - Advertising  costs are  generally  expensed in the
year incurred.

         Reclassifications  -  Certain  reclassifications  have been made to the
1998 financial statements to conform to the 1999 presentation.

2.       ACQUISITIONS

         On September 9, 1998, the Company  acquired 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.  Sales  generated  from
foreign countries are payable in U.S. dollars and are not material. Genetic Labs
became a wholly owned  subsidiary of the Company through the exchange of 338,158
shares of the Company's  common stock for all the  outstanding  stock of Genetic
Labs.  In  December,  1999,  pursuant to an  Agreement  and Plan of Merger dated
December  27, 1999,  Genetic  Labs was merged into Derma  Sciences by means of a
tax-free reorganization whereby the separate corporate existence of Genetic Labs
ceased.  The accompanying  financial  statements for the year ended December 31,
1998 are based on the assumption that the companies were combined for 1998.

                                       22

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


2.       ACQUISITIONS (CONTINUED)

         There were no intercompany  transactions or adjustments required to the
net assets or retained  earnings of the combined  companies  due to the business
combination.  Summarized results of operations of the separate companies for the
period from January 1 to August 31, 1998 (the date of  acquisition  is September
9, 1998), are as follows:
<TABLE>
<CAPTION>
                                                               Company             Genetic Labs          Total
                                                              ---------            ------------        ---------
<S>                                                         <C>                   <C>                <C>
              Net sales                                     $ 3,585,853           $ 2,048,992        $ 5,634,845
                                                              ---------             ---------          ---------

              Net income (loss)                             $  (831,845)          $    61,762        $  (770,083)
                                                             ----------           -----------         -----------
</TABLE>


         In 1998, the Company  acquired all of the issued and outstanding  stock
of 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.

         The results of  operations  of Sunshine  Products  are  included in the
accompanying  financial statements since the date of acquisition.  The following
summarized  pro forma  (unaudited)  information  assumes the  Sunshine  Products
acquisition had occurred on January 1, 1998.

                                                              1998
                                                              ----
                Net Sales                                 $  11,564,647
                Net Income                                $  (1,712,942)

                Earnings Per Share:
                Basic and Diluted                         $           (1.35)

         The purchase price was allocated as follows:

                Accounts receivable                       $     235,106
                Inventory                                       135,610
                Fixed assets                                    133,331
                Intangible assets                             1,447,000
                Liabilities                                    (426,047)
                                                         ---------------

                Total                                     $   1,525,000
                                                          =============
         Intangible  assets  of  approximately  $1,447,000  were  classified  as
goodwill  and are being  amortized  using the  straight-line  method over twelve
years.

                                       23

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


3.       INVENTORIES

         Inventories comprise the following:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         -----------------
                                                                                      1999                  1998
                                                                                  -----------            -------
<S>                                                                             <C>                   <C>

              Finished goods                                                    $1,108,244            $1,446,816
              Raw materials                                                         50,693                31,972
              Supplies                                                             159,931               166,768
                                                                                ----------            ----------
                                                                                $1,289,138            $1,645,556
                                                                                 =========             =========

</TABLE>

4.       PROPERTY AND EQUIPMENT

         Property and equipment comprise the following:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         -----------------
                                                                                      1999                  1998
                                                                                  -----------            -------
<S>                                                                               <C>                   <C>
              Furniture and equipment                                             $952,135              $867,745
              Leasehold improvements                                                14,543                14,543
                                                                                  --------              --------
                                                                                   966,678               882,288
              Less:   Accumulated depreciation                                     584,136               472,350
                                                                                   -------               -------
                                                                                  $382,542              $409,938
                                                                                   =======               =======
</TABLE>

5.       GOODWILL AND OTHER INTANGIBLES

         Goodwill and other intangibles comprise the following:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         -----------------
                                                                                      1999                  1998
                                                                                  -----------            -------
<S>                                                                             <C>                   <C>
              Goodwill                                                          $1,497,364            $1,497,365
              Patents and trademarks                                               451,417               454,469
              Contract rights                                                      350,000               350,000
                                                                                 ---------             ---------

                                                                                 2,298,782             2,301,834
              Less:   Accumulated amortization                                     750,535               627,408
                                                                                 ---------             ---------
                                                                                $1,548,246            $1,674,426
                                                                                 =========             =========

</TABLE>



                                       24

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


6.       CONCENTRATION OF CREDIT RISK

         The  Company  sells  almost  all  of its  products  to  medical  supply
companies,  pharmacies and healthcare providers.  At December 31, 1999 and 1998,
primarily all of the Company's  accounts  receivable  are from  companies in the
healthcare industry. Credit is extended based on an evaluation of the customer's
financial condition and collateral is not required.

         The Company  currently  has  manufacturing  arrangements  in place with
contract manufacturers with respect to all of its products. The Company believes
that the raw  materials  used in  manufacturing  its products  are  available in
adequate quantities from multiple sources.

         Although the Company  typically has a  manufacturing  agreement  with a
single source for each product,  multiple sources are generally  available.  The
Company has never experienced a material  interruption of supply from any of its
manufacturers.  However, in those instances in which it has only a single source
of supply,  any  material  delay or  cessation of  production  by the  Company's
contract  manufacturers  could have a material  adverse  impact on the Company's
results  of  operations.  The  Company  does  not  believe  that  the  level  of
manufacturing over-capacity in the industry is likely to change significantly in
the near  future  and,  accordingly,  does not believe  that its  reliance  upon
contract  manufacturers  will have a material  adverse  effect on the  Company's
operations.

7.       Accrued Expenses

         Accrued expenses comprise the following:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         -----------------
                                                                                      1999                  1998
                                                                                  -----------            -------
<S>                                                                               <C>                  <C>
              Salary, wages and severance                                         $  85,925            $  46,889
              Professional fees                                                     31,848               205,045
              Restructuring charges                                                121,631               463,183
              Other                                                                186,595               125,554
              Rebates payable                                                       49,873               125,068
                                                                                  --------               -------
                                                                                  $475,872              $965,739
                                                                                   =======               =======
</TABLE>

8.       BANK LINE OF CREDIT

         The  Company  has a  $1,000,000  bank  line of  credit  facility,  with
$650,000 and $300,000  outstanding at December 31, 1999 and 1998,  respectively,
which amounts  approximate  fair value. The maturity date of the line is October
31, 2000. The line of credit agreement  requires  monthly  interest  payments at
prime minus 1%, or 7.5% at December 31, 1999.  Cash  deposited  with the bank of
$1,000,000  secures the line of credit.


                                       25

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements

9.       OPERATING LEASES

         The Company has  operating  lease  agreements  for its  facilities  and
equipment expiring in various years through 2002. Expense under these agreements
amounted to $355,247 and $231,660 in 1999 and 1998, respectively. Minimum future
rental payments under  non-cancelable  operating  leases as of December 31, 1999
are:

                   Year Ending
                   December 31,

                      2000                                          $354,072
                      2001                                           324,951
                      2002                                           141,063
                      2003                                             9,526
                                                                   ---------
              Total minimum future rental payments                 $ 829,612
                                                                     =======

10.      INCOME TAXES

         Significant  components  of  the  Company's  deferred  tax  assets  and
liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                         -----------------
                                                                                      1999                1998
                                                                                      ----                ----
<S>                                                                           <C>                   <C>
              Deferred tax liabilities:
                Prepaid insurance                                             $     (4,177)         $    (10,842)
                Contributions                                                         (812)                  -
                Patent amortization                                                (69,176)               (76,856)
                                                                                -----------            ----------
                    Total deferred tax liabilities                                 (74,165)              (87,698)
                                                                                -----------           ----------
              Deferred tax assets:
                 Net operating loss carryforwards                                2,353,095             1,863,403
                 Depreciation                                                       84,350                31,219
                 Amortization of intangibles                                       150,142               108,656
                 Foreign tax, research and
                    development credits                                             24,559                24,559
                           Accrued Expenses                                        189,357                   -
                 Allowance for bad debts                                            61,458                32,881
                 Other                                                               2,263                65,333
                                                                              ------------           -----------
                                                                                 2,865,584             2,126,051
                 Valuation allowance                                            (2,791,419)           (2,038,353)
                                                                                 ---------             ---------
                    Total deferred tax assets                                       74,165                87,698
                                                                               -----------           -----------
              Net deferred tax assets                                         $          -           $         -
                                                                               ===========           ===========

</TABLE>



                                       26

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


10.      INCOME TAXES (CONTINUED)

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

         Significant  components  of  the  provision  for  income  taxes  are as
follows:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                    1999                1998
                                                                                    ----                ----
<S>                                                                               <C>                   <C>
              Current:
                Federal                                                           $     -               $19,000
                State                                                                   -                 2,218
                                                                                   -------              -------
                  Total current                                                   $     -               $21,218
                                                                                   =======               ======

              Deferred:
                Federal                                                           $     -               $    -
                State                                                                   -                    -
                                                                                   -------               -----
                  Total deferred                                                  $     -               $    -
                                                                                   =======               =====

              Total provision for income taxes                                    $     -               $21,218
                                                                                   =======               ======
</TABLE>


         The reconciliation of income tax attributable to continuing  operations
computed at the U.S. federal statutory tax rates to income tax expense (benefit)
is:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                    1999                1998
                                                                                    ----                ----
<S>                                                                              <C>                 <C>
              Tax benefit at U.S. statutory rates                                $(818,144)          $(610,236)
              State income taxes, net of
                federal benefit                                                    (16,539)             (63,327)
              Increase in valuation allowance                                      809,615              599,717
              Nondeductible expenses                                                25,068               14,950
              Tax on unconsolidated subsidiary
                (pre acquisition)                                                      -                 21,218
                                                                                   -------
              Other                                                                    -                (58,896)
                                                                                   -------             --------
                                                                                 $    0              $   21,218
                                                                                   =======             ========
</TABLE>

         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.


                                       27

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


11.      SHAREHOLDERS' EQUITY

         Increase in Authorized Common Stock

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

         Reverse Stock Split

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

         Series A Convertible Bonds

         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 Convertible Bonds

         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 Convertible Bonds

     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.


                                       28

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


11.      SHAREHOLDERS' EQUITY (CONTINUED)

         Series D Convertible Bonds

     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 New York prime,
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.

         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 1998,  2,500 shares of Series A Preferred  were  converted  into
2,500 shares of Common Stock.

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

         Stock Purchase Warrants

         At December 31, 1999, 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 $4.50 to $6.75 and expiring 1999 through 2009.



                                       29

<PAGE>


         DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


12.      STOCK OPTIONS

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

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

         In addition to the options granted under the stock option plan, options
to purchase  36,000 and 76,055  shares of common  stock were granted to officers
and directors in 1999 and 1998  respectively,  with exercise prices ranging from
$4.00 to $6.00 per share.  Options to purchase 3,780 shares of common stock were
exercised during 1999.

         Pro forma  information  regarding  net income and earnings per share is
required  by  Statement  123,  which  also  requires  that  the  information  be
determined  as if the  Company  has  accounted  for its  stock  options  granted
subsequent  to December 31, 1994 under the fair value method of that  Statement.
The fair value for these  options  was  estimated  at the date of grant  using a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions  for 1999 and  1998:  risk-free  interest  rate of 6.25%  and  6.0%,
respectively;  dividend yield of 0%; a volatility  factor of the expected market
price of the  Company's  common  stock of 0.830  and 0.885  respectively;  and a
weighted average life of the option of 4 years.

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

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

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

                                                  1999                1998
                                                --------            ------

     Pro forma net loss                    $(2,603,372)           $(2,369,376)
     Pro forma loss per common share       $     (1.99)           $     (1.90)



                                       30

<PAGE>


DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


12.      STOCK OPTIONS (CONTINUED)

         A  summary  of  the  Company's   stock  option   activity  and  related
information for the years ended December 31, follows:
<TABLE>
<CAPTION>
                                                                         1999                               1998
                                                                     -----------                        -----------
                                                                      Weighted-                          Weighted-
                                                                       Average                            Average
                                                                       Exercise                           Exercise
                                                       Options           Price            Options            Price
                                                       -------           -----            -------            -----
<S>                                                    <C>              <C>               <C>               <C>
           Outstanding - beginning of year             419,766          $ 6.60            267,611           $7.20
              Granted                                   43,000            5.41            152,155            5.60
              Exercised                                 (3,780)           3.12                  -               -
              Forfeited                                (73,100)           4.07                  -               -
                                                       --------                           --------
           Outstanding - end of year                   385,886           $7.00            419,766           $6.60
                                                       =======                            ========

           Exercisable at end of year                  360,866                            357,666
                                                       =======                            =======
</TABLE>

         Exercise  prices for options  outstanding  under the stock option plan,
non-statutory  option agreements and employment  agreements at December 31, 1999
ranged from $1.80 to $12.50.  The weighted  average fair value of options issued
was $3.47 in 1999.

13.      RELATED PARTY TRANSACTIONS

         The Company leased office space from a shareholder of the Company under
an operating  lease which was  terminated  January 31, 1998.  Rent expense under
this  lease was zero and  $3,600  for the years  ended  December  1999 and 1998,
respectively.

         In 1994, the Company entered into a five-year consulting agreement with
a director and  shareholder.  The agreement  provides that this  individual will
provide consulting  services to the Company in return for annual compensation of
$70,000,  to be adjusted from time to time by the Company's  President and Chief
Executive  Officer.  In 1999 and 1998, such compensation was $64,291and  $99,000
respectively.

         In 1997, the Company entered into a consulting  arrangement with a firm
with  which the  Company's  Chief  Financial  Officer is  affiliated  to provide
financial and accounting services. Total expenses for these services amounted to
$175,500 and $18,035 in 1999 and 1998, respectively.

14.      OFFICERS' NOTES RECEIVABLE

         Various  officers  of the  Company  received  draws  against  incentive
compensation  during 1994  totaling  approximately  $296,165.  The  Compensation
Committee of the Board of Directors  subsequently  determined  that no incentive
compensation was payable relative to 1994.  Accordingly,  the officers  executed
promissory notes requiring repayment of the incentive compensation over a period
of ten (10) years with  interest of 8.01% per annum.  The Board of Directors has
determined  that the officers may tender  either  common stock of the Company or
cash in payment of the promissory notes.

         Repayments of other  officers'  notes  receivable  during 1999 and 1998
totaled $0 and $20,000, respectively inclusive of principal and interest.

                                       31

<PAGE>



DERMA SCIENCES, INC.

Notes to Consolidated Financial Statements


15.      MEDICAID REBATES

         During  1999  and 1998  the  Company  negotiated  and  received  $0 and
$475,000,  respectively,  related to Medicaid rebate adjustments. This amount is
reflected in the accompanying statement of operations. At December 31, 1999, the
company has  estimated  that it will  receive  Medicaid  Rebate  adjustments  of
$170,000, which have been recorded as accounts receivable at December 31, 1999.

16.      YEAR 2000 (UNAUDITED)

         In prior years,  the Company  discussed  the nature and progress of its
plans  to  become  Year  2000  ready.   As  a  result  of  those   planning  and
implementation  efforts,  the Company experienced no significant  disruptions in
mission-critical  information technology and non-information  technology systems
and believes those systems successfully  responded to the Year 2000 date change.
The  Company  is not aware of any  material  problems  resulting  from Year 2000
issues,  either with its internal systems, or the products and services of third
parties.  The Company  will  continue to monitor its  mission-critical  computer
applications and those of its suppliers and vendors  throughout the year 2000 to
ensure that any latent year 2000 matters that may arise are addressed promptly.

                                       32

<PAGE>


                                    Part III
                                    --------

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors and Executive Officers
--------------------------------

         The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
<S>       <C>                                                   <C>    <C>
          Name                                                  Age    Position held with the Company
          ----                                                  ---    ------------------------------
          Edward J. Quilty (2)(3).........................       49    Chairman of the Board and Chief Executive Officer
          Richard S. Mink ................................       47    Vice President and Chief Operating Officer
          Stephen T. Wills, CPA ..........................       43    Vice President and Chief Financial Officer
          Srini Conjeevaram (1)(2)........................       41    Director
          Timothy J. Patrick (1)(2)(3)....................       41    Director
          Mary G. Clark, RN  .............................       67    Director
---------------
(1)  Member of the Audit Committee.
(2)  Member of the Compensation Committee.
(3)  Member of the Nominating Committee.
</TABLE>

Information Relative to Directors and Executive Officers
--------------------------------------------------------

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

         RICHARD  S. MINK has  served  as Vice  President  and  Chief  Operating
Officer of the Company since November, 1997 having previously serves as its Vice
President for Marketing  since April,  1997.  Prior to joining the Company,  Mr.
Mink was Senior Vice President/General  Manager,  Marketing Information Services
Division of Bio Imaging Technologies, Inc., a medical image data and information
management company,  from November,  1996 to April, 1997. He was a self-employed
marketing  consultant from May, 1995 to October,  1996, Executive Vice President
for Sales and Marketing for MedChem,  Inc. from August,  1994 to May, 1995, Vice
President for Sales and Marketing for Life Medical  Sciences from July,  1993 to
August,  1994, and had risen to the position of Director of Marketing for Becton
Dickinson  Company  during his tenure  there from  August,  1977 to July,  1993.
During May, 1996 through  April,  1997,  Mr. Mink was a member of the New Jersey
Technology  Council  Healthcare  Advisory Board. He earned a Bachelor of Science
degree in Biology/Chemistry and a Master of Business  Administration degree from
Rutgers University, Newark, New Jersey in 1975 and 1977, respectively.

         STEPHEN T. WILLS, CPA, MST has served as Chief Financial Officer of the
Company since July, 1997 and Vice President since November, 1997. Mr. Wills also
serves as President and Chief Operating Officer of Golomb,  Wills & Company, PC,
a public  accounting firm, and as Vice President and Chief Financial  Officer of
Palatin  Technologies,  Inc., a publicly traded  biopharmaceutical  company. Mr.
Wills is a member of the American Institute of Certified Public Accountants, New
Jersey Society of Certified  Public  Accountants and  Pennsylvania  Institute of
Certified  Public  Accountants.  He  earned a  Bachelor  of  Science  degree  in
Accounting from West Chester

                                       33

<PAGE>


University,  West  Chester,  Pennsylvania  in 1979 and a Master  of  Science  in
Taxation from Temple University, Philadelphia, Pennsylvania in 1994.

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

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

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

Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

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

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

ITEM 10.  EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE

         The following table shows all  compensation  paid by the Company to its
Chairman,  Chief Financial Officer and each of the Company's  executive officers
whose compensation exceeded $100,000 for their services in all capacities during
the years 1997, 1998 and 1999:

                                       34

<PAGE>

<TABLE>
<CAPTION>
                                                         Annual Compensation
                                                         -------------------                              All Other
Name and Principal Position              Year         Salary              Bonus        Options(#)*      Compensation
---------------------------              ----         ------              -----        -----------      ------------
<S>                                      <C>         <C>                 <C>            <C>              <C>
Edward J. Quilty                         1999        $150,000            $25,000           --                 --
Chairman and Chief Executive Officer     1998        $150,000            $25,000        76,055(1)             --
                                         1997        $149,986               --          60,000(2)             --

Richard S. Mink                          1999        $160,500               --             --                 --
Vice President and                       1998        $157,875            $ 6,000           --                 --
Chief Operating Officer                  1997        $100,961            $25,000(3)     40,000                --

Stephen T. Wills, CPA, MST               1999        $109,500(4)            --          40,000                --
Vice President and                       1998        $100,000(4)            --             --                 --
Chief Financial Officer                  1997        $ 85,000(5)            --          15,000                --

John T. Borthwick (6)                    1999        $180,000               --             --            $  9,962(7)
Vice President for Sales                 1998        $180,000               --             --            $  9,962(7)
                                         1997        $180,000               --          10,000           $  9,962(7)

Charles F. Caudell, III (8)              1999        $160,500               --             --                 --
Former Executive Vice President for      1998        $157,875            $ 6,000           --                 --
Field Operations                         1997        $100,961               --          40,000                --

</TABLE>
---------------------------
*        All options have been  adjusted to effect the  Company's  5-for-1 stock
         split effective August 2, 1999.
(1)      Options issued pursuant to the anti-dilution provisions of Mr. Quilty's
         employment agreement.
(2)      Includes 30,000 options  originally granted in 1996 and repriced by the
         Executive Committee of the Board of Directors on April 8, 1997.
(3)      Sign-on bonus.
(4)      Does not include  payments made to an affiliate of Mr.  Wills,  Golomb,
         Wills & Company, PC. See Certain Transactions below.
(5)      Represents compensation earned during the period July through December,
         1997.
(6)      Mr. Borthwick resigned as Chief Executive Officer and President in May,
         1997 and November, 1997, respectively.
(7)      The Company  enrolled Mr.  Borthwick in a  split-dollar  life insurance
         program on July 1, 1993. The monthly  premiums are $830.18 for $500,000
         coverage.
(8)      Mr. Caudell  resigned in August,  1999. Of the  compensation  shown for
         1999, $60,188 represents severance payments.

OPTION GRANTS TABLE

         The following table sets forth  information  regarding  grants of stock
options to the  following  named  executive  officer  made during the year ended
December 31, 1999:
<TABLE>
<CAPTION>
                                                    Percent of Total        Exercise
                                   Options         Options Granted to        Price
             Name               Granted (#)         Employees in 1999      ($/Share)       Expiration Date
             ----               -----------        ------------------      ---------       ---------------
<S>                              <C>                     <C>                   <C>      <C>
   Stephen T. Wills              12,000 (1)              50.0%                 $6.00    March 16, 2009
                                 20,000 (2)              50.0%                 $6.00    December 14, 2008
</TABLE>
-------------------
(1)      Options are 100% vested.
(2)      Options vest at the rate of 25% per year  commencing  February 1, 1999.
         See Employment Arrangements below.

                                       35

<PAGE>


AGGREGATE YEAR END OPTION VALUE TABLE

         The  following  table sets forth  information  regarding  the aggregate
number and value of options to purchase Common Stock held by the named executive
officers as of December 31, 1999. No options have been exercised:
<TABLE>
<CAPTION>
                                                Number of Shares                   Value of Unexercised
                                             Underlying Unexercised               In-The-Money Options
                                        Options at December 31, 1999 (#)      At December 31, 1999 ($)(1)
                                        --------------------------------      ---------------------------
   Name                                 Exercisable       Unexercisable       Exercisable      Unexercisable
   ----                                 -----------       -------------       -----------      -------------
<S>                                        <C>               <C>                       <C>             <C>

   Edward J. Quilty ...................    132,055            4,000                    0               0

   Richard S. Mink ....................     36,000            4,000                    0               0

   Charles F. Caudell, III ............     36,000            4,000                    0               0

   Stephen T. Wills, CPA...............     37,000           10,000                    0               0

   John T. Borthwick ..................     26,000            4,000                    0               0
</TABLE>
-------------------
(1)  Determined based on the fair market value for the Company's Common Stock at
     December 31, 1999 of $2.0625 per share.

EMPLOYMENT ARRANGEMENTS

EDWARD  J. QUILTY

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

RICHARD S. MINK

         The Company  entered into an  employment  agreement on May 7, 1999 (the
"Agreement")  with  Richard  S. Mink,  its Vice  President  and Chief  Operating
Officer.  The Agreement continues for an indefinite term and can be cancelled by
either  party upon thirty days  notice.  The  Agreement  provides  that Mr. Mink
receive the  following:  (1) base  compensation  of $160,500  per year,  and (2)
incentive  compensation  as determined by the Company's  Board of Directors upon
recommendation of the Chairman and Chief Executive Officer.

         The Agreement  further  provides that if the Agreement is terminated by
the Company other than "for cause," Mr. Mink will receive severance pay equal to
one  year's  base  salary and the period  for Mr.  Mink to  exercise  previously
granted  stock  options  will be extended to the earlier of three years from the
termination date or the original expiration date of said options.

STEPHEN T. WILLS, CPA, MST

         The Company  entered into an  employment  agreement on February 1, 1999
(the  "Agreement") with Stephen T. Wills, CPA, MST, its Vice President and Chief
Financial  Officer.  The Agreement  continues for an indefinite  term and can be
cancelled by either party upon thirty days notice.  The Agreement  provides that
Mr. Wills receive the following:  (1) base salary of $102,000 per year, together
with incentive  compensation  as may be awarded upon the  recommendation  of the
Chairman and approved by the Board of  Directors;  and (2) 20,000  non-qualified
stock options,  exercisable at $6.00,  which options become exercisable in 5,000
increments  on  February  1, 1999,  December  15,  1999,  December  15, 2000 and
December  15,  2001.  These  options  become 100%  exercisable  upon a change in
ownership  of in  excess of 75% of the  Company  or the sale by the  Company  of
substantially  all of its  assets.  Upon  termination  of the  Agreement  by the
Company without cause, the Company will pay Mr. Wills a severance payment

                                       36

<PAGE>


equal to his salary for one year and will  extend  the  period to  exercise  the
options granted under the Agreement to the earlier of five years or December 14,
2008.

JOHN T. BORTHWICK

         The Company entered into a five-year  employment  agreement on December
29, 1995, as amended on March 5, 1997, (the "Agreement") with John T. Borthwick,
its Director of Business  Development  and former  President and Chief Executive
Officer.   The  Agreement   provides  that  Mr.   Borthwick  will  receive  base
compensation  of $180,000 during the calendar years 1996, 1997 and 1998 and base
compensation  for the calendar years 1999 and 2000 to be determined by the Board
of Directors upon the  recommendation  of the Compensation  Committee,  together
with  such  incentive  and/or  bonus  compensation  as may be  awarded  upon the
recommendation  of the  Compensation  Committee;  provided,  however,  incentive
and/or bonus  compensation,  if any, will be predicated upon the extent to which
the  Company  attains  its  earnings  goals and the  extent  of Mr.  Borthwick's
contributions  thereto.  As additional  compensation,  the Agreement  grants Mr.
Borthwick 20,000  non-qualified stock options,  exercisable at a price of $11.25
per share, of which all were vested as of January 1, 2000.

         If the Company  sells  additional  Common  Stock during the term of the
Agreement in a  transaction,  or related series of  transactions,  the result of
which is to increase  the number of shares of Common Stock  outstanding  by 40%,
the Agreement  provides that Mr.  Borthwick will then be granted such additional
stock options,  exercisable  at $11.55 per share,  as may be necessary to enable
him to purchase the same percentage of outstanding Common Stock as he maintained
prior  to  such  sale  or  issuance.  In  addition,  in the  event  of a sale of
substantially  all of the  stock  or  assets  of the  Company,  or a  merger  or
consolidation  of the Company in which the Company is not the surviving  entity,
or upon the written  agreement  of the  Company to effect  such sale,  merger or
consolidation,  Mr.  Borthwick  will have the option of completing the remaining
term of his employment under the Agreement or receiving  severance  compensation
equal to his base compensation earned during the twelve-month period immediately
preceding  such sale,  merger or  consolidation.  Further,  in the event of such
sale,  merger or  consolidation:  (1) the stock options granted  pursuant to the
Agreement will become  exercisable in their entirety and will remain exercisable
for a period of not less than  thirty  (30) days;  and (2) the  promissory  note
between Mr.  Borthwick  and the Company  dated  January 17, 1995 in the original
principal amount of $99,530.34 will be forgiven.

         The  Agreement  further  provides  that Mr.  Borthwick  will  receive a
severance  payment  of  100%  of  his  base   compensation   earned  during  the
twelve-month period immediately preceding the expiration of the Agreement if the
Company  does not  renew or extend  the term of the  Agreement  upon  expiration
thereof.  The Agreement  also provides that Mr.  Borthwick  will receive:  (i) a
vehicle  for use  primarily  (but not  exclusively)  in the  conduct  of Company
business,  (ii) split-dollar life insurance in the face amount of $500,000,  and
(iii) disability income insurance providing for payments of 50% of compensation.
Mr.  Borthwick  may not disclose  any  confidential  information  of the Company
during or after the term of the Agreement,  and may not compete with the Company
during the term of the Agreement and for a period of one year thereafter.

STOCK OPTION PLAN

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

                                       37

<PAGE>


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

         At  December  31,  1999,  options  to  purchase  76,200  shares  of the
Company's common stock at prices ranging from $4.00 to $5.625 per share had been
granted under the Plan.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth as of March 24, 2000 certain information
regarding the current  beneficial  ownership of shares of the  Company's  Common
Stock by: (i) each person known by the Company to own beneficially  more than 5%
of the  outstanding  shares of Common Stock,  (ii) each director of the Company,
(iii) each officer of the Company,  and (iv) all  directors  and officers of the
Company as a group:
<TABLE>
<CAPTION>
                                                                 Number of Shares                  Percent
Name and Address of Beneficial Owner (1)                      Beneficially Owned(12)       Beneficially Owned(12)
----------------------------------------                      ----------------------       ----------------------
<S>                                                                  <C>                            <C>
Srini Conjeevaram (2)..................................              2,651,496                      65.30%
Hambrecht & Quist California (3).......................                993,788                      41.36%
Redwood Asset Management (4)...........................                573,562                      30.57%
Edward J. Quilty (5)...................................                371,117                      21.35%
Mary G. Clark, RN (6) .................................                155,095                      11.01%
Stephen T. Wills, CPA (7)..............................                135,920                      8.84%
Richard S. Mink (8) ...................................                 86,107                      5.78%
John T. Borthwick (9)..................................                 79,883                      5.56%
Timothy J. Patrick (10)................................                  2,000                       (*)
All directors and officers as a group (6 persons) (11)               3,481,617                      74.40%
</TABLE>

(1)   Except as otherwise noted, the address of each of the persons listed is:
      214 Carnegie Center, Suite 100, Princeton, New Jersey 08540.
(2)   Srini Conjeevaram is a general partner of the Galen III Partnerships.  The
      Galen III Partnerships  can be reached at: 610 Fifth Avenue,  Fifth Floor,
      New York,  New York 10020.  Includes  shares owned by Galen  Partners III,
      L.P., Galen Partners  International III, L.P. and Galen Employee Fund III,
      L.P.  Ownership  consists  of:  125,000  shares  of  Class  A  Convertible
      Preferred Stock ("Class A Preferred");  75,000 warrants to purchase Common
      Stock exercisable at $4.50 per share ("Class A Warrants");  416,667 shares
      of Class B  Convertible  Preferred  Stock ("Class B  Preferred");  416,667
      warrants to purchase Common Stock exercisable at $6.75 per share ("Class B
      Warrants");  bonds  convertible into 363,636 shares of Class C Convertible
      Preferred  Stock  ("Class C Preferred")  and 363,636  warrants to purchase
      Common Stock  exercisable  at $1.10 per share ("Class C Warrants");  bonds
      convertible  into 444,445  shares of Class D Convertible  Preferred  Stock
      ("Class D  Preferred")  and  444,445  warrants to  purchase  Common  Stock
      exercisable  at $1.01 per  share  ("Class D  Warrants");  and  exercisable
      options to purchase 2,000 shares of Common Stock. No additional options to
      purchase Common Stock will become  exercisable within 60 days of March 24,
      2000.
(3)   Hambrecht  & Quist  California  can be reached  at: One Bush  Street,  San
      Francisco,  California  94104.  Ownership  consists of:  122,500 shares of
      Class A Preferred;  122,500  Class A Warrants;  101,667  shares of Class B
      Preferred; 101,667 Class B Warrants; bonds convertible into 272,727 shares
      of Class C Preferred and 272,727 Class C Warrants.
(4)   Redwood Asset  Management can be reached at: Ovre Ullorn Terrasse 32, 0358
      Oslo,  Norway.  Ownership  consists of:  106,334  shares of Common  Stock;
      50,000 Class A Warrants; 83,334 Class B Warrants; 68,182 shares of Class C
      Preferred;  68,182 Class C Warrants;  98,765  shares of Class D Preferred;
      and 98,765 Class D Warrants.
(5)   Ownership  consists  of:  42,100  shares of Common  Stock;  38,000 Class A
      Warrants;  8,334  shares of Class B  Preferred;  8,334  Class B  Warrants;
      45,455 shares of Class C Preferred; 45,455 Class C Warrants; 24,692 shares
      of Class D Preferred;  24,692 Class D Warrants; and exercisable options to
      purchase 134,055 shares of

                                       38

<PAGE>


      Common Stock.  No additional  options to purchase Common Stock will become
      exercisable within 60 days of March 24, 2000.
(6)   Ownership consists of:  155,095 shares of Common Stock.
(7)   Ownership  consists  of  7,750  shares  of  Common  Stock;  7,750  Class A
      Warrants;  4,167  shares of Class B  Preferred;  4,167  Class B  Warrants;
      22,728 shares of Class C Preferred; 22,728 Class C Warrants; 14,815 shares
      of Class D Preferred;  14,815 Class D Warrants; and exercisable options to
      purchase 37,000 shares of Common Stock. No additional  options to purchase
      Common Stock will become exercisable within 60 days of March 24, 2000.
 (8)  Ownership  consists  of:  6,250  shares of  Common  Stock;  6,250  Class A
      Warrants;  4,167  shares of Class B  Preferred;  4,167  Class B  Warrants;
      13,637 shares of Class C Preferred;  13,637 Class C Warrants;  and options
      to  purchase  38,000  shares of Common  Stock.  No  additional  options to
      purchase Common Stock will become  exercisable within 60 days of March 24,
      2000.
(9)   Ownership  consists of:  51,883 shares of Common  Stock;  and  exercisable
      options to purchase 28,000 shares of Common Stock.  No additional  options
      to purchase Common Stock will become  exercisable  within 60 days of March
      24, 2000.
(10)  Ownership  consists of  exercisable  options to purchase  2,000  shares of
      Common Stock.  No additional  options to purchase Common Stock will become
      exercisable within 60 days of March 24, 2000.
(11)  Ownership  consists of: an aggregate of 3,240,562  shares of Common Stock,
      Class A  Preferred,  Class B  Preferred,  Class C  Preferred  and  Class D
      Preferred;  and options  currently  exercisable and exercisable  within 60
      days of March 24, 2000 to purchase 241,055 shares of Common Stock.
(12)  The number of shares beneficially owned and the percent beneficially owned
      by each  entity or  individual  assume  the  exercise  of all  exercisable
      options (including those that would be exercisable within 60 days of March
      24, 2000),  the conversion of all convertible  bonds into units consisting
      of warrants to purchase Common Stock and  Convertible  Preferred Stock and
      the exercise of all warrants and the  conversion  into Common Stock of all
      Convertible  Preferred  Stock  owned by such  entity  or  individual.  The
      percent  beneficially  owned is a fraction  the  numerator of which is the
      number  of shares of Common  Stock  beneficially  owned by each  entity or
      individual  and the  denominator  of which is the  number  of  outstanding
      shares of Common  Stock  plus the number of shares of Common  Stock  which
      would be issued  upon  exercise  by the subject  entity or  individual  of
      its/his/her  own  options  and  warrants,  the  conversion  into  units of
      its/his/her own convertible  bonds and the conversion into Common Stock of
      its/his/her own Convertible  Preferred Stock. This method of computing the
      percent beneficially owned results in the aggregate ownership  percentages
      exceeding 100%.
(*)   Less than one percent

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company employs the accounting firm of Golomb,  Wills & Company, PC
for various tax and financial  planning  services.  Stephen T. Wills,  CPA, MST,
Vice President, Chief Financial Officer and nominee for director of the Company,
is a principal  of Golomb,  Wills & Company,  PC.  Payments  to Golomb,  Wills &
Company, PC during 1998 and 1999 totaled $175,500 and $18,035, respectively.

         The Company has an oral consulting agreement with its founder, director
and  former  President,  Mary G.  Clark,  RN. In 1999  compensation  under  this
agreement was $64,292.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits
<TABLE>
<CAPTION>
Exhibit
Number                                                   Description                                             Page
-------                                                  -----------                                             ----
<S>                  <C>                                                                                         <C>
3.1                  Articles of Incorporation effective June 3, 1996 (previously filed as Exhibit B to the       --
                        Company's Proxy Statement filed on April 23, 1996 and incorporated herein by
                        reference).


                                       39

<PAGE>


3.2                  Amendment to the Articles of Incorporation effective February 10, 1998 (previously           --
                        filed as Exhibit A to the Company's Proxy Statement filed on December 22, 1997 and
                        incorporated herein by reference).
3.3                  Amendment to the Articles of Incorporation effective October 20, 1998 (previously filed      --
                        as Exhibit A to the Company's Proxy Statement filed on August 14, 1998 and
                        incorporated herein by reference).
3.4                  Amendment to the Articles of Incorporation effective May 26, 1999 (previously filed as       --
                        Exhibit A to the Company's Proxy Statement filed on April 13, 1999 and incorporated
                        herein by reference).
3.5                  Amendment to the Articles of Incorporation effective August 2, 1999 (previously filed        --
                        as Exhibit 3 to the Company's Form 8-K filed on August 6, 1999 and incorporated
                        herein by reference).
3.6                  Certificate of Designations, Voting Powers, Preferences and Rights of the Series of          --
                        Preferred Stock of Derma Sciences, Inc. to be Designated Series C Convertible
                        Preferred Stock (previously filed as Exhibit 10.05 to the Company's Form 8-K filed
                        on August 20, 1999 and incorporated herein by reference).
3.7                  Certificate of Designations, Voting Powers, Preferences and Rights of the Series of          --
                        Preferred Stock of Derma Sciences, Inc. to be Designated Series D Convertible
                        Preferred Stock (previously filed as Exhibit 10.05 to the Company's Form 8-K filed
                        on January 10, 2000 and incorporated herein by reference).
3.8                  Bylaws effective May 14, 1997 (previously filed as Exhibit 3.1 to the Company's Form         --
                        10-QSB filed on August 15, 1997 and incorporated herein by reference).
10.01                Agreement and Plan of Merger dated December 27, 1999 by and among Derma Sciences, Inc.       --
                        and Genetic Laboratories Wound Care, Inc. (previously filed as Exhibit 10.01 to the
                        Company's Form 8-K filed on January 10, 2000 and incorporated herein by reference).
10.02                Stock Purchase Agreement with annexes dated October 29, 1998 by and among Derma              --
                        Sciences, Inc., the John G. Vogel, Jr. Revocable Trust U/A dated August 23, 1995,
                        Martha A. Crimmins, the Gordon E. Cory Revocable Trust U/A dated August 24, 1995,
                        John G. Vogel, Jr., Gordon E. Cory and Sunshine Products, Inc. (previously filed as
                        Exhibit 2.1 to the Company's Form 8-K filed on November 13, 1998 and incorporated
                        herein by reference).
10.03*               Senior Management Stock Option Agreement, dated April 30, 1997, between the Company and      --
                        Edward J. Quilty (previously filed as Exhibit 10.05 to the Company's Form 8-K filed
                        on May 6, 1997 and incorporated herein by reference).
10.04*               Senior Management Stock Option Agreement, dated April 14, 1997, between the Company and      --
                        Richard S. Mink (previously filed as Exhibit 10.10 to the Company's Form 8-K filed
                        on May 6, 1997 and incorporated herein by reference).
10.05*               Employment Agreement, dated May 7, 1999, between the Company and Richard S. Mink             --
10.06*               Employment Agreement, dated February 1, 1999, between the Company and Stephen T. Wills,
                        CPA, MST
10.07*               Stock Option Agreement, dated July 23, 1997, between the Company and Stephen T. Wills,       --
                        CPA, MST (previously filed as Exhibit 10.01 to the Company's Form 10-QSB filed on
                        August 15, 1997 and incorporated herein by reference).
10.08*               Employment Agreement, dated December 29, 1995, between the Company and John T.               --
                        Borthwick (previously filed as Exhibit 10.37 to the Company's Form 10-KSB filed on
                        March 29, 1996 and incorporated herein by reference).
10.09*               Addendum to Employment Agreement, dated March 5, 1997, between the Company and John T.       --
                        Borthwick (previously filed as Exhibit 10.38 to the Company's  Form 10-KSB filed on
                        March 31, 1997 and incorporated herein by reference).
10.10*               Senior Management Stock Option Agreement, dated April 30, 1997, between the Company and      --
                        John T. Borthwick (previously filed as Exhibit 10.06 to the Company's Form 8-K filed
                        on May 6, 1997 and incorporated herein by reference).
10.11*               Senior Management Stock Option Agreement, dated April 30, 1997, between the Company and      --
                        Robert P. DiGiovine (previously filed as Exhibit 10.09 to the Company's Form 8-K
                        filed on May 6, 1997 and incorporated herein by reference).

                                       40

<PAGE>

10.12*               Promissory Note, dated January 17, 1995, between the Company and John T. Borthwick           --
                        (previously filed as Exhibit 10.73 to the Company's Form 10-KSB filed on March 30,
                        1995 and incorporated herein by reference).
10.13                Stock Option Agreement dated October 29, 1998 by and between Derma Sciences, Inc. and        --
                        John G. Vogel, Jr. (previously filed as Exhibit 10.01 to the Company's Form 8-K
                        filed on November 13, 1998 and incorporated by reference).
10.14                Stock Option Agreement dated October 29, 1998 by and between Derma Sciences, Inc. and        --
                        Martha A. Crimmins (previously filed as Exhibit 10.02 to the Company's Form 8-K
                        filed on November 13, 1998 and incorporated by reference).
10.15                Stock Option Agreement dated October 29, 1998 by and between Derma Sciences, Inc. and        --
                        Gordon E. Cory (previously filed as Exhibit 10.03 to the Company's Form 8-K filed on
                        November 13, 1998 and incorporated by reference).
10.16                Lease Agreement, dated January 5, 1994, between James S. Reid, Frances S. Reid and Joan      --
                        R. Milburn and Sunshine Products, Inc. (previously filed as Exhibit 10.38 to the
                        Company's Form 10-KSB filed on March 31, 1999 and incorporated herein by reference).
10.17                Lease Agreement, dated July 1, 1997, between the Company and Cross Creek Pointe              --
                        (previously filed as Exhibit 10.44 to the Company's Form 10-KSB filed on March 31,
                        1998 and incorporated by reference).
10.18                Lease Agreement, dated September 1, 1993, between the Company and Mariotti Building          --
                        Products (previously filed as Exhibit 10.51 to the Company's Registration Statement
                        filed on Form SB-2, No. 33-52246-NY, declared effective on May 13, 1994 and
                        incorporated herein by reference).
10.19                Sales Agreement, dated June 4, 1999, between the Company and Beverly Enterprises, Inc.       --
                        (previously filed as Exhibit 10.01 to the Company's Form 8-K filed on June 11, 1999
                        and incorporated herein by reference.)
10.20                Generic Products Agreement, dated September 29, 1997, between the Company and                --
                        Innovative Technologies Ltd. (previously filed as Exhibit 10.01 to the Company's
                        Form 10-QSB filed on November 10, 1997 and incorporated herein by reference).
10.21                Private Label Agreement, dated September 29, 1997, between the Company and Innovative        --
                        Technologies Ltd. (previously filed as Exhibit 10.02 to the Company's Form 10-QSB
                        filed on November 10, 1997 and incorporated herein by reference).
10.22                Manufacturers Agreement, dated August 25, 1992, between the Company and TapeMark             --
                        Company (previously filed as Exhibit 10.50 to the Company's Form 10-KSB filed on
                        March 31, 1999 and incorporated herein by reference).
10.23                Stock Option Plan, dated July 18, 1991 (previously filed as Exhibit 10.01 to the             --
                        Company's Registration Statement and incorporated herein by reference).
10.24*               Stock Option Plan Amendment, dated January 14, 1994 (previously filed as Exhibit 10.02       --
                        to the Company's Registration Statement and incorporated herein by reference).
10.25*               Stock Option Plan Amendment, dated November 21, 1995 (previously filed as Exhibit 10.03      --
                        to the Company's Form 10-KSB filed on March 31, 1996 and incorporated herein by
                        reference).
10.26*               Stock Option Plan Amendment, dated July 14, 1998 (previously filed as Appendix C to the      --
                        Company's Registration Statement on Form S-4 filed July 17, 1998 and incorporated
                        herein by reference).
10.27*               The Company's 401(k) Plan, dated June 30, 1995 (previously filed as Exhibit 10.56 to         --
                        the Company's Form 10-KSB filed on March 31, 1996 and incorporated herein by
                        reference).
21                   Information relative to subsidiaries                                                         --
23                   Consent of Ernst & Young LLP                                                                 --
27                   Financial Data Schedule
</TABLE>
--------------------------
* Management contract or compensatory plan.

                                       41

<PAGE>


(b)  Reports on Form 8-K

         No reports on Form 8-K were filed during the fourth quarter, 1999.


                                   SIGNATURES

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


                                   DERMA SCIENCES, INC.



March 30, 2000                     By:   /s/ Edward J. Quilty
                                      -----------------------
                                        Edward J. Quilty
                                        Chairman and Chief Executive Officer


           Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2000.


           Signatures:                                     Title:


     /s/  Edward J. Quilty
--------------------------              Chairman of the Board (Principal
Edward J. Quilty                           Executive Officer)


     /s/  Stephen T. Wills
--------------------------              Vice President and Chief Financial
Stephen T. Wills                           Officer (Principal Financial Officer)


     /s/ Srini Conjeevaram
--------------------------              Director
Srini Conjeevaram


     /s/  Mary G. Clark
---------------------------             Director
Mary G. Clark


     /s/  Timothy J. Patrick
----------------------------            Director
Timothy J. Patrick

                                       42