[GRAPHIC OMITTED]

WCMA® LOAN AND SECURITY AGREEMENT

--------------------------------------------------------------------------------

WCMA LOAN AND SECURITY AGREEMENT NO. 876-07H74 (“Loan Agreement”) dated as of
January 6, 2003, between DERMA SCIENCES, INC., a corporation organized and
existing under the laws of the State of Pennsylvania having its principal office
at 214 Carnegie Center, Suite 100, Princeton, NJ 08540 (“Customer”), and MERRILL
LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing
under the laws of the State of Delaware having its principal office at 222 North
LaSalle Street, Chicago, IL 60601 (“MLBFS”).

Pursuant to that certain WORKING CAPITAL MANAGEMENT® ACCOUNT AGREEMENT NO.
876-07H74 and the accompanying Program Description (as the same may be, or have
been, amended, modified or supplemented, the “WCMA Agreement”) between Customer
and MLBFS’ affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
(“MLPF&S”), Customer opened, or shall prior to the Activation Date open, a
Working Capital Management Account pursuant to the “WCMA Service” and the “WCMA
Program” described in the WCMA Agreement and any documents incorporated therein.
The WCMA Agreement is by this reference incorporated as a part hereof. In
conjunction therewith and as part of the WCMA Program, Customer has requested
that MLBFS provide, and subject to the terms and conditions herein set forth
MLBFS has agreed to provide, a commercial line of credit for Customer.

Accordingly, and in consideration of the premises and of the mutual covenants of
the parties hereto, Customer and MLBFS hereby agree as follows:

ARTICLE I. DEFINITIONS

1.1 Specific Terms. In addition to terms defined elsewhere in this Loan
Agreement, when used herein the following terms shall have the following
meanings:

“Activation Date” shall mean the date upon which MLBFS shall cause the WCMA Line
of Credit to be fully activated under MLPF&S’ computer system as part of the
WCMA Program.

“Bankruptcy Event” shall mean any of the following: (i) a proceeding under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
liquidation, winding up or receivership law or statute shall be commenced, filed
or consented to by any Credit Party; or (ii) any such proceeding shall be filed
against any Credit Party and shall not be dismissed or withdrawn within sixty
(60) days after filing; or (iii) any Credit Party shall make a general
assignment for the benefit of creditors; or (iv) any Credit Party shall
generally fail to pay or admit in writing its inability to pay its debts as they
become due; or (v) any Credit Party shall be adjudicated a bankrupt or
insolvent; or (vi) any Credit Party shall take advantage of any other law or
procedure for the relief of debtors or shall take any action for the purpose of
or with a view towards effecting any of the foregoing; or (vii) a receiver,
trustee, custodian, fiscal agent or similar official for any Credit Party or for
any substantial part of any of their respective property or assets shall be
sought by such Credit Party or appointed.

“Business Day” shall mean any day other than a Saturday, Sunday, federal holiday
or other day on which the New York Stock Exchange is regularly closed.

“Business Guarantor” shall mean every Guarantor that is not a natural person.

“Certificate of Compliance” shall mean, as applicable, that duly executed
certificate, substantially the same form as Exhibit B attached hereto to the
extent such certificate shall be applicable, of the president, chief financial
officer or chief executive officer of Customer, certifying as to the matters set
forth in such certificate.

“Collateral” shall mean the WCMA Account, all Accounts, Chattel Paper, Contract
Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts,
Documents, Instruments, Investment Property and Financial Assets of Customer,
howsoever arising, whether now owned or existing or hereafter acquired or
arising, and wherever located; together with all parts thereof (including spare
parts), all accessories and accessions thereto, all books and records (including
computer records) directly related thereto, all proceeds thereof (including,
without limitation, proceeds in the form of Accounts and insurance proceeds),
and the additional collateral described in Section 3.6 (b) hereof.

“Commitment Expiration Date” shall mean February 1, 2003.

“Credit Party” and “Credit Parties” shall mean, individually or collectively,
the Customer, all Guarantors and all Pledgors.

“Default” shall mean either an “Event of Default” as defined in Section 3.5
hereof, or an event which with the giving of notice, passage of time, or both,
would constitute such an Event of Default.

“Default Rate” shall mean an annual interest rate equal to the lesser of: (i)
two percentage points over the Interest Rate; or (ii) the highest interest rate
allowed by applicable law.

“Event of Loss” shall mean the occurrence whereby any tangible Collateral is
damaged beyond repair, lost, totally destroyed or confiscated.

“Excess Interest” shall mean any amount or rate of interest (including the
Default Rate and, to the extent that they may be deemed to constitute interest,
any prepayment fees, late charges and other fees and charges) payable, charged
or received in connection with any of the Loan Documents which exceeds the
maximum amount or rate of interest permitted under applicable law.

“GAAP” shall mean the generally accepted accounting principles in effect in the
United States of America from time to time.

“General Funding Conditions” shall mean each of the following conditions to any
WCMA Loan by MLBFS hereunder: (i) Customer shall have validly subscribed to and
continued to maintain the WCMA Account with MLPF&S, and the WCMA Account shall
then be reflected as an active “commercial” WCMA Account (i.e., one with line of
credit capabilities) on MLPF&S’ WCMA computer system; (ii) no Default or Event
of Default shall have occurred and be continuing or would result from the making
of any WCMA Loan hereunder by MLBFS; (iii) there shall not have occurred and be
continuing any material adverse change in the business or financial condition of
any Credit Party; (iv) all representations and warranties of all of the Credit
Parties herein or in any of the Loan Documents shall then be true and correct in
all material respects; (v) MLBFS shall have received this Loan Agreement and all
of the other Loan Documents duly executed and filed or recorded where
applicable, all of which shall be in form and substance satisfactory to MLBFS;
(vi) MLBFS shall have received evidence satisfactory to it as to the ownership
of the Collateral and the perfection and priority of MLBFS’ liens and security
interests thereon, as well as the ownership of and the perfection and priority
of MLBFS’ liens and security interests on any other collateral for the
Obligations furnished pursuant to any of the Loan Documents; (vii) MLBFS shall
have received evidence satisfactory to it of the insurance required hereby or by
any of the Loan Documents; and (viii) any additional conditions specified in the
“WCMA Line of Credit Approval” letter executed by MLBFS with respect to the
transactions contemplated hereby shall have been met to the satisfaction of
MLBFS.

“Guarantor” shall mean each Person obligated under a guaranty, endorsement or
other undertaking by which such Person guarantees or assumes responsibility in
any capacity for the payment or performance of any of the Obligations.

“Initial Maturity Date” shall mean the first date upon which the WCMA Line of
Credit will expire (subject to renewal in accordance with the terms hereof); to
wit: January 31, 2004.

“Individual Guarantor” shall mean each Guarantor who is a natural person.

“Interest Due Date” shall mean the first Business Day of each calendar month
during the term hereof.

“Interest Rate” shall mean a variable per annum rate of interest equal to the
sum of 3.00% plus the One-Month LIBOR. “One-Month LIBOR” shall mean, as of the
date of any determination, the interest rate then most recently published in the
“Money Rates” section of The Wall Street Journal as the one-month London
Interbank Offered Rate. The Interest Rate will change as of the date of
publication in The Wall Street Journal of a One-Month LIBOR that is different
from that published on the preceding Business Day, if more than one rate is
published, then the highest of such rates. In the event that The Wall Street
Journal shall, for any reason, fail or cease to publish the One-Month LIBOR,
MLBFS will choose a reasonably comparable index or source to use as the basis
for the Interest Rate.

“Line Fee” shall mean a fee of $20,000.00 payable periodically by Customer to
MLBFS in accordance with the provisions of Section 2.2 hereof.

“Loan Documents” shall mean this Loan Agreement, any indenture, any guaranty of
any of the Obligations and all other security and other instruments,
assignments, certificates, certifications and agreements of any kind relating to
any of the Obligations, whether obtained, authorized, authenticated, executed,
sent or received concurrently with or subsequent to this Loan Agreement, or
which evidence the creation, guaranty or collateralization of any of the
Obligations or the granting or perfection of liens or security interests upon
any Collateral or any other collateral for the Obligations, including any
modifications, amendments or restatements of the foregoing.

“Location of Tangible Collateral” shall mean the address of Customer set forth
at the beginning of this Loan Agreement, together with any other address or
addresses set forth on an exhibit hereto as being a Location of Tangible
Collateral.

“Maturity Date” shall mean the date of expiration of the WCMA Line of Credit.

“Maximum WCMA Line of Credit” shall mean, as of any date of determination
thereof, an amount Equal to the lesser of: (A) $2,000,000.00, or (B) 80% of
Customer’s Accounts and Chattel Paper, as shown on its regular books and records
(excluding Accounts over 90 days old, Accounts directly or indirectly due from
any person or entity not domiciled in the United States or from any shareholder,
officer or employee of Customer or any affiliated entity), and 50% of Customer’s
Inventory as shown on its regular books and records (excluding all
work-in-process inventory, and inventory located in Canada).

“Obligations” shall mean all liabilities, indebtedness and other obligations of
Customer to MLBFS, howsoever created, arising or evidenced, whether now existing
or hereafter arising, whether direct or indirect, absolute or contingent, due or
to become due, primary or secondary or joint or several, and, without limiting
the generality of the foregoing, shall include principal, accrued interest
(including without limitation interest accruing after the filing of any petition
in bankruptcy), all advances made by or on behalf of MLBFS under the Loan
Documents, collection and other costs and expenses incurred by or on behalf of
MLBFS, whether incurred before or after judgment and all present and future
liabilities, indebtedness and obligations of Customer under this Loan Agreement.

“Permitted Liens” shall mean with respect to the Collateral: (i) liens for
current taxes not yet due and payable, other non-consensual liens arising in the
ordinary course of business for sums not due, and, if MLBFS’ rights to and
interest in the Collateral are not materially and adversely affected thereby,
any such liens for taxes or other non-consensual liens arising in the ordinary
course of business being contested in good faith by appropriate proceedings;
(ii) liens in favor of MLBFS; (iii) liens which will be discharged with the
proceeds of the initial WCMA Loan; and (iv) any other liens expressly permitted
in writing by MLBFS.

“Person” shall mean any natural person and any corporation, partnership
(general, limited or otherwise), limited liability company, trust, association,
joint venture, governmental body or agency or other entity having legal status
of any kind.

“Pledgor” shall mean each Person who at any time provides collateral, or
otherwise now or hereinafter agrees to grant MLBFS a security interest in any
assets as security for Customer’s Obligations.

“Renewal Year” shall mean and refer to the 12-month period immediately following
the Initial Maturity Date and each 12-month period thereafter.

“WCMA Account” shall mean and refer to the Working Capital Management Account of
Customer with MLPF&S identified as Account No. 876-07H74 and any successor
Working Capital Management Account of Customer with MLPF&S.

“WCMA Line of Credit” shall mean a line of credit funded by MLBFS through the
WCMA Account.

“WCMA Loan” shall mean each advance made by MLBFS pursuant to this Loan
Agreement.

“WCMA Loan Balance” shall mean an amount equal to the aggregate unpaid principal
amount of all WCMA Loans.

“UCC” shall mean the Uniform Commercial Code of Illinois as in effect in
Illinois from time to time.

1.2 Other Terms. Except as otherwise defined herein: (i) all terms used in this
Loan Agreement which are defined in the UCC shall have the meanings set forth in
the UCC, and (ii) capitalized terms used herein which are defined in the WCMA
Agreement (including, without limitation, “Money Accounts”, “Minimum Money
Accounts Balance”, and “WCMA Directed Reserve Program”) shall have the meanings
set forth in the WCMA Agreement, and (iii) accounting terms not defined herein
shall have the meaning ascribed to them in GAAP.

1.3 UCC Filing. Customer hereby authorizes MLBFS to file a record or records (as
defined or otherwise specified under the UCC), including, without limitation,
financing statements, in all jurisdictions and with all filing offices as MLBFS
may determine, in its sole discretion, are necessary or advisable to perfect the
security interest granted to MLBFS herein. Such financing statements may
describe the Collateral in the same manner as described herein or may contain an
indication or description of collateral that describes such property in any
other manner as MLBFS may determine, in its sole discretion, is necessary,
advisable or prudent to ensure the perfection of the security interest in the
Collateral granted to the MLBFS herein.

ARTICLE II. THE WCMA LINE OF CREDIT

2.1 WCMA PROMISSORY NOTE. FOR VALUE RECEIVED, Customer hereby promises to pay to
the order of MLBFS, at the times and in the manner set forth in this Loan
Agreement, or in such other manner and at such place as MLBFS may hereafter
designate in writing, the following: (a) on the Maturity Date, or if earlier, on
the date of termination of the WCMA Line of Credit, the WCMA Loan Balance; (b)
interest at the Interest Rate (or, if applicable, at the Default Rate) on the
outstanding WCMA Loan Balance, from and including the date on which the initial
WCMA Loan is made until the date of payment of all WCMA Loans in full; and (c)
on demand, all other sums payable pursuant to this Loan Agreement, including,
but not limited to, the periodic Line Fee. Except as otherwise expressly set
forth herein, Customer hereby waives presentment, demand for payment, protest
and notice of protest, notice of dishonor, notice of acceleration, notice of
intent to accelerate and all other notices and formalities in connection with
this WCMA Promissory Note and this Loan Agreement.

2.2 WCMA LOANS

(a)     Activation Date. Provided that: (i) the Commitment Expiration Date shall
not then have occurred, and (ii) Customer shall have subscribed to the WCMA
Program and its subscription to the WCMA Program shall then be in effect, the
Activation Date shall occur on or promptly after the date, following the
acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois,
upon which each of the General Funding Conditions shall have been met or
satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the
WCMA Line of Credit for a nominal amount shall be deemed evidence of the
satisfaction of any of the conditions herein set forth, or a waiver of any of
the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out of
and charge to Customer’s WCMA Account on the Activation Date any and all amounts
necessary to fully pay off any bank or other financial institution having a lien
upon any of the Collateral other than a Permitted Lien.

(b)     WCMA Loans. Subject to the terms and conditions hereof, during the
period from and after the Activation Date to the first to occur of the Maturity
Date or the date of termination of the WCMA Line of Credit pursuant to the terms
hereof, and in addition to WCMA Loans automatically made to pay accrued
interest, as hereafter provided: (i) MLBFS will make WCMA Loans to Customer in
such amounts as Customer may from time to time request in accordance with the
terms hereof, up to an aggregate outstanding amount not to exceed the Maximum
WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in
part at any time, and request a re-borrowing of amounts repaid on a revolving
basis. Customer may request such WCMA Loans by use of WCMA Checks, FTS, Visa®
charges, wire transfers, or such other means of access to the WCMA Line of
Credit as may be permitted by MLBFS from time to time; it being understood that
so long as the WCMA Line of Credit shall be in effect, any charge or debit to
the WCMA Account which but for the WCMA Line of Credit would under the terms of
the WCMA Agreement result in an overdraft, shall be deemed a request by Customer
for a WCMA Loan.

(c)     Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not
be obligated to make any WCMA Loan, and may without notice refuse to honor any
such request by Customer, if at the time of receipt by MLBFS of Customer’s
request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of
Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the
WCMA Line of Credit shall have otherwise been terminated in accordance with the
terms hereof; or (iii) Customer’s subscription to the WCMA Program shall have
been terminated; or (iv) an event shall have occurred and be continuing which
shall have caused any of the General Funding Conditions to not then be met or
satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any
WCMA Loan at a time when any one or more of said conditions shall not have been
met shall not in any event be construed as a waiver of said condition or
conditions or of any Default, and shall not prevent MLBFS at any time thereafter
while any condition shall not have been met from refusing to honor any request
by Customer for a WCMA Loan.

(d)     Limitation of Liability. MLBFS shall not be responsible, and shall have
no liability to Customer or any other party, for any delay or failure of MLBFS
to honor any request of Customer for a WCMA Loan or any other act or omission of
MLBFS, MLPF&S or any of their affiliates due to or resulting from any system
failure, error or delay in posting or other clerical error, loss of power, fire,
Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any
of their affiliates unless directly arising out of the willful wrongful act or
active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer
or any other party for any incidental or consequential damages arising from any
act or omission by MLBFS, MLPF&S or any of their affiliates in connection with
the WCMA Line of Credit or this Loan Agreement.

(e)     Interest. (i) An amount equal to accrued interest on the daily WCMA Loan
Balance shall be payable by Customer monthly on each Interest Due Date,
commencing with the first Interest Due Date after the Activation Date. Unless
otherwise hereafter directed in writing by MLBFS on or after the first to occur
of the Maturity Date or the date of termination of the WCMA Line of Credit
pursuant to the terms hereof, such interest will be automatically charged to the
WCMA Account on the applicable Interest Due Date, and, to the extent not paid
with free credit balances or the proceeds of sales of any Money Accounts then in
the WCMA Account, as hereafter provided, paid by a WCMA Loan and added to the
WCMA Loan Balance. All interest shall be computed for the actual number of days
elapsed on the basis of a year consisting of 360 days.

(ii)     Upon the occurrence and during the continuance of any Default, but
without limiting the rights and remedies otherwise available to MLBFS hereunder
or waiving such Default, the interest payable by Customer hereunder shall at the
option of MLBFS accrue and be payable at the Default Rate. The Default Rate,
once implemented, shall continue to apply to the Obligations under this Loan
Agreement and be payable by Customer until the date MLBFS gives written notice
that such Default has been cured to the satisfaction of MLBFS.

(iii)     Notwithstanding any provision to the contrary in any of the Loan
Documents, no provision of any of the Loan Documents shall require the payment
or permit the collection of Excess Interest. If any Excess Interest is provided
for, or is adjudicated as being provided for, in any of the Loan Documents,
then: (A) Customer shall not be obligated to pay any Excess Interest; and (B)
any Excess Interest that MLBFS may have received hereunder or under any of the
Loan Documents shall, at the option of MLBFS, be either applied as a credit
against the then unpaid WCMA Loan Balance or refunded to the payor thereof.

(f)     Payments. All payments required or permitted to be made pursuant to this
Loan Agreement shall be made in lawful money of the United States. Unless
otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be
made by the delivery of checks (other than WCMA Checks), or by means of FTS or
wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S
for credit to Customer’s WCMA Account. Notwithstanding anything in the WCMA
Agreement to the contrary, Customer hereby irrevocably authorizes and directs
MLPF&S to apply available free credit balances in the WCMA Account to the
repayment of the WCMA Loan Balance prior to application for any other purpose.
Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by
Customer upon the same basis and schedule as funds are made available for
investment in the Money Accounts in accordance with the terms of the WCMA
Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid
authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance.
The acceptance by or on behalf of MLBFS of a check or other payment for a lesser
amount than shall be due from Customer, regardless of any endorsement or
statement thereon or transmitted therewith, shall not be deemed an accord and
satisfaction or anything other than a payment on account, and MLBFS or anyone
acting on behalf of MLBFS may accept such check or other payment without
prejudice to the rights of MLBFS to recover the balance actually due or to
pursue any other remedy under this Loan Agreement or applicable law for such
balance. All checks accepted by or on behalf of MLBFS in connection with the
WCMA Line of Credit are subject to final collection.

(g)     Irrevocable Instructions to MLPF&S. In order to minimize the WCMA Loan
Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective on
the Activation Date and continuing thereafter so long as this Loan Agreement
shall be in effect: (i) to immediately and prior to application for any other
purpose pay to MLBFS to the extent of any WCMA Loan Balance or other amounts
payable by Customer hereunder all available free credit balances from time to
time in the WCMA Account; and (ii) if such available free credit balances are
insufficient to pay the WCMA Loan Balance and such other amounts, and there are
in the WCMA Account at any time any investments in Money Accounts (other than
any investments constituting any Minimum Money Accounts Balance under the WCMA
Directed Reserve Program), to immediately liquidate such investments and pay to
MLBFS to the extent of any WCMA Loan Balance and such other amounts the
available proceeds from the liquidation of any such Money Accounts.

(h)     Late Charge. Any payment or deposit required to be made by Customer
pursuant to the Loan Documents not paid or made within ten (10) days of the
applicable due date shall be subject to a late charge in an amount equal to the
lesser of: (a) 5% of the overdue amount, or (b) the maximum amount permitted by
applicable law. Such late charge shall be payable on demand, or, without demand,
may in the sole discretion of MLBFS be paid by a Subsequent WCMA Loan and added
to the WCMA Loan Balance in the same manner as provided herein for accrued
interest with respect to the WCMA Line of Credit.

(i)     Statements. MLPF&S will include in each monthly statement it issues
under the WCMA Program information with respect to WCMA Loans and the WCMA Loan
Balance. Any questions that Customer may have with respect to such information
should be directed to MLBFS; and any questions with respect to any other matter
in such statements or about or affecting the WCMA Program should be directed to
MLPF&S.

(j)     Use of WCMA Loan Proceeds. The proceeds of each WCMA Loan initiated by
Customer shall be used by Customer solely for working capital in the ordinary
course of its business, or, with the prior written consent of MLBFS, for other
lawful business purposes of Customer not prohibited hereby. Customer agrees that
under no circumstances will the proceeds of any WCMA Loan be used: (i) for
personal, family or household purposes of any person whatsoever, or (ii) to
purchase, carry or trade in securities, or repay debt incurred to purchase,
carry or trade in securities, whether in or in connection with the WCMA Account,
another account of Customer with MLPF&S or an account of Customer at any other
broker or dealer in securities, or (iii) unless otherwise consented to in
writing by MLBFS, to pay any amount to Merrill Lynch and Co., Inc. or any of its
subsidiaries, other than Merrill Lynch Bank USA, Merrill Lynch Bank & Trust Co.
or any subsidiary of either of them (including MLBFS and Merrill Lynch Credit
Corporation).

(k)     Renewal at Option of MLBFS; Right of Customer to Terminate. MLBFS may at
any time, in its sole discretion and at its sole option, renew the WCMA Line of
Credit for one or more Renewal Years; it being understood, however, that no such
renewal shall be effective unless set forth in a writing executed by a duly
authorized representative of MLBFS and delivered to Customer. Unless any such
renewal is accompanied by a proposed change in the terms of the WCMA Line of
Credit (other than the extension of the Maturity Date), no such renewal shall
require Customer’s approval. Customer shall, however, have the right to
terminate the WCMA Line of Credit at any time upon written notice to MLBFS.
Concurrently with any such termination, Customer shall pay to MLBFS the entire
WCMA Loan Balance and all other Obligations.

(l)     Line Fees. (i) In consideration of the extension of the WCMA Line of
Credit by MLBFS to Customer during the period from the Activation Date to and
including the last day of January, 2004 (the “Initial Line Period”), Customer
has paid or shall pay the initial Line Fee to MLBFS. If the initial Line Fee has
not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at its
option, to either cause the initial Line Fee to be paid on the Activation Date
with a WCMA Loan, or invoice Customer for such initial Line Fee (in which event
Customer shall pay said fee within 5 Business Days after receipt of such
invoice). No delay in the Activation Date, howsoever caused, shall entitle
Customer to any rebate or reduction in the Line Fee or to any extension of the
Initial Maturity Date.

(ii)     Customer shall pay to MLBFS an additional Line Fee for each 12-month
period following the Initial Line Period to the Initial Maturity Date, and for
each Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at
its option, to either cause each such additional Line Fee to be paid with a WCMA
Loan on or at any time after the first Business Day of such 12-month period or
Renewal Year, as applicable, or invoiced to Customer at such time (in which
event Customer shall pay such Line Fee within 5 Business Days after receipt of
such invoice). Each Line Fee shall be deemed fully earned by MLBFS on the date
payable by Customer, and no termination of the WCMA Line of Credit, howsoever
caused, shall entitle Customer to any rebate or refund of any portion of such
Line Fee; provided, however, that if Customer shall terminate the WCMA Line of
Credit not later than 5 Business Days after the receipt by Customer of notice
from MLBFS of a renewal of the WCMA Line of Credit, Customer shall be entitled
to a refund of any Line Fee charged by MLBFS for the ensuing Renewal Year.

ARTICLE III. GENERAL PROVISIONS

3.1 REPRESENTATIONS AND WARRANTIES

Customer represents and warrants to MLBFS that:

(a)     Organization and Existence. Customer is a corporation, duly organized
and validly existing in good standing under the laws of the State of
Pennsylvania and is qualified to do business and in good standing in each other
state where the nature of its business or the property owned by it make such
qualification necessary; and, where applicable, each Business Guarantor is duly
organized, validly existing and in good standing under the laws of the state of
its formation and is qualified to do business and in good standing in each other
state where the nature of its business or the property owned by it make such
qualification necessary.

(b)     Execution, Delivery and Performance. Each Credit Party has the requisite
power and authority to enter into and perform the Loan Documents. The Customer
holds all necessary permits, licenses, certificates of occupancy and other
governmental authorizations and approvals required in order to own and operate
the Customer’s business. The execution, delivery and performance by Customer of
this Loan Agreement and by each of the other Credit Parties of such of the other
Loan Documents to which it is a party: (i) have been duly authorized by all
requisite action, (ii) do not and will not violate or conflict with any law,
order or other governmental requirement, or any of the agreements, instruments
or documents which formed or govern any of the Credit Parties, and (iii) do not
and will not breach or violate any of the provisions of, and will not result in
a default by any of the Credit Parties under, any other agreement, instrument or
document to which it is a party or is subject.

(c)     Notices and Approvals. Except as may have been given or obtained, no
notice to or consent or approval of any governmental body or authority or other
third party whatsoever (including, without limitation, any other creditor) is
required in connection with the execution, delivery or performance by any Credit
Party of such of this Loan Agreement and the Loan Documents to which it is a
party.

(d)     Enforceability. The Loan Documents to which any Credit Party is a party
are the respective legal, valid and binding obligations of such Credit Party,
enforceable against it or them, as the case may be, in accordance with their
respective terms, except as enforceability may be limited by bankruptcy and
other similar laws affecting the rights of creditors generally or by general
principles of equity.

(e)     Collateral. Except for priorities afforded to any Permitted Liens: (i)
Customer has good and marketable title to the Collateral, (ii) none of the
Collateral is subject to any lien, encumbrance or security interest, and (iii)
upon the filing of all Uniform Commercial Code financing statements
authenticated or otherwise authorized by Customer with respect to the Collateral
in the appropriate jurisdiction(s) and/or the completion of any other action
required by applicable law to perfect its liens and security interests, MLBFS
will have valid and perfected first liens and security interests upon all of the
Collateral.

(f)     Financial Statements. Except as expressly set forth in Customer’s or any
Business Guarantor’s financial statements, all financial statements of Customer
and each Business Guarantor furnished to MLBFS have been prepared in conformity
with generally accepted accounting principles, consistently applied, are true
and correct in all material respects, and fairly present the financial condition
of it as at such dates and the results of its operations for the periods then
ended (subject, in the case of interim unaudited financial statements, to normal
year-end adjustments); and since the most recent date covered by such financial
statements, there has been no material adverse change in any such financial
condition or operation. All financial statements furnished to MLBFS of any
Guarantor other than a Business Guarantor are true and correct in all material
respects and fairly represent such Guarantor’s financial condition as of the
date of such financial statements, and since the most recent date of such
financial statements, there has been no material adverse change in such
financial condition.

(g)     Litigation; Compliance With All Laws. No litigation, arbitration,
administrative or governmental proceedings are pending or, to the knowledge of
Customer, threatened against any Credit Party, which would, if adversely
determined, materially and adversely affect (i) such Credit Party’s interest in
the Collateral or the liens and security interests of MLBFS hereunder or under
any of the Loan Documents, or (ii) the financial condition of any Credit Party
or its continued operations. Each Credit Party is in compliance in all material
respects with all laws, regulations, requirements and approvals applicable to
such Credit Party.

(h)     Tax Returns. All federal, state and local tax returns, reports and
statements required to be filed by any Credit Party have been filed with the
appropriate governmental agencies and all taxes due and payable by any Credit
Party have been timely paid (except to the extent that any such failure to file
or pay will not materially and adversely affect (i) either the liens and
security interests of MLBFS hereunder or under any of the Loan Documents, (ii)
the financial condition of any Credit Party, or (iii) its continued operations).

(i)     Collateral Location. All of the tangible Collateral is located at a
Location of Tangible Collateral.

(j)     No Default. No “Default” or “Event of Default” (each as defined in this
Loan Agreement or any of the other Loan Documents) has occurred and is
continuing.

(k)     No Outside Broker. Except for employees of MLBFS, MLPF&S or one of their
affiliates, Customer has not in connection with the transactions contemplated
hereby directly or indirectly engaged or dealt with, and was not introduced or
referred to MLBFS by, any broker or other loan arranger.

Each of the foregoing representations and warranties: (i) has been and will be
relied upon as an inducement to MLBFS to provide the WCMA Line of Credit, and
(ii) is continuing and shall be deemed remade by Customer concurrently with each
request for a WCMA Loan.

3.2 FINANCIAL AND OTHER INFORMATION

(a)     Customer shall furnish or cause to be furnished to MLBFS during the term
of this Loan Agreement all of the following:

(i)     Quarterly Certificate of Compliance. Within 45 days after the close of
each calendar quarter, a Certificate of Compliance, duly executed by the
president, chief financial officer or chief executive officer of the Customer,
in the form of Exhibit B attached hereto, or such other form as reasonably
required by MLBFS from time to time;

(ii)     A/R Agings. Within 15 days after the close of each fiscal month of
Customer, a copy of the Accounts Receivable Aging of Customer as of the end of
such fiscal month;

(iii)     Inventory Reports. Within 15 days after the close of each fiscal month
of Customer, a copy of the Inventory Report (as and to the extent applicable,
breaking out Inventory by location, and separately reporting any work in
process) of Customer as of the end of such fiscal month;

(iv)     SEC Reports. Customer shall furnish or cause to be furnished to MLBFS
not later than 10 days after the date of filing with the Securities and Exchange
Commission (“SEC”), a copy of each 10-K, 10-Q and other report required to be
filed with the SEC during the term hereof by Customer; and

(v)     Other Information. Such other information as MLBFS may from time to time
reasonably request relating to Customer, any Credit Party or the Collateral.

(vi)     General Agreements With Respect to Financial Information. Customer
agrees that except as otherwise specified herein or otherwise agreed to in
writing by MLBFS: (i) all annual financial statements required to be furnished
by Customer to MLBFS hereunder will be prepared by either the current
independent accountants for Customer or other independent accountants reasonably
acceptable to MLBFS, and (ii) all other financial information required to be
furnished by Customer to MLBFS hereunder will be certified as correct in all
material respects by the party who has prepared such information, and, in the
case of internally prepared information with respect to Customer or any Business
Guarantor, certified as correct by their respective chief financial officer.

3.3 OTHER COVENANTS

Customer further covenants and agrees during the term of this Loan Agreement
that:

(a)     Financial Records; Inspection. Each Credit Party (other than any
Individual Guarantor) will: (i) maintain at its principal place of business
complete and accurate books and records, and maintain all of its financial
records in a manner consistent with the financial statements heretofore
furnished to MLBFS, or prepared on such other basis as may be approved in
writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives,
upon reasonable notice and at reasonable times, to inspect its properties (both
real and personal), operations, books and records.

(b)     Taxes. Each Credit Party will pay when due all of its respective taxes,
assessments and other governmental charges, howsoever designated, and all other
liabilities and obligations, except to the extent that any such failure to file
or pay will not materially and adversely affect either the liens and security
interests of MLBFS hereunder or under any of the Loan Documents, the financial
condition of any Credit Party or its continued operations.

(c)     Compliance With Laws and Agreements. No Credit Party will violate (i)
any law, regulation or other governmental requirement, any judgment or order of
any court or governmental agency or authority; (ii) any agreement, instrument or
document which is material to its operations or to the operation or use of any
Collateral, in each case as contemplated by the Loan Documents; or (iii) any
agreement, instrument or document to which it is a party or by which it is
bound, if any such violation will materially and adversely affect either the
liens and security interests of MLBFS hereunder or under any of the Loan
Documents, the financial condition of any Credit Party, or its continued
operations.

(d)     No Use of Merrill Lynch Name. No Credit Party will directly or
indirectly publish, disclose or otherwise use in any advertising or promotional
material, or press release or interview, the name, logo or any trademark of
MLBFS, MLPF&S, Merrill Lynch and Co., Incorporated or any of their affiliates.

(e)     Notification By Customer. Customer shall provide MLBFS with prompt
written notification of: (i) any Default; (ii) any material adverse change in
the business, financial condition or operations of any Credit Party; (iii) any
information which indicates that any financial statements of any Credit Party
fail in any material respect to present fairly the financial condition and
results of operations purported to be presented in such statements; (iv) any
threatened or pending litigation involving any Credit Party; (v) any casualty
loss, attachment, lien, judicial process, encumbrance or claim affecting or
involving $25,000 or more of any Collateral; and (vi) any change in Customer’s
outside accountants. Each notification by Customer pursuant hereto shall specify
the event or information causing such notification, and, to the extent
applicable, shall specify the steps being taken to rectify or remedy such event
or information.

(f)     Entity Organization. Each Credit Party which is an entity will (i)
remain (A) validly existing and in good standing in the state of its
organization and (B) qualified to do business and in good standing in each other
state where the nature of its business or the property owned by it make such
qualification necessary, and (ii) maintain all governmental permits, licenses
and authorizations. Customer shall give MLBFS not less than 30 days prior
written notice of any change in name (including any fictitious name) or chief
executive office, place of business, or as applicable, the principal residence
of any Credit Party.

(g)     Merger, Change in Business. Except upon the prior written consent of
MLBFS Customer shall not cause or permit any Credit Party to: (i) be a party to
any merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets of, or any material stock, partnership, joint
venture or other equity interest in, any Person, or sell, transfer or lease all
or any substantial part of its assets; (ii) engage in any material business
substantially different from its business in effect as of the date of
application by Customer for credit from MLBFS, or cease operating any such
material business; or (iii) cause or permit any other Person to assume or
succeed to any material business or operations of such Credit Party.

(h)     No Acquisitions of Assets or Stock of Any Kind. Without limiting any
other provision hereof, Customer shall not without the prior written consent of
MLBFS directly or indirectly acquire the assets or stock of any other entity.

(i)     No Additional Debt. Except upon the prior written consent of MLBFS,
Customer shall not directly or indirectly incur or permit to exist any debt of
Customer for borrowed money or the lease under a capital lease or deferred
purchase price of real or personal property other than: (i) debt to MLBFS, and
(ii) debt existing as of the date of and reflected on the last financial
statements of Customer submitted to MLBFS prior to the date hereof and not
refinanced by MLBFS.

(j)     Fixed Charge Coverage Ratio. Customer’s “Fixed Charge Coverage Ratio”,
defined and calculated as set forth in exhibit B attached hereto, shall at all
times exceed 1.25 to 1.

3.4 COLLATERAL

(a)     Pledge of Collateral. To secure payment and performance of the
Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS,
and grants to MLBFS first liens and security interests in and upon all of the
Collateral, subject only to priorities afforded to Permitted Liens.

(b)     Liens. Except upon the prior written consent of MLBFS, Customer shall
not create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.

(c)     Performance of Obligations. Customer shall perform all of its
obligations owing on account of or with respect to the Collateral; it being
understood that nothing herein, and no action or inaction by MLBFS, under this
Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of
Customer’s said obligations.

(d)     Sales and Collections. Customer shall not sell, transfer or otherwise
dispose of any Collateral, except that so long as no Event of Default shall have
occurred and be continuing, Customer may in the ordinary course of its business:
(i) sell any Inventory normally held by Customer for sale, (ii) use or consume
any materials and supplies normally held by Customer for use or consumption, and
(iii) collect all of its Accounts.

(e)     Account Schedules. Upon the request of MLBFS, which may be made from
time to time, Customer shall deliver to MLBFS, in addition to the other
information required hereunder, a schedule identifying, for each Account and all
Chattel Paper subject to MLBFS’ security interests hereunder, each account
debtor by name and address and amount, invoice or contract number and date of
each invoice or contract. Customer shall furnish to MLBFS such additional
information with respect to the Collateral, and amounts received by Customer as
proceeds of any of the Collateral, as MLBFS may from time to time reasonably
request.

(f)     Alterations and Maintenance. Except upon the prior written consent of
MLBFS, Customer shall not make or permit any material alterations to any
tangible Collateral which might materially reduce or impair its market value or
utility. Customer shall at all times (i) keep the tangible Collateral in good
condition and repair, reasonable wear and tear excepted, (ii) protect the
Collateral against loss, damage or destruction and (iii) pay or cause to be paid
all obligations arising from the repair and maintenance of such Collateral, as
well as all obligations with respect to any Location of Tangible Collateral
(e.g., all obligations under any lease, mortgage or bailment agreement), except
for any such obligations being contested by Customer in good faith by
appropriate proceedings.

(g)     Location. Except for movements required in the ordinary course of
Customer’s business, Customer shall give MLBFS 30 days’ prior written notice of
the placing at or movement of any tangible Collateral to any location other than
a Location of Tangible Collateral. In no event shall Customer cause or permit
any material tangible Collateral to be removed from the United States without
the express prior written consent of MLBFS. Customer will keep its books and
records at its principal office address specified in the first paragraph of this
Loan Agreement. Customer will not change the address where books and records are
kept, or change its name or taxpayer identification number. Customer will place
a legend acceptable to MLBFS on all Chattel Paper that is Collateral in the
possession or control of Customer from time to time indicating that MLBFS has a
security interest therein.

(h)     Insurance. Customer shall insure all of the tangible Collateral under a
policy or policies of physical damage insurance for the full replacement value
thereof against such perils as MLBFS shall reasonably require and also providing
that losses will be payable to MLBFS as its interests may appear pursuant to a
lender’s or mortgagee’s long form loss payable endorsement and containing such
other provisions as may be reasonably required by MLBFS. Customer shall further
provide and maintain a policy or policies of commercial general liability
insurance naming MLBFS as an additional party insured. Customer and each
Business Guarantor shall maintain such other insurance as may be required by law
or is customarily maintained by companies in a similar business or otherwise
reasonably required by MLBFS. All such insurance policies shall provide that
MLBFS will receive not less than 10 days prior written notice of any
cancellation, and shall otherwise be in form and amount and with an insurer or
insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a
copy or certificate of each such policy or policies and, prior to any expiration
or cancellation, each renewal or replacement thereof.

(i)     Event of Loss. Customer shall at its expense promptly repair all
repairable damage to any tangible Collateral. In the event that there is an
Event of Loss and the affected Collateral had a value prior to such Event of
Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days
after the occurrence of such Event of Loss, or (ii) 10 Business Days after the
date on which either Customer or MLBFS shall receive any proceeds of insurance
on account of such Event of Loss, or any underwriter of insurance on such
Collateral shall advise either Customer or MLBFS that it disclaims liability in
respect of such Event of Loss, Customer shall, at Customer’s option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Customer shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or
permanently prepay the Obligations by an amount equal to the actual cash value
of such Collateral as determined by either the insurance company’s payment (plus
any applicable deductible) or, in absence of insurance company payment, as
reasonably determined by MLBFS; it being further understood that any such
permanent prepayment shall cause an immediate permanent reduction in the Maximum
WCMA Line of Credit in the amount of such prepayment and shall not reduce the
amount of any future reductions in the Maximum WCMA Line of Credit that may be
required hereunder. Notwithstanding the foregoing, if at the time of occurrence
of such Event of Loss or any time thereafter prior to replacement or line
reduction, as aforesaid, an Event of Default shall have occurred and be
continuing hereunder, then MLBFS may at its sole option, exercisable at any time
while such Event of Default shall be continuing, require Customer to either
replace such Collateral or prepay the Obligations and reduce the Maximum WCMA
Line of Credit, as aforesaid.

(j)     Notice of Certain Events. Customer shall give MLBFS immediate notice of
any attachment, lien, judicial process, encumbrance or claim affecting or
involving $25,000.00 or more of the Collateral.

(k)     Indemnification. Customer shall indemnify, defend and save MLBFS
harmless from and against any and all claims, liabilities, losses, costs and
expenses (including, without limitation, reasonable attorneys’ fees and
expenses) of any nature whatsoever which may be asserted against or incurred by
MLBFS arising out of or in any manner occasioned by (i) the ownership,
collection, possession, use or operation of any Collateral, or (ii) any failure
by Customer to perform any of its obligations hereunder; excluding, however,
from said indemnity any such claims, liabilities, etc. arising directly out of
the willful wrongful act or active gross negligence of MLBFS. This indemnity
shall survive the expiration or termination of this Loan Agreement as to all
matters arising or accruing prior to such expiration or termination.

3.5 EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an “Event of
Default” under this Loan Agreement:

(a)     Exceeding the Maximum WCMA Line of Credit. If the WCMA Loan Balance
shall at any time exceed the Maximum WCMA Line of Credit and Customer shall fail
to deposit sufficient funds into the WCMA Account to reduce the WCMA Loan
Balance below the Maximum WCMA Line of Credit within five (5) Business Days
after written notice thereof shall have been given by MLBFS to Customer.

(b)     Other Failure to Pay. Customer shall fail to pay to MLBFS or deposit
into the WCMA Account when due any other amount owing or required to be paid or
deposited by Customer under this Loan Agreement or any of the Loan Documents, or
shall fail to pay when due any other Obligations, and any such failure shall
continue for more than five (5) Business Days after written notice thereof shall
have been given by MLBFS to Customer.

(c)     Failure to Perform. Any Credit Party shall default in the performance or
observance of any covenant or agreement on its part to be performed or observed
under any of the Loan Documents (not constituting an Event of Default under any
other clause of this Section), and such default shall continue unremedied for
ten (10) Business Days (i) after written notice thereof shall have been given by
MLBFS to Customer, or (ii) from Customer’s receipt of any notice or knowledge of
such default from any other source.

(d)     Breach of Warranty. Any representation or warranty made by any Credit
Party contained in this Loan Agreement or any of the Loan Documents shall at any
time prove to have been incorrect in any material respect when made.

(e)     Default Under Other ML Agreement. A default or event of default by any
Credit Party shall occur under the terms of any other agreement, instrument or
document with or intended for the benefit of MLBFS, MLPF&S or any of their
affiliates, and any required notice shall have been given and required passage
of time shall have elapsed, or the WCMA Agreement shall be terminated for any
reason.

(f)     Bankruptcy Event. Any Bankruptcy Event shall occur.

(g)     Material Impairment. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of full payment or performance
by the Credit Parties of any of their respective liabilities or obligations
under any of the Loan Documents has been materially impaired. The existence of
such a material impairment shall be determined in a manner consistent with the
intent of Section 1-208 of the UCC.

(h)     Default Under Other Agreements. Any event shall occur which results in
any default of any material agreement involving any Credit Party or any
agreement evidencing any indebtedness of any Credit Party of $100,000.00 or
more.

(i)     Collateral Impairment. The loss, theft or destruction of any Collateral,
the occurrence of any material deterioration or impairment of any Collateral or
any material decline or depreciation in the value or market price thereof
(whether actual or reasonably anticipated), which causes any Collateral, in the
sole opinion of MLBFS, to become unsatisfactory as to value or character; or any
levy, attachment, seizure or confiscation of the Collateral which is not
released within ten (10) Business Days.

(j)     Contested Obligation. (i) Any of the Loan Documents shall for any reason
cease to be, or are asserted by any Credit Party not to be a legal, valid and
binding obligations of any Credit Party, enforceable in accordance with their
terms; or (ii) the validity, perfection or priority of MLBFS’ first lien and
security interest on any of the Collateral is contested by any Person; or (iii)
any Credit Party shall or shall attempt to repudiate, revoke, contest or
dispute, in whole or in part, such Credit Party’s obligations under any Loan
Document.

(k)     Judgments. A judgment shall be entered against any Credit Party in
excess of $25,000 and the judgment is not paid in full and discharged, or stayed
and bonded to the satisfaction of MLBFS.

(l)     Change in Control/Change in Management. (i) Any direct or indirect sale,
conveyance, assignment or other transfer of or grant of a security interest in
any ownership interest of any Credit Party which results, or if any rights
related thereto were exercised would result, in any change in the identity of
the individuals or entities in control of any Credit Party; or (ii) the owner(s)
of the controlling equity interest of any Credit Party on the date hereof shall
cease to own and control such Credit Party; or (iii) the Person (or a
replacement who is satisfactory to MLBFS in its sole discretion) who is the
chief executive officer or holds such similar position, or any senior manager of
such Credit Party on the date hereof shall for any reason cease to be the chief
executive officer or senior manager of such Credit Party.

(m)     Withdrawal, Death, etc. The incapacity, death, withdrawal, dissolution,
or the filing for dissolution of: (i) any Credit Party; or (ii) any controlling
shareholder, partner, or member of any Credit Party.

3.6 REMEDIES

(a)     Remedies Upon Default. Upon the occurrence and during the continuance of
any Event of Default, MLBFS may at its sole option do any one or more or all of
the following, at such time and in such order as MLBFS may in its sole
discretion choose:

(i)     Termination. MLBFS may without notice terminate the WCMA Line of Credit
and all obligations to extend any credit to or for the benefit of Customer (it
being understood, however, that upon the occurrence of any Bankruptcy Event all
such obligations shall automatically terminate without any action on the part of
MLBFS).

(ii)     Acceleration. MLBFS may declare the principal of and interest on the
WCMA Loan Balance, and all other Obligations to be forthwith due and payable,
whereupon all such amounts shall be immediately due and payable, without
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate or other notice
or formality of any kind, all of which are hereby expressly waived; provided,
however, that upon the occurrence of any Bankruptcy Event all such principal,
interest and other Obligations shall automatically become due and payable
without any action on the part of MLBFS.

(iii)     Exercise Other Rights. MLBFS may exercise any or all of the remedies
of a secured party under applicable law and in equity, including, but not
limited to, the UCC, and any or all of its other rights and remedies under the
Loan Documents.

(iv)     Possession. MLBFS may require Customer to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated by
MLBFS which is reasonably convenient to Customer, or may take possession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice to Customer.

(v)     Sale. MLBFS may sell any or all of the Collateral at public or private
sale upon such terms and conditions as MLBFS may reasonably deem proper, whether
for cash, on credit, or for future delivery, in bulk or in lots. MLBFS may
purchase any Collateral at any such sale free of Customer’s right of redemption,
if any, which Customer expressly waives to the extent not prohibited by
applicable law. The net proceeds of any such public or private sale and all
other amounts actually collected or received by MLBFS pursuant hereto, after
deducting all costs and expenses incurred at any time in the collection of the
Obligations and in the protection, collection and sale of the Collateral, will
be applied to the payment of the Obligations, with any remaining proceeds paid
to Customer or whoever else may be entitled thereto, and with Customer and each
Guarantor remaining jointly and severally liable for any amount remaining unpaid
after such application.

(vi)     Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith
upon receipt, transmit and deliver to MLBFS in the form received, all cash,
checks, drafts and other instruments for the payment of money (properly
endorsed, where required, so that such items may be collected by MLBFS) which
may be received by Customer at any time in full or partial payment of any
Collateral, and require that Customer not commingle any such items which may be
so received by Customer with any other of its funds or property but instead hold
them separate and apart and in trust for MLBFS until delivery is made to MLBFS.

(vii)     Notification of Account Debtors. MLBFS may notify any account debtor
that its Account or Chattel Paper has been assigned to MLBFS and direct such
account debtor to make payment directly to MLBFS of all amounts due or becoming
due with respect to such Account or Chattel Paper; and MLBFS may enforce payment
and collect, by legal proceedings or otherwise, such Account or Chattel Paper.

(viii)     Control of Collateral. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and of
any rejected, returned, stopped in transit or repossessed goods included in the
Collateral and endorse Customer’s name on any item of payment on or proceeds of
the Collateral.

(b)     Set-Off. MLBFS shall have the further right upon the occurrence and
during the continuance of an Event of Default to set-off, appropriate and apply
toward payment of any of the Obligations, in such order of application as MLBFS
may from time to time and at any time elect, any cash, credit, deposits,
accounts, financial assets, investment property, securities and any other
property of Customer which is in transit to or in the possession, custody or
control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S.
Customer hereby collaterally assigns and grants to MLBFS a continuing security
interest in all such property as Collateral and as additional security for the
Obligations. Upon the occurrence and during the continuance of an Event of
Default, MLBFS shall have all rights in such property available to collateral
assignees and secured parties under all applicable laws, including, without
limitation, the UCC.

(c)     Power of Attorney. Effective upon the occurrence and during the
continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS
as its attorney-in-fact, with full power of substitution, in its place and stead
and in its name or in the name of MLBFS, to from time to time in MLBFS’ sole
discretion take any action and to execute any instrument which MLBFS may deem
necessary or advisable to accomplish the purposes of this Loan Agreement and the
other Loan Documents, including, but not limited to, to receive, endorse and
collect all checks, drafts and other instruments for the payment of money made
payable to Customer included in the Collateral. The powers of attorney granted
to MLBFS in this Loan Agreement are coupled with an interest and are irrevocable
until the Obligations have been indefeasibly paid in full and fully satisfied
and all obligations of MLBFS under this Loan Agreement have been terminated

(d)     Remedies are Severable and Cumulative. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available in the Loan Documents, at law or in equity, and any one or
more of such rights and remedies may be exercised simultaneously or
successively.

(e)     No Marshalling. MLBFS shall be under no duty or obligation to (i)
preserve, protect or marshall the Collateral; (ii) preserve or protect the
rights of any Credit Party or any other Person claiming an interest in the
Collateral; (iii) realize upon the Collateral in any particular order or manner,
(iv) seek repayment of any Obligations from any particular source; (v) proceed
or not proceed against any Credit Party pursuant to any guaranty or security
agreement or against any Credit Party under the Loan Documents, with or without
also realizing on the Collateral; (vi) permit any substitution or exchange of
all or any part of the Collateral; or (vii) release any part of the Collateral
from the Loan Agreement or any of the other Loan Documents, whether or not such
substitution or release would leave MLBFS adequately secured.

(f)     Notices. To the fullest extent permitted by applicable law, Customer
hereby irrevocably waives and releases MLBFS of and from any and all liabilities
and penalties for failure of MLBFS to comply with any statutory or other
requirement imposed upon MLBFS relating to notices of sale, holding of sale or
reporting of any sale, and Customer waives all rights of redemption or
reinstatement from any such sale. Any notices required under applicable law
shall be reasonably and properly given to Customer if given by any of the
methods provided herein at least 5 Business Days prior to taking action. MLBFS
shall have the right to postpone or adjourn any sale or other disposition of
Collateral at any time without giving notice of any such postponed or adjourned
date. In the event MLBFS seeks to take possession of any or all of the
Collateral by court process, Customer further irrevocably waives to the fullest
extent permitted by law any bonds and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession, and any demand for possession prior to the commencement of any suit
or action.

3.7 MISCELLANEOUS

(a)     Non-Waiver. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Loan Agreement or any of the other Loan
Documents shall operate as a waiver thereof, and no single or partial exercise
of any such right, power or remedy shall preclude any other or further exercise
thereof, or the exercise of any other right, power or remedy. Neither any waiver
of any provision of any of the Loan Documents, nor any consent to any departure
by Customer therefrom, shall be effective unless the same shall be in writing
and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any
of the other Loan Documents and any consent to any departure by Customer from
the terms of this Loan Agreement or any of the other Loan Documents shall be
effective only in the specific instance and for the specific purpose for which
given. Except as otherwise expressly provided herein, no notice to or demand on
Customer shall in any case entitle Customer to any other or further notice or
demand in similar or other circumstances.

(b)     Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its
affiliates, including without limitation MLPF&S, to at any time (whether or not
an Event of Default shall have occurred) obtain from and disclose to each other
any and all financial and other information about Customer. In connection with
said authorization, the parties recognize that in order to provide a WCMA Line
of Credit certain information about Customer is required to be made available on
a computer network accessible by certain affiliates of MLBFS, including MLPF&S.
Customer further irrevocably authorizes MLBFS to contact, investigate, inquire
and obtain consumer reports, references and other information on Customer from
consumer reporting agencies and other credit reporting services, former or
current creditors, and other persons and sources (including, without limitation,
any Affiliate of MLBFS) and to provide to any references, consumer reporting
agencies, credit reporting services, creditors and other persons and sources
(including, without limitation, affiliates of MLBFS) all financial, credit and
other information obtained by MLBFS relating to the Customer.

(c)     Communications. Delivery of an agreement, instrument or other document
may, at the discretion of MLBFS, be by electronic transmission. Except as
required by law or otherwise provided herein or in a writing executed by the
party to be bound, all notices demands, requests, accountings, listings,
statements, advices or other communications to be given under the Loan Documents
shall be in writing and shall be served either personally, by deposit with a
reputable overnight courier with charges prepaid, or by deposit in the United
States mail by certified mail, return receipt required. Notices may be addressed
to Customer as set forth at its address shown in the preamble hereto, or to any
office to which billing or account statements are sent; to MLBFS at its address
shown in the preamble hereto, or at such other address designated in writing by
MLBFS. Any such communication shall be deemed to have been given upon, in the
case of personal delivery the date of delivery, one Business Day after deposit
with an overnight courier, two (2) Business Days after deposit in the United
States by certified mail (return receipt required), or receipt of electronic
transmission (which shall be presumed to be three hours after the time of
transmission unless an error message is received by the sender), except that any
notice of change of address shall not be effective until actually received.

(d)     Fees, Expenses and Taxes. Customer shall pay or reimburse MLBFS for: (i)
all UCC, real property or other filing, recording, and search fees and expenses
incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS’ rights hereunder or in any Collateral or any other
collateral for the Obligations; (ii) any and all stamp, transfer, mortgage,
intangible, document, filing, recording and other taxes and fees payable or
determined to be payable in connection with the borrowings hereunder or the
execution, delivery, filing and/or recording of the Loan Documents and any other
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith; and (iii) all fees and out-of-pocket
expenses (including, attorneys’ fees and legal expenses) incurred by MLBFS in
connection with the preparation, execution, administration, collection,
enforcement, protection, waiver or amendment of this Loan Agreement, the other
Loan Documents and such other instruments or documents, and the rights and
remedies of MLBFS thereunder and all other matters in connection therewith.
Customer hereby authorizes MLBFS, at its option, to either cause any and all
such fees, expenses and taxes to be paid with a WCMA Loan, or invoice Customer
therefore (in which event Customer shall pay all such fees, expenses and taxes
within 5 Business Days after receipt of such invoice). The obligations of
Customer under this paragraph shall survive the expiration or termination of
this Loan Agreement and the discharge of the other Obligations.

(e)     Right to Perform Obligations. If Customer shall fail to do any act or
thing which it has covenanted to do under any of the Loan Documents or any
representation or warranty on the part of Customer contained in the Loan
Documents shall be breached, MLBFS may, in its sole discretion, after 5 Business
Days written notice is sent to Customer (or such lesser notice, including no
notice, as is reasonable under the circumstances), do the same or cause it to be
done or remedy any such breach, and may expend its funds for such purpose. Any
and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by
Customer upon demand, with interest at the Interest Rate during the period from
and including the date funds are so expended by MLBFS to the date of repayment,
and all such amounts shall be additional Obligations. The payment or performance
by MLBFS of any of Customer’s obligations hereunder shall not relieve Customer
of said obligations or of the consequences of having failed to pay or perform
the same, and shall not waive or be deemed a cure of any Default.

(f)     Further Assurances. Customer agrees to do such further acts and things
and to execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of the Loan Documents, to confirm the WCMA Loan Balance, or to
establish, perfect and maintain MLBFS’ security interests and liens upon the
Collateral, including, but not limited to: (i) executing financing statements or
amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the
reasonable judgment of MLBFS it is required by local law, causing the owners
and/or mortgagees of the real property on which any Collateral may be located to
execute and deliver to MLBFS waivers or subordinations reasonably satisfactory
to MLBFS with respect to any rights in such Collateral.

(g)     Binding Effect. This Loan Agreement and the Loan Documents shall be
binding upon, and shall inure to the benefit of MLBFS, Customer and their
respective successors and assigns. MLBFS reserves the right, at any time while
the Obligations remain outstanding, to sell, assign, syndicate or otherwise
transfer or dispose of any or all of MLBFS’ rights and interests under the Loan
Documents. MLBFS also reserves the right at any time to pool the WCMA Loan with
one or more other loans originated by MLBFS or any other Person, and to
securitize or offer interests in such pool on whatever terms and conditions
MLBFS shall determine. Customer consents to MLBFS releasing financial and other
information regarding Credit Parties, the Collateral and the WCMA Loan in
connection with any such sale, pooling, securitization or other offering.
Customer shall not assign any of its rights or delegate any of its obligations
under this Loan Agreement or any of the Loan Documents without the prior written
consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by
MLBFS, no such consent shall in any event relieve Customer of any of its
obligations under this Loan Agreement or the Loan Documents.

(h)     Interpretation; Construction. (i) Captions and section and paragraph
headings in this Loan Agreement are inserted only as a matter of convenience,
and shall not affect the interpretation hereof; (ii) no provision of this Loan
Agreement shall be construed against a particular Person or in favor of another
Person merely because of which Person (or its representative) drafted or
supplied the wording for such provision; and (iii) where the context requires:
(a) use of the singular or plural incorporates the other, and (b) pronouns and
modifiers in the masculine, feminine or neuter gender shall be deemed to refer
to or include the other genders.

(i)     Governing Law. This Loan Agreement, and, unless otherwise expressly
provided therein, each of the Loan Documents, shall be governed in all respects
by the laws of the State of Illinois, not including its conflict of law
provisions.

(j)     Severability of Provisions. Whenever possible, each provision of this
Loan Agreement and the other Loan Documents shall be interpreted in such manner
as to be effective and valid under applicable law. Any provision of this Loan
Agreement or any of the Loan Documents which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Loan Agreement and the Loan Documents or affecting
the validity or enforceability of such provision in any other jurisdiction.

(k)     Term. This Loan Agreement shall become effective on the date accepted by
MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof,
shall continue in effect so long thereafter as the WCMA Line of Credit shall be
in effect or there shall be any Obligations outstanding. Customer hereby waives
notice of acceptance of this Loan Agreement by MLBFS.

(l)     Exhibits. The exhibits to this Loan Agreement are hereby incorporated
and made a part hereof and are an integral part of this Loan Agreement.

(m)     Counterparts. This Loan Agreement may be executed in one or more
counterparts which, when taken together, constitute one and the same agreement.

(n)     Jurisdiction; Waiver. Customer acknowledges that this Loan Agreement is
being accepted by MLBFS in partial consideration of MLBFS’ right and option, in
its sole discretion, to enforce this Loan Agreement and all of the Loan
Documents in either the State of Illinois or in any other jurisdiction where
Customer or any Collateral may be located. Customer irrevocably submits itself
to jurisdiction in the State of Illinois and venue in any state or federal court
in the County of Cook for such purposes, and Customer waives any and all rights
to contest said jurisdiction and venue and the convenience of any such forum,
and any and all rights to remove such action from state to federal court.
Customer further waives any rights to commence any action against MLBFS in any
jurisdiction except in the County of Cook and State of Illinois. Customer agrees
that all such service of process shall be made by mail or messenger directed to
it in the same manner as provided for notices to Customer in this Loan Agreement
and that service so made shall be deemed to be completed upon the earlier of
actual receipt or three (3) days after the same shall have been posted to
Customer or Customer’s agent. Nothing contained herein shall affect the right of
MLBFS to serve legal process in any other manner permitted by law or affect the
right of MLBFS to bring any action or proceeding against Customer or its
property in the courts of any other jurisdiction. Customer waives, to the extent
permitted by law, any bond or surety or security upon such bond which might, but
for this waiver, be required of MLBFS. Customer further waives the right to
bring any non-compulsory counterclaims.

(o)     Jury Waiver. MLBFS and Customer hereby each expressly waive any and all
rights to a trial by jury in any action, proceeding or counterclaim brought by
either of the parties against the other party with respect to any matter
relating to, arising out of or in any way connected with the WCMA Line of
Credit, the Obligations, this Loan Agreement, any of the Loan Documents and/or
any of the transactions which are the subject matter of this Loan Agreement.

(p)     Integration. This Loan Agreement, together with the other Loan
Documents, constitutes the entire understanding and represents the full and
final agreement between the parties with respect to the subject matter hereof,
and may not be contradicted by evidence of prior written agreements or prior,
contemporaneous or subsequent oral agreements of the parties. There are no
unwritten oral agreements of the parties. Without limiting the foregoing,
Customer acknowledges that: (i) no promise or commitment has been made to it by
MLBFS, MLPF&S or any of their respective employees, agents or representatives to
extend the availability of the WCMA Line of Credit or the Maturity Date, or to
increase the Maximum WCMA Line of Credit, or to make any WCMA Loan on any terms
other than as expressly set forth herein or to otherwise extend any other credit
to Customer or any other party; (ii) no purported extension of the Maturity
Date, increase in the Maximum WCMA Line of Credit or other extension or
agreement to extend credit shall be valid or binding unless expressly set forth
in a written instrument signed by MLBFS; and (iii) this Loan Agreement
supersedes and replaces any and all proposals, letters of intent and approval
and commitment letters from MLBFS to Customer, none of which shall be considered
a Loan Document. No amendment or modification of any of the Loan Documents to
which Customer is a party shall be effective unless in a writing signed by both
MLBFS and Customer.

(q)     Survival. All representations, warranties, agreements and covenants
contained in the Loan Documents shall survive the signing and delivery of the
Loan Documents, and all of the waivers made and indemnification obligations
undertaken by Customer shall survive the termination, discharge or cancellation
of the Loan Documents.

(r)     Customer’s Acknowledgments. The Customer acknowledges that the Customer:
(i) has had ample opportunity to consult with counsel and such other parties as
deemed advisable prior to signing and delivering this Loan Agreement and the
other Loan Documents; (ii) understands the provisions of this Loan Agreement and
the other Loan Documents, including all waivers contained therein; and (iii)
signs and delivers this Loan Agreement and the other Loan Documents freely and
voluntarily, without duress or coercion.

--------------------------------------------------------------------------------

This Loan Agreement and the other Loan Documents are executed under seal and are
intended to take effect as sealed instruments.

IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year
first above written.

DERMA SCIENCES, INC.

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

Accepted at Chicago, Illinois:

MERRILL LYNCH BUSINESS FINANCIALSERVICES
INC.

By:____________________________________________________

--------------------------------------------------------------------------------

EXHIBIT A

ATTACHED TO AND HEREBY MADE A PART OF WCMA LOAN AND SECURITY AGREEMENT NO.
876-07H74 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND DERMA
SCIENCES, INC.

--------------------------------------------------------------------------------

ADDITIONAL LOCATIONS OF TANGIBLE COLLATERAL:

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

SECRETARY'S CERTIFICATE

--------------------------------------------------------------------------------

The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES
INC. that the undersigned is the duly appointed and acting Secretary (or
Assistant Secretary) of DERMA SCIENCES, INC., a corporation duly organized,
validly existing and in good standing under the laws of the State of
Pennsylvania; and that the following is a true, accurate and compared transcript
of resolutions duly, validly and lawfully adopted on the _______ day of
____________________, 2003 by the Board of Directors of said Corporation acting
in accordance with the laws of the state of incorporation and the charter and
by-laws of said Corporation:

“RESOLVED, that this Corporation is authorized and empowered, now and from time
to time hereafter, to borrow and/or obtain credit from, and/or enter into other
financial arrangements with, MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
(“MLBFS”), and in connection therewith to grant to MLBFS liens and security
interests on any or all property belonging to this Corporation; all such
transactions to be on such terms and conditions as may be mutually agreed from
time to time between this Corporation and MLBFS; and

“FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary
or other officer of this Corporation, or any one or more of them, be and each of
them hereby is authorized and empowered to: (a) execute and deliver to MLBFS on
behalf of this Corporation any and all loan agreements, promissory notes,
security agreements, pledge agreements, financing statements, mortgages, deeds
of trust, leases and/or all other agreements, instruments and documents required
by MLBFS in connection therewith, and any present or future extensions,
amendments, supplements, modifications and restatements thereof; all in such
form as any such officer shall approve, as conclusively evidenced by his or her
signature thereon, and (b) do and perform all such acts and things deemed by any
such officer to be necessary or advisable to carry out and perform the
undertakings and agreements of this Corporation in connection therewith; and any
and all prior acts of each of said officers in these premises are hereby
ratified and confirmed in all respects; and

“FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation from an
authorized officer of this Corporation, which change or revocation shall not in
any event affect the obligations of this Corporation with respect to any
transaction conditionally agreed or committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS.”

The undersigned further certifies that: (a) the foregoing resolutions have not
been rescinded, modified or repealed in any manner, are not in conflict with any
agreement of said Corporation and are in full force and effect as of the date of
this Certificate, and (b) the following individuals are now the duly elected and
acting officers of said Corporation and the signatures set forth below are the
true signatures of said officers:

      President:
_____________________________________________________________________________

      Vice President:
________________________________________________________________________

      Treasurer:
_____________________________________________________________________________

      Secretary:
______________________________________________________________________________

--------------------------------------------------------------------------------

      Additional Title
______________________________________________________________________________

IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said corporation hereto, pursuant to due authorization, all
as of this ________ day of _________________, 2003.

(Corporate Seal) ________________________________________________  
      Secretary Printed Name: ________________________________________________

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

UNCONDITIONAL GUARANTY

--------------------------------------------------------------------------------

FOR VALUE RECEIVED, and in order to induce MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC. (“MLBFS”) to advance moneys or extend or continue to extend credit
or lease property to or for the benefit of, or modify its credit relationship
with, or enter into any other financial accommodations with DERMA SCIENCES,
INC., a corporation organized and existing under the laws of the State of
Pennsylvania (with any successor in interest, including, without limitation, any
successor by merger or by operation of law, herein collectively referred to as
“Customer”) under: (a) that certain WCMA LOAN AND SECURITY AGREEMENT NO.
876-07H74 between MLBFS and Customer (the “Loan Agreement”), (b) any “Loan
Documents”, as that term is defined in the Loan Agreement, and (c) all present
and future amendments, restatements, supplements and other evidences of any
extensions, increases, renewals, modifications and other changes of or to the
Loan Agreement or any Loan Documents (collectively, the “Guaranteed Documents”),
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the undersigned, SUNSHINE PRODUCTS, INC., a
corporation organized and existing under the laws of the State of Missouri
(“Guarantor”), hereby unconditionally guarantees to MLBFS: (i) the prompt and
full payment when due, by acceleration or otherwise, of all sums now or any time
hereafter due from Customer to MLBFS under the Guaranteed Documents, (ii) the
prompt, full and faithful performance and discharge by Customer of each and
every other covenant and warranty of Customer set forth in the Guaranteed
Documents, and (iii) the prompt and full payment and performance of all other
indebtedness, liabilities and obligations of Customer to MLBFS, howsoever
created or evidenced, and whether now existing or hereafter arising
(collectively, the “Obligations”). Guarantor further agrees to pay all
reasonable costs and expenses (including, but not limited to, court costs and
reasonable attorneys’ fees) paid or incurred by MLBFS in endeavoring to collect
or enforce performance of any of the Obligations, or in enforcing this Guaranty.
Guarantor acknowledges that MLBFS is relying on the execution and delivery of
this Guaranty in advancing moneys to or extending or continuing to extend credit
to or for the benefit of Customer.

This Guaranty is absolute, unconditional and continuing and shall remain in
effect until all of the Obligations shall have been fully and indefeasibly paid,
performed and discharged. Upon the occurrence and during the continuance of any
default or Event of Default under any of the Guaranteed Documents, any or all of
the indebtedness hereby guaranteed then existing shall, at the option of MLBFS,
become immediately due and payable from Guarantor (it being understood, however,
that upon the occurrence of any “Bankruptcy Event”, as defined in the Loan
Agreement, all such indebtedness shall automatically become due and payable
without action on the part of MLBFS). Notwithstanding the occurrence of any such
event, this Guaranty shall continue and remain in full force and effect. To the
extent MLBFS receives payment with respect to the Obligations, and all or any
part of such payment is subsequently invalidated, declared to be fraudulent or
preferential, set aside, required to be repaid by MLBFS or is repaid by MLBFS
pursuant to a settlement agreement, to a trustee, receiver or any other person
or entity, whether under any Bankruptcy law or otherwise (a “Returned Payment”),
this Guaranty shall continue to be effective or shall be reinstated, as the case
may be, to the extent of such payment or repayment by MLBFS, and the
indebtedness or part thereof intended to be satisfied by such Returned Payment
shall be revived and continued in full force and effect as if said Returned
Payment had not been made.

The liability of Guarantor hereunder shall in no event be affected or impaired
by any of the following, any of which may be done or omitted by MLBFS from time
to time, without notice to or the consent of Guarantor: (a) any renewals,
amendments, restatements, modifications or supplements of or to any of the
Guaranteed Documents, or any extensions, forbearances, compromises or releases
of any of the Obligations or any of MLBFS’ rights under any of the Guaranteed
Documents; (b) any acceptance by MLBFS of any collateral or security for, or
other guarantees of, any of the Obligations; (c) any failure, neglect or
omission on the part of MLBFS to realize upon or protect any of the Obligations,
or any collateral or security therefor, or to exercise any lien upon or right of
appropriation of any moneys, credits or property of Customer or any other
guarantor, possessed by or under the control of MLBFS or any of its affiliates,
toward the liquidation or reduction of the Obligations; (d) any invalidity,
irregularity or unenforceability of all or any part of the Obligations, of any
collateral security for the Obligations, or the Guaranteed Documents; (e) any
application of payments or credits by MLBFS; (f) the granting of credit from
time to time by MLBFS to Customer in excess of the amount set forth in the
Guaranteed Documents; or (g) any other act of commission or omission of any kind
or at any time upon the part of MLBFS or any of its affiliates or any of their
respective employees or agents with respect to any matter whatsoever. MLBFS
shall not be required at any time, as a condition of Guarantor’s obligations
hereunder, to resort to payment from Customer or other persons or entities
whatsoever, or any of their properties or estates, or resort to any collateral
or pursue or exhaust any other rights or remedies whatsoever.

No release or discharge in whole or in part of any other guarantor of the
Obligations shall release or discharge Guarantor unless and until all of the
Obligations shall have been indefeasibly fully paid and discharged. Guarantor
expressly waives presentment, protest, demand, notice of dishonor or default,
notice of acceptance of this Guaranty, notice of advancement of funds under the
Guaranteed Documents and all other notices and formalities to which Customer or
Guarantor might be entitled, by statute or otherwise, and, so long as there are
any Obligations or MLBFS is committed to extend credit to Customer, waives any
right to revoke or terminate this Guaranty without the express written consent
of MLBFS.

So long as there are any Obligations, Guarantor shall not have any claim, remedy
or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right, or remedy of MLBFS
against Customer or any security which MLBFS now has or hereafter acquires,
whether or not such claim, right or remedy arises in equity, under contract, by
statute, under common law, or otherwise.

MLBFS is hereby irrevocably authorized by Guarantor at any time during the
continuance of an Event of Default under the Loan Agreement or any other of the
Guaranteed Documents or in respect of any of the Obligations, in its sole
discretion and without demand or notice of any kind, to appropriate, hold, set
off and apply toward the payment of any amount due hereunder, in such order of
application as MLBFS may elect, all cash, credits, deposits, accounts, financial
assets, investment property, securities and any other property of Guarantor
which is in transit to or in the possession, custody or control of MLBFS or
Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), or any of their
respective agents, bailees or affiliates. Guarantor hereby collaterally assigns
and grants to MLBFS a continuing security interest in all such property as
additional security for the Obligations. Upon the occurrence and during the
continuance of an Event of Default, MLBFS shall have all rights in such property
available to collateral assignees and secured parties under all applicable laws,
including, without limitation, the Uniform Commercial Code.

Guarantor agrees to furnish to MLBFS such financial information concerning
Guarantor as may be required by any of the Guaranteed Documents or as MLBFS may
otherwise from time to time reasonably request. Guarantor further hereby
irrevocably authorizes MLBFS and each of its affiliates, including without
limitation MLPF&S, to at any time (whether or not an Event of Default shall have
occurred) obtain from and disclose to each other any and all financial and other
information about Guarantor.

No delay on the part of MLBFS in the exercise of any right or remedy under any
of the Guaranteed Documents, this Guaranty or any other agreement shall operate
as a waiver thereof, and, without limiting the foregoing, no delay in the
enforcement of any security interest, and no single or partial exercise by MLBFS
of any right or remedy shall preclude any other or further exercise thereof or
the exercise of any other right or remedy. This Guaranty may be executed in any
number of counterparts, each of which counterparts, once they are executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Guaranty. This Guaranty
shall be binding upon Guarantor and its successors and assigns, and shall inure
to the benefit of MLBFS and its successors and assigns. If there are more than
one guarantor of the Obligations, all of the obligations and agreements of
Guarantor are joint and several with such other guarantors.

This Guaranty shall be governed by the laws of the State of Illinois. WITHOUT
LIMITING THE RIGHT OF MLBFS TO ENFORCE THIS GUARANTY IN ANY JURISDICTION AND
VENUE PERMITTED BY APPLICABLE LAW: (I) GUARANTOR AGREES THAT THIS GUARANTY MAY
AT THE OPTION OF MLBFS BE ENFORCED BY MLBFS IN EITHER THE STATE OF ILLINOIS OR
IN ANY OTHER JURISDICTION WHERE GUARANTOR, CUSTOMER OR ANY COLLATERAL FOR THE
OBLIGATIONS OF CUSTOMER MAY BE LOCATED, (II) GUARANTOR IRREVOCABLY SUBMITS
ITSELF TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR
FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND (III) GUARANTOR
WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE
CONVENIENCE OF ANY SUCH FORUM AND ANY AND ALL RIGHTS TO REMOVE SUCH ACTION FROM
STATE TO FEDERAL COURT. GUARANTOR FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY
ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE
OF ILLINOIS. MLBFS AND GUARANTOR HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS
TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER
OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO,
ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY AND/OR ANY OF THE
TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS GUARANTY. GUARANTOR FURTHER
WAIVES THE RIGHT TO BRING ANY NON-COMPULSORY COUNTERCLAIMS. Wherever possible
each provision of this Guaranty shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Guaranty
shall be prohibited by or invalid under such law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Guaranty. No modification or waiver of any of the provisions of this Guaranty
shall be effective unless in writing and signed by both Guarantor and an officer
of MLBFS. Each signatory on behalf of Guarantor warrants that he or she has
authority to sign on behalf of Guarantor, and by so signing, to bind Guarantor
hereunder.

Dated as of January 6, 2003.

SUNSHINE PRODUCTS, INC.

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

Address of Guarantor:

1149 RECO DRIVE
ST. LOUIS, MISSOURI 63126

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

SECRETARY’S CERTIFICATE

--------------------------------------------------------------------------------

(Guaranty by Corporation)

The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES
INC. that the undersigned is the duly appointed and acting Secretary (or
Assistant Secretary) of SUNSHINE PRODUCTS, INC., a corporation duly organized,
validly existing and in good standing under the laws of the State of Missouri;
and that the following is a true, accurate and compared transcript of
resolutions duly, validly and lawfully adopted on the _______ day of
____________________, 2003 by the Board of Directors of said Corporation acting
in accordance with the laws of the state of incorporation and the charter and
by-laws of said Corporation:

“RESOLVED, that it is advisable and in the best interests and to the benefit of
this Corporation to guaranty the obligations of DERMA SCIENCES, INC.
(“Customer”) to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. (“MLBFS”); and

“FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary
or other officer of this Corporation, or any one or more of them, be and each of
them hereby is authorized and empowered for and on behalf of this Corporation
to: (a) execute and deliver to MLBFS: (i) an Unconditional Guaranty of the
obligations of Customer, (ii) any other agreements, instruments and documents
required by MLBFS in connection therewith, including, without limitation, any
agreements, instruments and documents evidencing liens or security interests on
any of the property of this Corporation as collateral for said Unconditional
Guaranty and/or the obligations of Customer to MLBFS, and (iii) any present or
future amendments to any of the foregoing; all in such form as such officer
shall approve, as evidenced by his signature thereon; and (b) to do and perform
all such acts and things deemed by any such officer to be necessary or advisable
to carry out and perform the undertakings and agreements of this Corporation set
forth therein; and all prior acts of each of said officers in these premises are
hereby ratified and confirmed; and

“FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation from an
authorized officer of this Corporation, which change or revocation shall not in
any event affect the obligations of this Corporation with respect to any
transaction conditionally agreed or committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS.”

The undersigned further certifies that: (a) the foregoing resolutions have not
been rescinded, modified or repealed in any manner, are not in conflict with any
agreement of said Corporation and are in full force and effect as of the date of
this Certificate, and (b) the following individuals are now the duly elected and
acting officers of said Corporation and the signatures set forth below are the
true signatures of said officers:

      President:
_____________________________________________________________________________

      Vice President:
________________________________________________________________________

      Treasurer:
_____________________________________________________________________________

       Secretary:
______________________________________________________________________________

      Additional Title
______________________________________________________________________________

IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said corporation hereto, pursuant to due authorization, all
as of this ________ day of _________________, 2003.

(Corporate Seal) ________________________________________________  
      Secretary Printed Name: ________________________________________________

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

SECURITY AGREEMENT

--------------------------------------------------------------------------------

SECURITY AGREEMENT (“Agreement”) dated as of January 6, 2003, between SUNSHINE
PRODUCTS, INC., a corporation organized and existing under the laws of the State
of Missouri having its principal office at 1149 Reco Drive, St. Louis, Missouri
63126 (“Grantor”), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a
corporation organized and existing under the laws of the State of Delaware
having its principal office at 222 North LaSalle Street, Chicago, IL 60601
(“MLBFS”).

In order to induce MLBFS to extend or continue to extend credit to DERMA
SCIENCES, INC. (“Customer”) under the Loan Agreement (as defined below) or
otherwise, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Grantor hereby agrees with MLBFS as
follows:

1.     DEFINITIONS

(a)     Specific Terms. In addition to terms defined elsewhere in this
Agreement, when used herein the following terms shall have the following
meanings:

(i)     “Account Debtor” shall mean any party who is or may become obligated
with respect to an Account or Chattel Paper.

(ii)     “Bankruptcy Event” shall mean any of the following: (A) a proceeding
under any bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt or receivership law or statute shall be filed or consented to by Grantor or
Customer; or (B) any such proceeding shall be filed against Grantor or Customer
and shall not be dismissed or withdrawn within sixty (60) days after filing; or
(C) Grantor or Customer shall make a general assignment for the benefit of
creditors; or (D) Grantor or Customer shall generally fail to pay or admit in
writing its inability to pay its debts as they become due; or (E) Grantor or
Customer shall be adjudicated a bankrupt or insolvent.

(iii)     “Business Day” shall mean any day other than a Saturday, Sunday,
federal holiday or other day on which the New York Stock Exchange is regularly
closed.

(iv)     “Collateral” shall mean all Accounts, Chattel Paper, Contract Rights,
Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts,
Documents, Instruments, Financial Assets and Investment Property of Grantor,
howsoever arising, whether now owned or existing or hereafter acquired or
arising, and wherever located; together with all parts thereof (including spare
parts), all accessories and accessions thereto, all books and records (including
computer records) directly related thereto, all proceeds thereof (including,
without limitation, proceeds in the form of Accounts and insurance proceeds),
and the additional collateral described in Section 7 (b) hereof.

(v)     “Default” shall mean an “Event of Default”, as defined in Section 6
hereof, or any event which with the giving of notice, passage of time, or both,
would constitute such an Event of Default.

(vi)     “Loan Agreement” shall mean that certain WCMA LOAN AND SECURITY
AGREEMENT NO. 876-07H74 between MLBFS and Customer, together with all
agreements, instruments and documents executed pursuant thereto, as any or all
of the same may from time to time be or have been amended, restated, extended or
supplemented.

(vii)     “Location of Tangible Collateral” shall mean the address of Grantor
set forth at the beginning of this Agreement, together with any other address or
addresses set forth on any exhibit hereto as being a Location of Tangible
Collateral.

(viii)     “Obligations” shall mean all liabilities, indebtedness and other
obligations of Customer or Grantor to MLBFS, howsoever created, arising or
evidenced, whether now existing or hereafter arising, whether direct or
indirect, absolute or contingent, due or to become due, primary or secondary or
joint or several, and, without limiting the foregoing, shall include interest
accruing after the filing of any petition in bankruptcy, and all present and
future liabilities, indebtedness and obligations of Customer under the Loan
Agreement and the agreements, instruments and documents executed pursuant
thereto, and of Grantor under this Agreement.

(ix)     “Permitted Liens” shall mean with respect to the Collateral: (A) liens
for current taxes not delinquent, other non-consensual liens arising in the
ordinary course of business for sums not due, and, if MLBFS’ rights to and
interest in the Collateral are not materially and adversely affected thereby,
any such liens for taxes or other non-consensual liens arising in the ordinary
course of business being contested in good faith by appropriate proceedings; (B)
liens in favor of MLBFS; and (C) any other liens expressly permitted in writing
by MLBFS.

(b)     Other Terms. Except as otherwise defined herein, all terms used in this
Agreement which are defined in the Uniform Commercial Code of Illinois (“UCC”)
shall have the meanings set forth in the UCC.

2.     COLLATERAL

(a)     Pledge of Collateral. To secure payment and performance of the
Obligations, Grantor hereby pledges, assigns, transfers and sets over to MLBFS,
and grants to MLBFS a first lien and security interest in and upon all of the
Collateral, subject only to Permitted Liens.

(b)     Liens. Except upon the prior written consent of MLBFS, Grantor shall not
create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.

(c)     Performance of Obligations. Grantor shall perform all of its obligations
owing on account of or with respect to the Collateral; it being understood that
nothing herein, and no action or inaction by MLBFS, under this Agreement or
otherwise, shall be deemed an assumption by MLBFS of any of Grantor’s said
obligations.

(d)     Notice of Certain Events. Grantor shall give MLBFS immediate notice of
any attachment, lien, judicial process, encumbrance or claim affecting or
involving $25,000.00 or more of the Collateral.

(e)     Indemnification Grantor shall indemnify, defend and save MLBFS harmless
from and against any and all claims, losses, costs, expenses (including, without
limitation, reasonable attorneys’ fees and expenses), demands, liabilities,
penalties, fines and forfeitures of any nature whatsoever which may be asserted
against or incurred by MLBFS arising out of or in any manner occasioned by (i)
the ownership, use, operation, condition or maintenance of any Collateral, or
(ii) any failure by Grantor to perform any of its obligations hereunder;
excluding, however, from said indemnity any such claims, losses, etc. arising
out of the willful wrongful act or active gross negligence of MLBFS. This
indemnity shall survive the expiration or termination of this Agreement as to
all matters arising or accruing prior to such expiration or termination.

(f)     Insurance. Grantor shall insure all of the tangible Collateral with an
insurer or insurers reasonably acceptable to MLBFS, under a policy or policies
of physical damage insurance reasonably acceptable to MLBFS providing that (i)
losses will be payable to MLBFS as its interests may appear pursuant to a
Lender’s Loss Payable endorsement , and (ii) MLBFS will receive not less than 10
days prior written notice of any cancellation; and containing such other
provisions as may be reasonably required by MLBFS. Grantor shall maintain such
other insurance as may be required by law or otherwise reasonably required by
MLBFS. Grantor shall furnish MLBFS with a copy or certificate of each such
policy or policies and, prior to any expiration or cancellation, each renewal or
replacement thereof.

(g)     Event of Loss. Grantor shall at its expense promptly repair all
repairable damage to any tangible Collateral. In the event that any tangible
Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an
“Event of Loss”) and such Collateral had a value prior to such Event of Loss of
$25,000.00 or more, then, on or before the first to occur of (i) 90 days after
the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on
which either Grantor or MLBFS shall receive any proceeds of insurance on account
of such Event of Loss, or any underwriter of insurance on such tangible
Collateral shall advise either Grantor or MLBFS that it disclaims liability in
respect of such Event of Loss, Grantor shall, at Grantor’s option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Grantor shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or pay
to MLBFS on account of the Obligations an amount equal to the actual cash value
of such Collateral as determined by either the applicable insurance company’s
payment (plus any applicable deductible) or, in absence of insurance company
payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at
the time of occurrence of such Event of Loss or any time thereafter prior to
replacement or payment, as aforesaid, an Event of Default shall have occurred
and be continuing hereunder, then MLBFS may at its sole option, exercisable at
any time while such Event of Default shall be continuing, require Grantor to
either replace such Collateral or make a payment on account of the Obligations,
as aforesaid.

(h)     Sales and Collections. So long as no Event of Default shall have
occurred and be continuing, Grantor may in the ordinary course of its business:
(i) sell any Inventory normally held by Grantor for sale, (ii) use or consume
any materials and supplies normally held by Grantor for use or consumption, and
(iii) collect all of its Accounts. Grantor shall take such action with respect
to protection of its Inventory and the other Collateral and the collection of
its Accounts as MLBFS may from time to time reasonably request.

(i)     Account Schedules. Upon the request of MLBFS, made now or at any time or
times hereafter, Grantor shall deliver to MLBFS, in addition to the other
information required hereunder, a schedule identifying, for each Account and all
Chattel Paper subject to MLBFS’ security interests hereunder, each Account
Debtor by name and address and amount, invoice number and date of each invoice.
Grantor shall furnish to MLBFS such additional information with respect to the
Collateral, and amounts received by Grantor as proceeds of any of the
Collateral, as MLBFS may from time to time reasonably request.

(j)     Location. Except for movements in the ordinary course of its business,
Grantor shall give MLBFS 30 days’ prior written notice of the placing at or
movement of any tangible Collateral to any location other than a Location of
Tangible Collateral. In no event shall Grantor cause or permit any tangible
Collateral to be removed from the United States without the express prior
written consent of MLBFS.

(k)     Alterations and Maintenance. Except upon the prior written consent of
MLBFS, Grantor shall not make or permit any material alterations to any tangible
Collateral which might materially reduce or impair its market value or utility.
Grantor shall at all times keep the tangible Collateral in good condition and
repair and shall pay or cause to be paid all obligations arising from the repair
and maintenance of such Collateral, as well as all obligations with respect to
each Location of Tangible Collateral, except for any such obligations being
contested by Grantor in good faith by appropriate proceedings.

3.     REPRESENTATIONS AND WARRANTIES

Grantor represents and warrants to MLBFS that:

(a)     Organization. Grantor is a corporation duly organized and validly
existing in good standing under the laws of the State of Missouri, and is
qualified to do business and in good standing in each other state where the
nature of its business or the property owned by it make such qualification
necessary.

(b)     Execution, Delivery and Performance. The execution, delivery and
performance by Grantor of this Agreement have been duly authorized by all
requisite action, do not and will not violate or conflict with any law or other
governmental requirement, or any of the agreements, instruments or documents
which formed or governed Grantor, and do not and will not breach or violate any
of the provisions of, and will not result in a default by Grantor under, any
other agreement, instrument or document to which it is a party or by which it or
its properties are bound.

(c)     Notice or Consent. Except as may have been given or obtained, no notice
to or consent or approval of any governmental body or authority or other third
party whatsoever (including, without limitation, any other creditor) is required
in connection with the execution, delivery or performance by Grantor of this
Agreement.

(d)     Valid and Binding. This Agreement is the legal, valid and binding
obligation of Grantor, enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy and other similar laws
affecting the rights of creditors generally or by general principles of equity.

(e)     Financial Statements. Except as expressly set forth in Grantor ‘s
financial statements, all financial statements of Grantor furnished to MLBFS
have been prepared in conformity with generally accepted accounting principles,
consistently applied, are true and correct, and fairly present the financial
condition of it as at such dates and the results of its operations for the
periods then ended; and since the most recent date covered by such financial
statements, there has been no material adverse change in any such financial
condition or operation.

(f)     Litigation, etc. No litigation, arbitration, administrative or
governmental proceedings are pending or threatened against Grantor, which would,
if adversely determined, materially and adversely affect the financial condition
or continued operations of Grantor, or the liens and security interests of MLBFS
hereunder.

(g)     Taxes. All federal, state and local tax returns, reports and statements
required to be filed by Grantor have been filed with the appropriate
governmental agencies and all taxes due and payable by Grantor have been timely
paid (except to the extent that any such failure to file or pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder or the financial condition or continued operations of Grantor).

(h)     Collateral. Grantor has good and marketable title to the Collateral,
and, except for any Permitted Liens: (i) none of the Collateral is subject to
any lien, encumbrance or security interest, and (ii) upon the filing of all
Uniform Commercial Code financing statements executed by Grantor with respect to
the Collateral or a copy of this Agreement in the appropriate jurisdiction(s)
and/or the completion of any other action required by applicable law to perfect
is lien and security interests, MLBFS will have valid and perfected first liens
and security interests upon all of the Collateral.

Each of the foregoing representations and warranties has been and will be relied
upon as an inducement to MLBFS to advance funds or extend or continue to extend
credit to Customer, and is continuing and shall be deemed remade by Grantor
concurrently with each such advance or extension of credit by MLBFS to Customer.

4.     FINANCIAL AND OTHER INFORMATION

Grantor covenants and agrees that Grantor will furnish or cause to be furnished
to MLBFS during the term of this Agreement such financial and other information
as may be required by the Loan Agreement or any other document evidencing the
Obligations or as MLBFS may from time to time reasonably request relating to
Grantor or the Collateral.

5.     OTHER COVENANTS

Grantor further agrees during the term of this Agreement that:

(a)     Financial Records; Inspection. Grantor will: (i) maintain complete and
accurate books and records at its principal place of business, and maintain all
of its financial records in a manner consistent with the financial statements
heretofore furnished to MLBFS, or prepared on such other basis as may be
approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized
representatives, upon reasonable notice and at reasonable times, to inspect its
properties (both real and personal), operations, books and records.

(b)     Taxes. Grantor will pay when due all taxes, assessments and other
governmental charges, howsoever designated, and all other liabilities and
obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder, or the financial condition or continued operations of Grantor.

(c)     Compliance With Laws and Agreements. Grantor will not violate any law,
regulation or other governmental requirement, any judgment or order of any court
or governmental agency or authority, or any agreement, instrument or document to
which it is a party or by which it is bound, if any such violation will
materially and adversely affect either the liens and security interests of MLBFS
hereunder, or the financial condition or continued operations of Grantor.

(d)     Notification By Grantor. Grantor shall provide MLBFS with prompt written
notification of: (i) any Default; (ii) any materially adverse change in the
business, financial condition or operations of Customer or Grantor; and (iii)
any information which indicates that any financial statements of Customer or
Grantor fail in any material respect to present fairly the financial condition
and results of operations purported to be presented in such statements. Each
notification by Grantor pursuant hereto shall specify the event or information
causing such notification, and, to the extent applicable, shall specify the
steps being taken to rectify or remedy such event or information.

(e)     Notice of Change Grantor shall give MLBFS not less than 30 days prior
written notice of any change in the name (including any fictitious name) or
principal place of business of Grantor.

(f)     Continuity. Except upon the prior written consent of MLBFS, which
consent will not be unreasonably withheld: (i) Grantor shall not be a party to
any merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets of, or any material stock, partnership, joint
venture or other equity interest in, any person or entity, or sell, transfer or
lease all or any substantial part of its assets, if any such action would result
in either: (A) a material change in the principal business, ownership or control
of Grantor, or (B) a material adverse change in the financial condition or
operations of Grantor; (ii) Grantor shall preserve its existence and good
standing in the jurisdiction(s) of establishment and operation; (iii) Grantor
shall not engage in any material business substantially different from its
business in effect as of the date of application by Customer for credit from
MLBFS, or cease operating any such material business; (iv) Grantor shall not
cause or permit any other person or entity to assume or succeed to any material
business or operations of Grantor; and (iv) Grantor shall not cause or permit
any material change in its controlling ownership.

6.     EVENTS OF DEFAULT

The occurrence of any of the following events shall constitute an “Event of
Default” under this Agreement:

(a)     Event of Default Under any Loan Agreement. An Event of Default shall
occur under the terms of the Loan Agreement.

(b)     Failure to Perform. Grantor shall default in the performance or
observance of any covenant or agreement on its part to be performed or observed
under this Agreement (not constituting an Event of Default under any other
clause of this Section), and such default shall continue unremedied for 10
Business Days after written notice thereof shall have been given by MLBFS to
Grantor.

(c)     Breach of Warranty. Any representation or warranty made by Grantor
contained in this Agreement shall at any time prove to have been incorrect in
any material respect when made.

(d)     Default Under Other Agreement. A default or Event of Default by Grantor
shall occur under the terms of any other agreement, instrument or document with
or intended for the benefit of MLBFS, Merrill Lynch, Pierce, Fenner & Smith
Incorporated (“MLPF&S”) or any of their affiliates, and any required notice
shall have been given and required passage of time shall have elapsed.

(e)     Seizure or Abuse of Collateral. The Collateral, or any material part
thereof, shall be or become subject to any levy, attachment, seizure or
confiscation which is not released within 10 Business Days.

(f)     Bankruptcy Event. Any Bankruptcy Event shall occur.

(g)     Material Impairment. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of payment or performance by
Grantor has been materially impaired. The existence of such a material
impairment shall be determined in a manner consistent with the intent of Section
1-208 of the UCC.

(h)     Acceleration of Debt to Other Creditors. Any event shall occur which
results in the acceleration of the maturity of any indebtedness of $100,000.00
or more of Grantor to another creditor under any indenture, agreement,
undertaking, or otherwise.

7.     REMEDIES

(a)     Remedies Upon Default Upon the occurrence and during the continuance of
any Event of Default, MLBFS may at its sole option do any one or more or all of
the following, at such time and in such order as MLBFS may in its sole
discretion choose:

(i)     Acceleration. MLBFS may declare all Obligations to be forthwith due and
payable, whereupon all such amounts shall be immediately due and payable,
without presentment, demand for payment, protest and notice of protest, notice
of dishonor, notice of acceleration, notice of intent to accelerate or other
notice or formality of any kind, all of which are hereby expressly waived;
provided, however, that upon the occurrence of any Bankruptcy Event all
Obligations shall automatically become due and payable without any action on the
part of MLBFS.

(ii)     Exercise Rights of Secured Party. MLBFS may exercise any or all of the
remedies of a secured party under applicable law, including, but not limited to,
the UCC, and any or all of its other rights and remedies under this Agreement.

(iii)     Possession. MLBFS may require Grantor to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated by
MLBFS which is reasonably convenient to Grantor, or may take possession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice to Grantor.

(iv)     Sale. MLBFS may sell any or all of the Collateral at public or private
sale upon such terms and conditions as MLBFS may reasonably deem proper, and
MLBFS may purchase any Collateral at any such public sale; and the net proceeds
of any such public or private sale and all other amounts actually collected or
received by MLBFS pursuant hereto, after deducting all costs and expenses
incurred at any time in the collection of the Obligations and in the protection,
collection and sale of the Collateral, will be applied to the payment of the
Obligations, with any remaining proceeds paid to Grantor or whoever else may be
entitled thereto, and with Customer and each guarantor of Customer’s obligations
remaining jointly and severally liable for any amount remaining unpaid after
such application.

(v)     Delivery of Cash, Checks, Etc. MLBFS may require Grantor to forthwith
upon receipt, transmit and deliver to MLBFS in the form received, all cash,
checks, drafts and other instruments for the payment of money (properly
endorsed, where required, so that such items may be collected by MLBFS) which
may be received by Grantor at any time in full or partial payment of any
Collateral, and require that Grantor not commingle any such items which may be
so received by Grantor with any other of its funds or property but instead hold
them separate and apart and in trust for MLBFS until delivery is made to MLBFS.

(vi)     Notification of Account Debtors. MLBFS may notify any Account Debtor
that its Account or Chattel Paper has been assigned to MLBFS and direct such
Account Debtor to make payment directly to MLBFS of all amounts due or becoming
due with respect to such Account or Chattel Paper; and MLBFS may enforce payment
and collect, by legal proceedings or otherwise, such Account or Chattel Paper.

(vii)     Control of Collateral. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and of
any rejected, returned, stopped in transit or repossessed goods included in the
Collateral and endorse Grantor name on any item of payment on or proceeds of the
Collateral, and, in connection therewith, MLBFS may notify the postal
authorities to change the address for delivery of mail addressed to Grantor to
such address as MLBFS may designate.

(b)     Set-Off. MLBFS shall have the further right upon the occurrence and
during the continuance of an Event of Default to set-off, appropriate and apply
toward payment of any of the Obligations, in such order of application as MLBFS
may from time to time and at any time elect, any cash, credits, deposits,
accounts, financial assets, investment property, securities and any other
property of Grantor which is in transit to or in the possession, custody or
control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S.
Grantor hereby collaterally assigns and grants to MLBFS a security interest in
all such property as additional Collateral.

(c)     Power of Attorney. Effective upon the occurrence and during the
continuance of an Event of Default, Grantor hereby irrevocably appoints MLBFS as
its attorney-in-fact, with full power of substitution, in its place and stead
and in its name or in the name of MLBFS, to from time to time in MLBFS’ sole
discretion take any action and to execute any instrument which MLBFS may deem
necessary or advisable to accomplish the purposes of this Agreement, including,
but not limited to, to receive, endorse and collect all checks, drafts and other
instruments for the payment of money made payable to Grantor included in the
Collateral.

(d)     Remedies are Severable and Cumulative. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available at law or in equity, and any one or more of such rights and
remedies may be exercised simultaneously or successively. Any notice required
under this Agreement or under applicable law shall be deemed reasonably and
properly given to Grantor if given at the address and by any of the methods of
giving notice set forth in this Agreement at least 5 Business Days before taking
any action specified in such notice.

(e)     Notices. To the fullest extent permitted by applicable law, Grantor
hereby irrevocably waives and releases MLBFS of and from any and all liabilities
and penalties for failure of MLBFS to comply with any statutory or other
requirement imposed upon MLBFS relating to notices of sale, holding of sale or
reporting of any sale, and Grantor waives all rights of redemption or
reinstatement from any such sale. MLBFS shall have the right to postpone or
adjourn any sale or other disposition of Collateral at any time without giving
notice of any such postponed or adjourned date. In the event MLBFS seeks to take
possession of any or all of the Collateral by court process, Grantor further
irrevocably waives to the fullest extent permitted by law any bonds and any
surety or security relating thereto required by any statute, court rule or
otherwise as an incident to such possession, and any demand for possession prior
to the commencement of any suit or action.

8.     MISCELLANEOUS

(a)     Non-Waiver. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Agreement shall operate as a waiver
thereof, and no single or partial exercise of any such right, power or remedy
shall preclude any other or further exercise thereof, or the exercise of any
other right, power or remedy. Neither any waiver of any provision of this
Agreement, nor any consent to any departure by Grantor therefrom, shall be
effective unless the same shall be in writing and signed by MLBFS. Any waiver of
any provision of this Agreement and any consent to any departure by Grantor from
the terms of this Agreement shall be effective only in the specific instance and
for the specific purpose for which given. Except as otherwise expressly provided
herein, no notice to or demand on Grantor shall in any case entitle Grantor to
any other or further notice or demand in similar or other circumstances.

(b)     Communications. All notices and other communications required or
permitted hereunder shall be in writing, and shall be either delivered
personally, mailed by postage prepaid certified mail or sent by express
overnight courier or by facsimile. Such notices and communications shall be
deemed to be given on the date of personal delivery, facsimile transmission or
actual delivery of certified mail, or one Business Day after delivery to an
express overnight courier. Unless otherwise specified in a notice sent or
delivered in accordance with the terms hereof, notices and other communications
in writing shall be given to the parties hereto at their respective addresses
set forth at the beginning of this Agreement, and, in the case of facsimile
transmission, to the parties at their respective regular facsimile telephone
number.

(c)     Costs, Expenses and Taxes. Grantor shall pay or reimburse MLBFS upon
demand for: (i) all Uniform Commercial Code filing and search fees and expenses
incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS’ rights hereunder or in the Collateral; (ii) any and all
stamp, transfer and other taxes and fees payable or determined to be payable in
connection with the execution, delivery and/or recording of this Agreement; and
(iii) all reasonable fees and out-of-pocket expenses (including, but not limited
to, reasonable fees and expenses of outside counsel) incurred by MLBFS in
connection with the enforcement of this Agreement or the protection of MLBFS’
rights hereunder, excluding, however, salaries and expenses of MLBFS’ employees.
The obligations of Grantor under this paragraph shall survive the expiration or
termination of this Agreement and the discharge of the other Obligations.

(d)     Right to Perform Obligations. If Grantor shall fail to do any act or
thing which it has covenanted to do under this Agreement or any representation
or warranty on the part of Grantor contained in this Agreement shall be
breached, MLBFS may, in its sole discretion, after 5 Business Days written
notice is sent to Grantor (or such lesser notice, including no notice, as is
reasonable under the circumstances), do the same or cause it to be done or
remedy any such breach, and may expend its funds for such purpose. Any and all
reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Grantor
upon demand, with interest at the highest “Interest Rate” under the Loan
Agreement under the Loan Agreement, or the highest interest rate permitted by
law, whichever is less, during the period from and including the date funds are
so expended by MLBFS to the date of repayment, and any such amounts due and
owing MLBFS shall be additional Obligations. The payment or performance by MLBFS
of any of Grantor’s obligations hereunder shall not relieve Grantor of said
obligations or of the consequences of having failed to pay or perform the same,
and shall not waive or be deemed a cure of any Default.

(e)     Further Assurances. Grantor agrees to do such further acts and things
and to execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of this Agreement, or to establish, perfect and maintain MLBFS’
security interests and liens upon the Collateral, including, but not limited to:
(i) executing financing statements or amendments thereto when and as reasonably
requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is
required by local law, causing the owners and/or mortgagees of the real property
on which any Collateral may be located to execute and deliver to MLBFS waivers
or subordinations reasonably satisfactory to MLBFS with respect to any rights in
such Collateral.

(f)     Binding Effect. This Agreement shall be binding upon Grantor and its
successors and assigns, and shall inure to the benefit of MLBFS and its
successors and assigns.

(g)     Headings. Captions and section and paragraph headings in this Agreement
are inserted only as a matter of convenience, and shall not affect the
interpretation hereof.

(h)     Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Illinois.

(i)     Severability of Provisions. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.

(j)     Term. This Agreement shall become effective upon acceptance by MLBFS,
and, subject to the terms hereof, shall continue in effect so long thereafter as
either MLBFS shall be committed to advance funds or extend credit to Customer or
there shall be any Obligations outstanding.

(k)     Counterparts. This Agreement may be executed in one or more counterparts
which, when taken together, constitute one and the same agreement.

(l)     Jurisdiction; Waiver. GRANTOR ACKNOWLEDGES THAT THIS AGREEMENT IS BEING
ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS’ RIGHT AND OPTION, IN ITS
SOLE DISCRETION, TO ENFORCE THIS AGREEMENT IN EITHER THE STATE OF ILLINOIS OR IN
ANY OTHER JURISDICTION WHERE GRANTOR OR ANY COLLATERAL FOR THE OBLIGATIONS MAY
BE LOCATED. GRANTOR IRREVOCABLY SUBMITS ITSELF TO JURISDICTION IN THE STATE OF
ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH
PURPOSES, AND GRANTOR WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND
VENUE AND THE CONVENIENCE OF ANY SUCH FORUM, AND ANY AND ALL RIGHTS TO REMOVE
SUCH ACTION FROM STATE TO FEDERAL COURT. GRANTOR FURTHER WAIVES ANY RIGHTS TO
COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF
COOK AND STATE OF ILLINOIS. MLBFS AND GRANTOR HEREBY EACH EXPRESSLY WAIVE ANY
AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY
MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE LOAN
AGREEMENT, THIS AGREEMENT AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT
MATTER OF THE LOAN AGREEMENT OR THIS AGREEMENT. GRANTOR FURTHER WAIVES THE RIGHT
TO BRING ANY NON-COMPULSORY COUNTERCLAIMS.

(m)     Integration. THIS WRITTEN AGREEMENT CONSTITUTES THE ENTIRE UNDERSTANDING
AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO
THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR
WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. NO AMENDMENT
OR MODIFICATION OF THIS AGREEMENT SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED
BY BOTH MLBFS AND GRANTOR.

IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.

SUNSHINE PRODUCTS, INC.

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

--------------------------------------------------------------------------------

Accepted at Chicago, Illinois:

MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.

By: __________________________________________________________

--------------------------------------------------------------------------------

EXHIBIT A

ATTACHED TO AND HEREBY MADE A PART OF SECURITY AGREEMENT NO. 876-07H74 BETWEEN
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND SUNSHINE PRODUCTS, INC.

LOCATIONS OF TANGIBLE COLLATERAL:

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

COLLATERAL REMOVAL AGREEMENT

--------------------------------------------------------------------------------

The undersigned Landlord is the record owner and lessor to SUNSHINE PRODUCTS,
INC. (“Tenant”) of the real property commonly known as 1149 RECO Drive, St.
Louis, Missouri 63126 (the “Premises”).

Landlord has been advised that MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
(“MLBFS”) has or is about to lend moneys to, extend or continue to extend credit
to or for the benefit of, or enter into another financial accommodation with,
Tenant, or for the benefit of a third party based upon the credit and/or
collateral of Tenant, and in connection therewith that Tenant has granted or is
about to grant to MLBFS a security interest in, among other collateral, the
following property of Tenant; to wit:

  all accounts receivable, equipment, inventory, removable trade fixtures and
other tangible and intangible personal property now or hereafter owned by Tenant
(“MLBFS’ Collateral”).

Among other conditions thereof, MLBFS has required that Landlord execute and
deliver this Agreement.

Accordingly, and for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Landlord hereby agrees that in the event that
MLBFS shall at any time seek to take possession of or remove all or any part of
MLBFS’ Collateral from the Premises, Landlord will not hinder the same or
interfere or object thereto, and Landlord hereby consents to MLBFS’ entry upon
the Premises for such purposes; provided, however, that: (i) any such removal
shall be made during reasonable business hours; (ii) MLBFS shall not, without
the prior written consent of Landlord, conduct any public or auction sale on the
Premises; and (iii) MLBFS shall promptly at its expense repair any damage to the
Premises directly caused by any such removal by MLBFS or its agents of MLBFS’
Collateral from the Premises.

This Agreement shall be binding upon and shall inure to the benefit of Landlord
and it successors, assigns, heirs and/or personal representatives, as
applicable, and MLBFS and its successors and assigns.

Dated as of January 6, 2003.

Landlord:______________________________________________

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

--------------------------------------------------------------------------------

JANUARY 6, 2003

TO: CAPITAL SOURCE

ATTENTION: ________________________

PHONE NUMBER: ___________________

Ladies and Gentlemen:

You are hereby authorized and directed to furnish to MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC., 222 North LaSalle Street, 17th Floor, Chicago, IL 60601
(“MLBFS”):

1.     A payoff letter in the form attached hereto setting forth the amounts
necessary to pay off all loans and obligations of the undersigned to you and the
other information set forth on said form; and

2.     Such information about the undersigned’s loans and obligations, credit
history and the relationship between you and the undersigned as may be requested
by MLBFS.

If and when all of the undersigned’s said loans and obligations have been fully
paid and satisfied, please forward UCC and/or other applicable lien terminations
directly to MLBFS.

Very truly yours,

DERMA SCIENCES, INC.

By: _________________________________________________

Title: ______________________________________________

--------------------------------------------------------------------------------

CAPITAL SOURCE

PAYOFF LETTER

         Date: __________________

Merrill Lynch Business Financial Services Inc.222
North LaSalle Street, 17th Floor
Chicago, IL 60601

Ladies and Gentlemen:

In accordance with the request of DERMA SCIENCES, INC. (“Customer”), the
following are the amounts necessary to fully pay off all loans and other
obligations of Customer to CAPITAL SOURCE:

Loan No(s): __________________________________________________________________

Balance of Principal & Interest as of ______________, 2003: $_______________

Per Diem Interest: $_______________

Funds to pay off said loan(s) should be wire transferred to:

      CAPITAL SOURCE

      Bank’s Address: ______________________________________________

      Routing #:____________________________________________________

      Account Name: ________________________________________________

      Account #:____________________________________________________

      Attention: ___________________________________________________

      Phone #: _____________________________________________________

Upon our receipt of the above-referenced wire transfer, all security interests,
mortgages, deeds of trust and other liens or encumbrances that we may have with
respect to property of Customer and/or Sunshine Products, Inc. (collectively the
“Loan Parties”) will immediately terminate and cease to be effective. We shall
not at any time after the date hereof take or authorize any action to be taken
which would continue or amend such security interests which are to be so
terminated and released.

We hereby authorize Merrill Lynch Business Financial Services Inc. (“MLBFS”), to
(at any time after our receipt of the above-referenced wire transfer) file on
our behalf, as secured party of record, any amendment, termination or such other
financing statement as deemed necessary or desireable to terminate and release
any financing statements or UCC-1 filings for which we are named or listed as
the secured party of record and for which the Customer or any Loan Party is
named or listed as the debtor. We acknowledge that while MLBFS is authorized,
MLBFS is not obligated to file any such amendment, termination or other
financing statement in full or in part, to terminate or release any such
financing statements or UCC-1 filings.

We further agree that upon your request, we will execute and deliver to you such
statements or other instruments or documents or take such action or actions from
time to time as may be necessary and required in order to enable you to
effectuate the terminations and releases of all security interests, mortgages,
deeds of trust and other liens or encumbrances that we may have with respect to
property of Customer or any Loan Party.

Very truly yours,

CAPITAL SOURCE

By: _________________________________________________

Title: ______________________________________________
      (Must be signed by an Officer)

PLEASE FURNISH THIS FORM TO YOUR INSURANCE AGENT, OR FILL IN YOUR AGENT’S NAME,
ADDRESS AND PHONE NUMBER, SIGN AND RETURN THE FORM,AND
WE WILL DIRECTLY REQUEST THE REQUIRED CERTIFICATE OF INSURANCE.

CUSTOMER’S INSURANCE AGENT:

   (Name, address & phone #)

_________________

_________________

_________________

_________________

_________________

In connection with one or more credit facilities from MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC. (“MLBFS”) to or for the benefit of DERMA SCIENCES, INC.
(“Customer”), you are hereby authorized and directed by Customer to provide and
maintain the following policies of insurance for the benefit of MLBFS at the
expense of Customer, and to furnish to MLBFS a certificate of each policy of
insurance and, not later than 10 days prior to expiration, a certificate of each
renewal policy, as follows:

PROPERTY DAMAGE INSURANCE

(a)     Property damage insurance with all risk clauses on the contents located
at 214 Carnegie Center, Suite 100, Princeton, NJ 08540 and all Additional
Locations of Tangible Collateral (the “Business Personal Property”).

(b)     MLBFS should be named as Loss Payee on the Business Personal Property
and the policy must include a lender’s loss payable endorsement in favor of
MLBFS.

(c)     MLBFS must receive not less than 30 days prior written notice of any
cancellation or material modification.

Each certificate should be mailed to MLBFS as follows:

Merrill Lynch Business Financial Services Inc.
222 North LaSalle Street, 17th Floor
Chicago, IL 60601

Very truly yours,

DERMA SCIENCES, INC.

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

SUNSHINE PRODUCTS, INC.

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title  

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

Private Client Group

Merrill Lynch Business Financial Services Inc.
222 North LaSalle Street 17th Floor
Chicago, Illinois 60601
312-269-4488
FAX: (312) 499-3251

January 6, 2003

Mr. John Yetter
Derma Sciences, Inc.
214 Carnegie Center
Suite 100
Princeton, NJ 08540

         Re: WCMA Line of Credit Approval

Dear Mr. Yetter,

As I believe you know, we have approved the request of Derma Sciences, Inc.
(“Customer”) for a WCMA Line of Credit upon the terms and conditions set forth
in the enclosed documents (“Loan Documents”).

For your information, the following are some of the principal terms of the
approval:

  Maximum WCMA Line of Credit: An amount Equal to the lesser of: (A)
$2,000,000.00, or (B) 80% of Customer’s Accounts and Chattel Paper, as shown on
its regular books and records (excluding Accounts over 90 days old, Accounts
directly or indirectly due from any person or entity not domiciled in the United
States or from any shareholder, officer or employee of Customer or any
affiliated entity), and 50% of Customer’s Inventory as shown on its regular
books and records (excluding all work-in-process inventory, and inventory
located in Canada).

  WCMA Interest Rate: Variable at a per annum rate equal to the sum of 3.00%
plus the one-month LIBOR (as published in The Wall Street Journal), based upon
actual days elapsed over a 360-day year.

        Initial Expiration Date: January 31, 2004 (subject to renewal annually
thereafter).

      Annual WCMA Line Fee: $20,000.00.

Please refer to the Loan Documents for a complete statement of the terms.

In addition to conditions set forth in the Loan Documents, our approval is
subject to:

(a)     The payment by Customer of an amount equal to the greater of the cost of
all Uniform Commercial Code filing and search fees and expenses incurred by
MLBFS in connection with the verification, perfection or preservation of MLBFS’
rights thereunder or $175.00 (the “Search Deposit”) to cover the cost of all
Uniform Commercial Code filing and search fees and expenses (including tax
searches) incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS’ rights thereunder. To the extent the Search Deposit has
not been received by MLBFS, Customer hereby authorizes MLBFS, at its option, to
either cause the Search Deposit or any remaining outstanding balance thereof
initial to be paid on the Activation Date with a WCMA Loan, or invoice Customer
for such initial Line Fee (in which event Customer shall pay said fee within 5
Business Days after receipt of such invoice).

(b)     The valid subscription and continued maintenance by Customer of a
Working Capital Management Account with Merrill Lynch, Pierce, Fenner and Smith
Incorporated for use in connection with the WCMA Line of Credit, which
subscription and maintenance shall be evidenced on Merrill Lynch’s computer
system.

(c)     Our receipt of all of the Loan Documents together with any additional
documents contemplated thereby or otherwise reasonably required by us, all of
which shall be duly executed and, if applicable, recorded, and all of which
shall be in form and substance satisfactory to us.

(d)     Acceptance by us in writing of the executed Loan Documents at our office
in Chicago after review and a final determination by us of the consistency of
the Loan Documents with our original internal credit approval. (Without limiting
the foregoing, it should be understood that prior to such acceptance we are not
bound by any clerical or other errors in or omissions from the Loan Documents.)

(e)     Our continuing satisfaction with the financial condition of Customer and
each guarantor of Customer’s obligations to us.

(f)     There not occurring any event which under the terms of the Loan
Documents would constitute a Default.

(g)     Evidence satisfactory to us of the perfection and priority of any liens
required by us in the Loan Documents.

(h)     Our receipt and satisfaction with a payoff letter from Capital Source
setting forth: (i) a payoff balance as of a specified date; (ii) a per diem
interest charge; (iii) wire transfer instructions; and (iv) a statement that
upon receipt of the payoff amount said bank will terminate all of its liens and
security interests on Customer’s assets, and remit stamped copies of UCC
Termination Statements and/or other appropriate documents evidencing said
termination to us. A form of payoff letter is enclosed.

(h)     Our receipt of a Certificate of Insurance satisfactory to us evidencing
a policy or policies of physical damage insurance on the tangible collateral
described in the Loan Documents, and providing that losses shall be payable to
us as our interests may appear pursuant to a Lender’s Loss Payable Endorsement,
and that we shall receive not less than 10 days prior notice of any cancellation
or material amendment.

In addition to the foregoing, our approval is subject to our receipt (where
applicable) and satisfaction with the following:

(1) Financial Reference;

(2) Current Accounts Receivable Aging Report dated within 15 days of funding;

(3) Current Inventory Report dated within 15 days of funding; and

(4) Customer Reference.

Our approval will remain open subject to said conditions until February 1, 2003,
after which time it shall be void.

Note that the Loan Documents require an initial WCMA Line Fee of $20,000.00.
This fee will be charged to Customer’s WCMA Account after the Loan Documents
have been executed and returned to us. Note further that under the terms of the
Loan Documents Customer is responsible for UCC filing and search fees and
expenses and any taxes in connection with the Loan Documents and/or such filing
.

In addition to such Line Fee the Loan Documents require Customer to pay or
reimburse MLBFS for the cost of all Uniform Commercial Code filing and search
fees and expenses incurred by MLBFS in connection with the verification,
perfection or preservation of MLBFS’ rights thereunder. To which extent, an
initial money deposit of $175.00 is hereby requested. Upon receipt of this
deposit, MLBFS will conduct or have conducted lien, tax, litigation and other
related searches of the proposed borrower and any business entity providing
collateral. This deposit will be applied to Search Deposit, as hereinafter
described.

To assist you in completing the Loan Documents, we have affixed a “Sign Here”
sticker to each page requiring a signature, and have penciled an “x” in front of
each signature line.

In order to minimize signature requirements, we normally seek only one copy of
each of the Loan Documents. After the WCMA Line of Credit has been activated, we
will return a fully executed duplicate copy for your records.

Although we will endeavor to make the WCMA Line of Credit available as soon as
feasible after the conditions of our approval have been met, there may be system
delays of up to several days until actual availability. Accordingly, we suggest
that you contact us prior to your initial use of the WCMA line.

If you have any questions about our approval or the structure or terms of the
facility, please call Jessica Schultz at 312-499-3056. If you have any questions
about the Loan Documents, please call me at 312-269-4488.

Very truly yours,

MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.

      By: _________________________________________________Thomasine Konkel
Documentation Manager

cc: Ms. Susan R Lonergan
    Jessica Schultz

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

COMPLIANCE CERTIFICATE

--------------------------------------------------------------------------------

To:
Merrill Lynch Business Financial Services Inc. (“MLBFS”)
222 North LaSalle Street 17th
Floor
Chicago, IL 60601

The undersigned, on behalf of DERMA SCIENCES, INC. (“Customer”), hereby
certifies to MLBFS that: (i) he/she is an officer authorized to execute and
deliver this certificate on behalf of Customer, and is familiar with the
business and financial condition of the Customer; (ii) the financial statements
delivered with this Certificate fairly present in all material respects the
results of operations and financial condition of Customer; and (iii) to the best
of my knowledge and belief, after reasonable investigation, each of the
following statements is true and correct as of the date hereof: (a) no Event of
Default, or event which with the giving of notice, passage of time, or both,
would constitute and Event of Default, has occurred or is continuing, (b) no
material adverse change in the financial condition of Customer has occurred or
is continuing, and (c) the attached annexations, which are hereby incorporated
herein by reference, are accurate, true and correct, and do not fail to state
any material fact known (or should have been known) to Customer which would, but
for the lapse of time, make any such statement or calculation false in any
respect.

Date: ___________________

_________________

      Signature

_________________

      Printed Name

_________________

      Title

INSTRUCTIONS: IN ACCORDANCE WITH THE TERMS OF THE LOAN AGREEMENT (TO WHICH THIS
ORIGINAL FORM OF COMPLIANCE CERTIFICATE IS ATTACHED AS EXHIBIT B), THIS
COMPLIANCE CERTIFICATE AND THE ATTACHED ANNEXATIONS MUST BE COMPLETED BY YOU
WITHIN 45 DAYS AFTER THE CLOSE OF EACH CALENDAR QUARTER. MLBFS EXPECTS YOU TO
MAKE COPIES OF THIS ORIGINAL FORM OF COMPLIANCE CERTIFICATE AND SEND THEM
QUARTERLY TO MLBFS WITHOUT NOTIFICATION OR REMINDER. ADDITIONAL COPIES WILL BE
PROVIDED TO YOU UPON REQUEST.

--------------------------------------------------------------------------------

FIXED CHARGE COVERAGE RATIO ANNEX

TO COMPLIANCE CERTIFICATE (EXHIBIT B TO LOAN AGREEMENT)

Customer’s “Fixed Charge Coverage Ratio” shall at all times exceed 1.25 to 1.
For purposes hereof, “Fixed Charge Coverage Ratio” shall mean the ratio of: (a)
income before interest (including payments in the nature of interest under
capital leases), taxes, depreciation, amortization, and other non-cash charges,
minus any internally financed capital expenditures, to (b) the sum of the
aggregate principal and interest paid or accrued, the aggregate rental under
capital leases paid or accrued, any dividends and other distributions paid or
payable to shareholders, and taxes paid in cash; all as determined on a trailing
12-month basis as set forth in Customer’s regular Quarterly financial statements
prepared in accordance with GAAP.

As of _________________ (insert Quarterly end date) for the prior trailing
12-month period :

Net after-tax income                          $_______________
taxes (+)                                     $_______________
interest  (+)                                 $_______________
depreciation (+)                              $_______________
amortization (+)                              $_______________
other non-cash charges (+)                    $_______________
internally financed capital expenditures (-)  $_______________
(a) Total EBITDA (=)                                           $_______________

principal and interest                        $_______________
rents under capital leases (+)                $_______________
div./distr. to owners (+)                     $_______________
taxes paid in cash (+)                        $_______________
(b) Total fixed charges (=)                                    $_______________

        Fixed Charge Coverage Ratio (a/b) __________ to 1.

In Compliance? Yes / No

--------------------------------------------------------------------------------

[GRAPHIC OMITTED]

LANDLORD’S SUBORDINATION AGREEMENT

--------------------------------------------------------------------------------

The undersigned Landlord is the record owner and lessor to DERMA SCIENCES, INC.
(“Tenant”) of the real property commonly known as 214 Carnegie Center, Suite
100, Princeton, NJ 08540 (the “Premises”).

Landlord has been advised that MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
(“MLBFS”) has or is about to lend moneys to, extend or continue to extend credit
to or for the benefit of, or enter into another financial accommodation with,
Tenant, or for the benefit of a third party based upon the credit and/or
collateral of Tenant, and in connection therewith that Tenant has granted or is
about to grant to MLBFS a security interest in, among other collateral, the
following property of Tenant (“MLBFS’ Collateral”); to wit:

  All equipment, inventory, removable trade fixtures and other tangible and
intangible personal property now and hereafter owned by Tenant.

Among other conditions thereof, MLBFS has required that Landlord execute and
deliver this Agreement. Accordingly, and for valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, Landlord hereby agrees as
follows:

1.     Landlord hereby subordinates for the benefit of MLBFS, and with respect
to all present and future obligations of or secured by Tenant to MLBFS, any
right or interest in MLBFS’ Collateral which, but for this Agreement, would or
might be prior to the rights and/or security interests of MLBFS, as aforesaid;
and Landlord agrees so long as Tenant shall be obligated to MLBFS, it will not,
without the prior consent of MLBFS, exercise any right under local law to levy
or distrain upon any of MLBFS’ Collateral.

2.     Landlord further agrees that in the event that MLBFS shall at any time
seek to take possession of or remove all or any part of MLBFS’ Collateral from
the Premises, Landlord will not hinder the same or interfere or object thereto,
and Landlord hereby consents to MLBFS’ entry upon the Premises for such
purposes; provided, however, that: (i) any such removal shall be made during
reasonable business hours; (ii) MLBFS shall not, without the prior written
consent of Landlord, conduct any public or auction sale on the Premises; and
(iii) MLBFS shall promptly at its expense repair any damage to the Premises
directly caused by any such removal by MLBFS or its agents of MLBFS’ Collateral
from the Premises.

This Agreement shall be binding upon and shall inure to the benefit of Landlord
and it successors, assigns, heirs and/or personal representatives, as
applicable, and MLBFS and its successors and assigns.

Dated as of January 6, 2003.

Landlord:_______________________________________________

         By:
____________________________________________________________________________________

  Signature (1)   Signature (2)  

         By:
____________________________________________________________________________________

  Printed Name   Printed Name  

         By:
____________________________________________________________________________________

  Title   Title