---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549    FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended
     
     June 30, 2007Commission File Number
     
     1-31070  Derma Sciences, Inc.(Exact name of small business issuer as specified in its charter) Pennsylvania
     23-2328753(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)  214 Carnegie Center, Suite 300Princeton, New Jersey
08540(609) 514-4744(Address including zip code and
telephonenumber, of principal executive offices)


Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    
No [  ]

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).

Yes [  ]    
No [X]

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

|                      |        |                                       
|--------------------- | ------ | --------------------------------------
|Date: August 14, 2007 | Class: | Common Stock, par value $.01 per share
|                      |        | Shares Outstanding: 25,258,335        

Transitional Small Business Disclosure Format (check one):
   Yes [  ]     No [X]

---



Part IDERMA SCIENCES,
INC.FORM 10-QSBINDEX

|                                         |         |                                                                                                                           |   
|---------------------------------------- | ------- | ------------------------------------------------------------------------------------------------------------------------- | --
|Description                              | Page   
|Part I - Condensed Financial Information
|                                         | Item 1. | Condensed Consolidated Financial Statements                                                                               |   
|                                         |         | Condensed Consolidated Balance
     Sheets  June 30, 2007 (Unaudited) and December 31, 2006 (1)                          | 3 
|                                         |         | Condensed Consolidated Statements of
     Operations  Three months ended June 30, 2007 and June 30, 2006 (1) (Unaudited) | 4 
|                                         |         | Condensed Consolidated Statements of
     Operations  Six months ended June 30, 2007 and June 30, 2006 (1) (Unaudited)   | 5 
|                                         |         | Condensed Consolidated Statements of
     Cash Flows  Six months ended June 30, 2007 and June 30, 2006 (1) (Unaudited)   | 6 
|                                         |         | Notes to Condensed Consolidated Financial
     Statements (Unaudited) (1)                                                 | 7 
|                                         | Item 2. | Management's Discussion and
     Analysis or Plan of Operation                                                            | 21
|                                         | Item 3. | Controls and
     Procedures                                                                                              | 38
|                                         | Item 4. | Submission of Matters to a Vote of Security
     Holders                                                                  | 38
|Part II - Other Information             
|                                         | Item 1. | Legal
     Proceedings                                                                                                    | 39
|                                         | Item 6. | Exhibits                                                                                                                  | 39

(1)    
          The Companys previously issued financial statements for the three and six
          months ended June 30, 2006 have been restated for the correction of errors
          related to the accounting for an exclusive distribution agreement in Canada. The
          restatement is more fully described in the Notes to the Condensed Consolidated
          Financial Statements.

Forward Looking Statements

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

1

---



Index

Part I - Financial Information

Item 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                                |  |                |              |                |  
|--------------------------------------------------------------- |  | -------------- | ------------ | -------------- | -
|Condensed Consolidated Balance Sheets                          
|                                                                |  | June 30,       | December 31,
|                                                                |  | 2007           | 2006        
|                                                                |  | (Unaudited)    |             
|                                                               
|Current Assets                                                  |  |                |              |                |  
|Cash and cash equivalents                                       |  | $      768,888 |              | $   1,285,943  |  
|Accounts receivable, net                                        |  | 1,921,324      |              | 2,270,552      |  
|Inventories                                                     |  | 6,959,261      |              | 4,678,107      |  
|Prepaid expenses and other current assets                       |  | 395,479        |              | 279,864        |  
|                                                               
|Total current assets                                            |  | 10,044,952     |              | 8,514,466      |  
|Equipment and improvements, net                                 |  | 4,529,774      |              | 4,133,595      |  
|Goodwill                                                        |  | 2,441,542      |              | 2,441,542      |  
|Other intangible assets, net                                    |  | 2,923,638      |              | 3,197,365      |  
|Other assets, net                                               |  | 216,480        |              | 218,953        |  
|                                                               
|Total Assets                                                    |  | $ 20,156,386   |              | $ 18,505,921   |  
|                                                               
|LIABILITIES AND SHAREHOLDERS' EQUITY                            | 
|                                                               
|Current Liabilities                                             | 
|Current maturities of long-term debt                            |  | $      279,777 |              | $      338,155 |  
|Accounts payable                                                |  | 1,521,748      |              | 1,645,575      |  
|Accrued expenses and other current liabilities                  |  | 1,695,640      |              | 762,687        |  
|                                                               
|Total current liabilities                                       |  | 3,497,165      |              | 2,746,417      |  
|                                                               
|Long-term debt, net of current portion                          |  | 637,370        |              | 546,268        |  
|Other long-term liabilities                                     |  | 408,860        |              | 235,224        |  
|                                                               
|Total Liabilities                                               |  | 4,543,395      |              | 3,527,909      |  
|                                                               
|Shareholders' Equity                                            | 
|Convertible preferred stock, $.01 par value; 11,750,000 shares  | 
|authorized; issued and outstanding:  2,280,407 shares           | 
|(liquidation preference of $4,210,231 at June 30, 2007)         |  | 22,804         |              | 22,804         |  
|Common stock, $.01 par value, 50,000,000 shares authorized;     | 
|issued and outstanding:  25,258,335 shares at June 30, 2007     | 
|and 24,906,160 at December 31, 2006                             |  | 252,583        |              | 249,062        |  
|Additional paid-in capital                                      |  | 27,588,080     |              | 27,272,440     |  
|Accumulated other comprehensive income - cumulative translation | 
|adjustments                                                     |  | 1,415,321      |              | 850,987        |  
|Accumulated deficit                                             |  | (13,665,797    | )            | (13,417,281    | )
|                                                               
|Total Shareholders' Equity                                      |  | 15,612,991     |              | 14,978,012     |  
|                                                               
|Total Liabilities and Shareholders' Equity                      |  | $ 20,156,386   |              | $ 18,505,921   |  
|                                                               

See accompanying notes to
condensed consolidated financial statements.

3

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                                  |  |                    |                      |               | 
|----------------------------------------------------------------- |  | ------------------ | -------------------- | ------------- | 
|Condensed Consolidated Statements of Operations (Unaudited)       | 
|                                                                  |  | Three months ended
|                                                                  |  | June 30,          
|                                                                  |  | 2007               | 2006      (Restated)
|                                                                 
|Net sales                                                         |  | $   7,461,258      |                      | $  7,124,287  | 
|Cost of sales                                                     |  | 4,796,060          |                      | 4,669,119     | 
|                                                                 
|Gross Profit                                                      |  | 2,665,198          |                      | 2,455,168     | 
|                                                                 
|Operating expenses                                                |  | 2,589,957          |                      | 1,976,941     | 
|Interest expense                                                  |  | 47,564             |                      | 110,145       | 
|Other expense, net                                                |  | 23,141             |                      | 21,915        | 
|                                                                 
|Total Expenses                                                    |  | 2,660,662          |                      | 2,109,001     | 
|                                                                 
|Income before provision for income taxes                          |  | 4,536              |                      | 346,167       | 
|Provision for income taxes                                        |  | 114,099            |                      |              | 
|                                                                 
|Net (Loss) Income                                                 |  | $    (109,563      | )                    | $     346,167 | 
|                                                                 
|(Loss) income per common share - basic                            |  | ($0.00             | )                    | $0.02         | 
|                                                                 
|(Loss) income per common share - diluted                          |  | ($0.00             | )                    | $0.01         | 
|                                                                 
|Shares used in computing (loss) income per common share - basic   |  | 25,258,335         |                      | 20,805,423    | 
|                                                                 
|Shares used in computing (loss) income per common share - diluted |  | 25,258,335         |                      | 25,207,546    | 
|                                                                 

See accompanying notes to
condensed consolidated financial statements.

4

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                                  |  |                  |                      |                |  
|----------------------------------------------------------------- |  | ---------------- | -------------------- | -------------- | -
|Condensed Consolidated Statements of Operations (Unaudited)       | 
|                                                                  |  | Six months ended
|                                                                  |  | June 30,        
|                                                                  |  | 2007             | 2006      (Restated)
|                                                                 
|Net sales                                                         |  | $ 15,427,055     |                      | $ 12,593,531   |  
|Cost of sales                                                     |  | 9,957,429        |                      | 8,234,032      |  
|                                                                 
|Gross Profit                                                      |  | 5,469,626        |                      | 4,359,499      |  
|                                                                 
|Operating expenses                                                |  | 5,383,111        |                      | 3,841,271      |  
|Interest expense                                                  |  | 97,810           |                      | 192,195        |  
|Other expense (income), net                                       |  | 49,698           |                      | (47,606        | )
|                                                                 
|Total Expenses                                                    |  | 5,530,619        |                      | 3,985,860      |  
|                                                                 
|(Loss) income before provision for income taxes                   |  | (60,993          | )                    | 373,639        |  
|Provision for income taxes                                        |  | 187,523          |                      |               |  
|                                                                 
|Net (Loss) Income                                                 |  | $    (248,516    | )                    | $      373,639 |  
|                                                                 
|(Loss) income per common share - basic                            |  | ($0.01           | )                    | $0.02          |  
|                                                                 
|(Loss) income per common share - diluted                          |  | ($0.01           | )                    | $0.02          |  
|                                                                 
|Shares used in computing (loss) income per common share - basic   |  | 25,252,498       |                      | 16,569,131     |  
|                                                                 
|Shares used in computing (loss) income per common share - diluted |  | 25,252,498       |                      | 20,455,906     |  
|                                                                 

See accompanying notes to
condensed consolidated financial statements.

5

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                                      |  |                  |                      |              |  
|--------------------------------------------------------------------- |  | ---------------- | -------------------- | ------------ | -
|Condensed Consolidated Statements of Cash Flows (Unaudited)           | 
|                                                                      |  | Six months ended
|                                                                      |  | June,           
|                                                                      |  | 2007             | 2006      (Restated)
|                                                                     
|Operating Activities                                                  |  |                  |                      |              |  
|Net (loss) income                                                     |  | $  (248,516      | )                    | $    373,639 |  
|Adjustments to reconcile net (loss) income                            | 
|to net cash provided by (used in) operating activities:               | 
|Depreciation of equipment and improvements                            |  | 357,102          |                      | 285,385      |  
|Amortization of intangible assets                                     |  | 273,727          |                      | 132,663      |  
|Amortization of deferred financing costs                              |  | 30,831           |                      | 43,285       |  
|(Recovery of) provision for bad debts                                 |  | (10,433          | )                    | 3,917        |  
|Allowance for sales adjustments                                       |  | 330,738          |                      | 821,159      |  
|Provision for (recovery of) inventory obsolescence                    |  | 44,641           |                      | (63,203      | )
|Deferred rent                                                         |  | (11,149          | )                    | 6,296        |  
|Share based compensation expense                                      |  | 319,161          |                      | 98,337       |  
|Deferred tax provision                                                |  | 182,328          |                      |             |  
|Gain on settlement of accounts payable                                |  |                 |                      | (64,971      | )
|Changes in operating assets and liabilities:                          | 
|Accounts receivable                                                   |  | 989,870          |                      | (505,064     | )
|Inventories                                                           |  | (1,966,130       | )                    | (293,475     | )
|Prepaid expenses and other current assets                             |  | (107,395         | )                    | (44,983      | )
|Other assets                                                          |  | 24,104           |                      | 21,269       |  
|Accounts payable                                                      |  | (194,410         | )                    | (391,245     | )
|Accrued expenses and other current liabilities                        |  | (135,100         | )                    | 9,305        |  
|                                                                     
|Net cash (used in) provided by operating activities                   |  | (120,631         | )                    | 432,314      |  
|                                                                     
|Investing Activities                                                  | 
|Acquisition of Western Medical assets                                 |  |                 |                      | (6,000,000   | )
|Business acquisition costs                                            |  | (48,045          | )                    | (662,691     | )
|Purchases of equipment and improvements                               |  | (267,108         | )                    | (329,338     | )
|                                                                     
|Net cash used in investing activities                                 |  | (315,153         | )                    | (6,992,029   | )
|                                                                     
|Financing Activities                                                  | 
|Loan proceeds                                                         |  |                 |                      | 1,000,000    |  
|Net change in bank lines of credit                                    |  |                 |                      | (181,626     | )
|Deferred financing costs                                              |  |                 |                      | (48,722      | )
|Long-term debt repayments                                             |  | (152,198         | )                    | (147,787     | )
|Proceeds from issuance of stock, net of issuance costs                |  |                 |                      | 5,822,637    |  
|                                                                     
|Net cash (used in) provided by financing activities                   |  | (152,198         | )                    | 6,444,502    |  
|                                                                     
|Effect of exchange rate changes on cash and cash equivalents          |  | 70,927           |                      | 61,482       |  
|                                                                     
|Net decrease in cash and cash equivalents                             |  | (517,055         | )                    | (53,731      | )
|Cash and cash equivalents                                             | 
|Beginning of period                                                   |  | 1,285,943        |                      | 1,105,330    |  
|                                                                     
|End of period                                                         |  | $    768,888     |                      | $ 1,051,599  |  
|                                                                     
|Supplemental cash flow information:                                   | 
|Office furniture obtained with capital lease                          |  | $    163,745     |                      |             |  
|Issuance of promissory note in connection with acquisition of Western |  |                 |                      | $    500,000 |  
|Medical assets (see Note 2)                                           | 
|                                                                     

See accompanying notes to
condensed consolidated financial statements.

6

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

1.     Organization and
Summary of Significant Accounting Policies

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

Restatement
of Financial Statements

In
May 2005, the Company entered into a five-year distribution agreement with a Canadian
company to serve as the Companys exclusive distributor in Canada. The Company
records revenue at the time product is shipped to the distributor. The distribution
agreement requires the Company to pay a distribution fee to the distributor. Prior to
October 1, 2006, the Company classified this distribution fee in operating expenses. The
Company has since concluded that this fee should be classified as an adjustment to gross
sales in arriving at net sales, similar to trade rebates and other adjustments to gross
sales. Further, the Company has concluded that the distribution fee should be accrued and
expensed at the time of sale. Previously the Company expensed the fee when billed by the
distributor to the Company. Accrued distribution fees are recorded as a credit to accounts
receivable on the consolidated balance sheet. Previously, accrued distribution fees were
recorded in accounts payable on the consolidated balance sheet. As a result of the
foregoing errors, the Company has restated its financial statements and accompanying notes
for the correction of these errors in the application of U.S. generally accepted
accounting principles. A summary of the restatement impact on the consolidated balance
sheet at June 30, 2006 and on the consolidated statement of operations for the three and
six months ended June 30, 2006 is outlined below:

|                                          |  |                       |  |             | 
|----------------------------------------- |  | --------------------- |  | ----------- | 
|                                          |  | June 30, 2006         | 
|                                          |  | As PreviouslyReported |  | As Restated | 
|                                         
|                                          |  | (Unaudited)          
|Selected consolidated balance sheet data: |  |                       |  |             | 
|                                         
|Total current assets                      |  | $8,216,701            |  | $7,897,810  | 
|Total assets                              |  | $18,453,829           |  | $18,134,938 | 
|Total current liabilities                 |  | $3,266,357            |  | $3,174,656  | 
|Total liabilities                         |  | $4,873,299            |  | $4,781,598  | 
|Total shareholders equity                |  | $13,580,530           |  | $13,353,340 | 

7

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

|                                                                 |  |                            |  |                               |  |                       |   |                |  
|---------------------------------------------------------------- |  | -------------------------- |  | ----------------------------- |  | --------------------- | - | -------------- | -
|                                                                 |  | Quarter EndedJune 30, 2006 |  | Six Months EndedJune 30, 2006 | 
|                                                                 |  | As PreviouslyReported      |  | As Restated                   |  | As PreviouslyReported |   | As Restated    |  
|                                                                
|                                                                 |  | (Unaudited)                |  | (Unaudited)                   | 
|Consolidated statements of                                       |  |                            |  |                               |  |                       |   |                |  
|operations data:                                                 | 
|                                                                
|Net Sales                                                        |  | $  7,386,681               |  | $  7,124,287                  |  | $ 13,143,595          |   | $ 12,593,531   |  
|Cost of sales                                                    |  | 4,669,119                  |  | 4,669,119                     |  | 8,234,032             |   | 8,234,032      |  
|Gross profit                                                     |  | 2,717,562                  |  | 2,455,168                     |  | 4,909,563             |   | 4,359,499      |  
|                                                                
|Operating expenses                                               |  | 2,254,712                  |  | 1,976,941                     |  | 4,376,464             |   | 3,841,271      |  
|Interest                                                         |  | 110,145                    |  | 110,145                       |  | 192,195               |   | 192,195        |  
|Other expense (income), net                                      |  | 21,915                     |  | 21,915                        |  | (47,606               | ) | (47,606        | )
|                                                                
|Total expense                                                    |  | 2,386,772                  |  | 2,109,001                     |  | 4,521,053             |   | 3,985,860      |  
|                                                                
|Income before provision for
               income taxes          |  | 330,790                    |  | 346,167                       |  | 388,510               |   | 373,639        |  
|Provision for income taxes                                       |  |                           |  |                              |  |                      |   |               |  
|                                                                
|Net income                                                       |  | $     330,790              |  | $     346,167                 |  | $      388,510        |   | $      373,639 |  
|                                                                
|Income per common share - basic                                  |  | $0.02                      |  | $0.02                         |  | $ 0.02                |   | $ 0.02         |  
|Income per common share - diluted                                | 
|                                                                 |  | $0.01                      |  | $0.01                         |  | $ 0.02                |   | $ 0.02         |  
|                                                                
|Shares used in computing income       per common share - basic   |  | 20,805,423                 |  | 20,805,423                    |  | 16,569,131            |   | 16,569,131     |  
|Shares used in computing income       per common share - diluted |  | 25,207,546                 |  | 25,207,546                    |  | 20,455,906            |   | 20,455,906     |  

Basis
of Presentation

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30, 2007, are
not necessarily indicative of the results that may be expected for the year ending
December 31, 2007. Information included in the condensed balance sheet as of December 31,
2006 has been derived from the consolidated financial statements and footnotes thereto for
the year ended December 31, 2006, included in Form 10-KSB previously filed with the
Securities and Exchange Commission. For further information, refer to that Form 10-KSB.

Summary
of Significant Accounting Policies:

Accounting
for Uncertainty in Income Taxes  In June 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of

8

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

SFAS No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company adopted the
provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material
effect on the Companys financial condition or results of operations for the three
and six months ended June 30, 2007.

As
of January 1, 2007 and June 30, 2007, the Company had no unrecognized tax benefits, and no
adjustment to its financial position, results of operations or cash flows was required.
The Company does not expect that unrecognized tax benefits will increase within the next
twelve months. The Company records interest and penalties related to tax matters within
other expense on the accompanying Condensed Consolidated Statements of Operations. These
amounts are not material to the consolidated financial statements for the periods
presented. The Companys U.S. tax returns are subject to examination by federal and
state taxing authorities. Tax years prior to 2002 are no longer subject to federal or
state examination. The Companys State of New Jersey tax returns for the tax years
2002 through 2005 have been examined and there were no assessments. The Companys
2003 and 2002 Canadian tax returns were subject to examination and adjustment by the
Canada Customs and Revenue Agency. These adjustments will not have a material impact on
the Companys financial position, results of operations or cash flows. Tax years
prior to 2004 are no longer subject to examination in Canada.

Net
Income (Loss) per Share  Net income (loss) per common share  basic is computed
by dividing net income (loss) by the weighted average number of common shares outstanding
for the period. Net income (loss) per common share  diluted reflects the potential
dilution of earnings by including the effects of the assumed exercise, conversion or
issuance of potentially issuable shares of common stock (potentially dilutive
securities), including those attributable to stock options, warrants, convertible
preferred stock and restricted common stock in the weighted average number of common
shares outstanding for a period, if dilutive. The effects of the assumed exercise of
warrants and stock options are determined using the treasury stock method. Potentially
dilutive securities have not been included in the computation of diluted loss per share
for the three and six months ended June 30, 2007 as the effect would be anti-dilutive.

Total
dilutive shares that have or would have been used to compute diluted income per common
share for the three and six months ended June 30, 2007 and 2006 are outlined below:

|                                                         |  |                             |  |                           |  |            |  |            | 
|-------------------------------------------------------- |  | --------------------------- |  | ------------------------- |  | ---------- |  | ---------- | 
|                                                         |  | Three Months Ended June 30, |  | Six Months Ended June 30, | 
|                                                         |  | 2007                        |  | 2006                      |  | 2007       |  | 2006      
|                                                        
|Weighted average common shares     outstanding  basic   |  | 25,258,335                  |  | 20,805,423                |  | 25,252,498 |  | 16,569,131 | 
|Dilutive shares attributable to:                         | 
|Convertible preferred stock                              |  |                            |  | 2,280,407                 |  |           |  | 2,280,407  | 
|Restricted common stock                                  |  |                            |  | 96,154                    |  |           |  | 48,343     | 
|Warrants                                                 |  |                            |  | 451,821                   |  |           |  | 287,828    | 
|Stock options                                            |  |                            |  | 1,573,741                 |  |           |  | 1,270,197  | 
|                                                        
|Sub-total dilutive shares                                |  |                            |  | 4,402,123                 |  |           |  | 3,886,775  | 
|                                                        
|Weighted average common     shares outstanding - diluted |  | 25,258,335                  |  | 25,207,546                |  | 25,252,498 |  | 20,455,906 | 

9

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

Potentially
dilutive shares excluded as a result of the effects being anti-dilutive are as follows:

|                            |  |                             |  |                           |  |            |  |           | 
|--------------------------- |  | --------------------------- |  | ------------------------- |  | ---------- |  | --------- | 
|                            |  | Three Months Ended June 30, |  | Six Months Ended June 30, | 
|                            |  | 2007                        |  | 2006                      |  | 2007       |  | 2006     
|                           
|Dilutive shares:            |  |                             |  |                           |  |            |  |           | 
|Convertible preferred stock |  | 2,280,407                   |  |                          |  | 2,280,407  |  |          | 
|Restricted common stock     |  | 175,000                     |  |                          |  | 175,000    |  |          | 
|Warrants                    |  | 6,169,904                   |  | 5,415,098                 |  | 6,169,904  |  | 5,415,098 | 
|Stock options               |  | 6,783,480                   |  | 1,966,155                 |  | 6,783,480  |  | 2,161,155 | 
|                           
|Total dilutive shares       |  | 15,408,791                  |  | 7,381,253                 |  | 15,408,791 |  | 7,576,253 | 

2.     Acquisition of Western
Medical Assets

On
April 18, 2006, the Company acquired certain assets and assumed the trade payables and the
business of Western Medical, Inc. (Western Medical) for $6,500,000 of which
$6,000,000 was paid in cash and $500,000 was paid via a three-year promissory note issued
to Western Medical by the Company. In addition, the Company incurred a total of $819,052
of transaction costs related to the acquisition. The purchased assets consist of trade
receivables, inventories, equipment and certain identifiable intangibles. To fund the
purchase, the Company raised $5,803,304 (net of $568,932 in commissions and other offering
expenses) from the private sale of 2,655,098 units (the Units) at $2.40 per
Unit, each Unit consisting of four shares of common stock and one five-year warrant to
purchase one share of common stock at $1.00 per share. In addition, the placement agent
for the Units received 754,806 five-year warrants each to purchase one share of common
stock at $0.72 per share. The Company also received $1,000,000 in cash from a new term
loan that bears interest at prime plus 5% from its U.S. lender through an amendment to its
existing three-year revolving credit facility.

Western
Medical was a privately held manufacturer and marketer of a line of specialty medical
textile compression, support and protective dressing products. Western Medicals
product line is complementary to and will serve to expand the Companys existing
basic wound care line. The Company anticipates being able to leverage cross selling
opportunities presented by the acquisition to grow sales. In addition, the Company
anticipates being able to absorb Western Medicals business within its existing
operating infrastructure with only modest incremental overhead increases. Both of these
initiatives are anticipated to increase the contribution of the business going forward.

The
acquisition has been accounted for under the purchase method. Accordingly, the results of
operations of Western Medical have been included in the consolidated financial statements
commencing April 18, 2006. A final purchase price and allocation of the purchase price are
outlined below:

10

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

|                                                 |  |              |  
|------------------------------------------------ |  | ------------ | -
|Purchase Price:                                  |  |              |  
|                                                
|Cash paid                                        |  | $ 6,000,000  |  
|Promissory note bearing interest at 12%          |  | 500,000      |  
|Transaction costs                                |  | 819,052      |  
|                                                
|Total                                            |  | $ 7,319,052  |  
|                                                
|Allocation of Purchase Price:                    | 
|                                                
|Trade receivables                                |  | $    483,465 |  
|Inventory                                        |  | 1,179,233    |  
|Equipment                                        |  | 483,932      |  
|Goodwill                                         |  | 2,441,542    |  
|Identifiable intangibles subject to amortization |  | 3,300,000    |  
|Accounts payable                                 |  | (569,120     | )
|                                                
|Total                                            |  | $ 7,319,052  |  

The
allocation of the purchase price to the assets acquired and liabilities assumed as
reflected in the consolidated financial statements is based on finalization of the
Companys valuation study to establish the fair market value of the assets,
liabilities and the identifiable intangible assets and goodwill acquired. The identifiable
intangible assets acquired consist of customer lists, trademarks and a non-compete
agreement.

3.     Inventories

Inventories
include the following:

|                    |  |              |  |                  | 
|------------------- |  | ------------ |  | ---------------- | 
|                    |  | June 30,2007 |  | December 31,2006 | 
|                   
|Finished goods      |  | $4,709,303   |  | $2,784,612       | 
|Work in process     |  | 38,364       |  | 92,780           | 
|Packaging materials |  | 1,129,001    |  | 777,046          | 
|Raw materials       |  | 1,082,593    |  | 1,023,669        | 
|                   
|Total inventories   |  | $6,959,261   |  | $4,678,107       | 

4.     Lines of Credit

U.S.
Line of Credit

In
connection with the acquisition of Western Medical (see Note 2), the Company entered into
an amended three-year revolving credit facility agreement (the Agreement)
dated April 18, 2006. The amended Agreement provides for maximum borrowings of $3,500,000
with its U.S. lender. The Agreement replaces the $2,000,000 revolving credit facility that
the Company entered into on January 31, 2005. At June 30, 2007 and December 31, 2006, the
outstanding balances under the Agreement were zero. Advances will be utilized to fund
general working capital requirements, new product development, marketing efforts and
strategic initiatives.

The
Company may request advances under the Agreement up to the value of 85% of eligible
receivables (as defined) and 55% of eligible inventory (as defined). Interest on
outstanding advances is payable monthly in arrears at the prime rate (as defined) plus
2.0%, but not less than 7.50% per annum. At June 30, 2007, the effective interest rate
was 10.25%. In addition, the Company pays a monthly collateral management fee at the rate
of 1.5%

11

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

per annum upon the daily average
amount of advances outstanding and a monthly unused line fee of 0.5% per annum upon the
difference between the daily average amount of advances outstanding and $3,500,000.
Outstanding advances are secured by all of the Companys existing and after-acquired
tangible and intangible U.S. assets. In addition, the Company has accorded the U.S.
lender its guarantee of payment together with a second lien security interest in the
assets of the Companys wholly owned Canadian subsidiary. The U.S. lender has agreed
not to exercise its rights under its second lien security interest and guarantee against
the Canadian assets without the Canadian lenders approval.

Over
the term of the Agreement, the Company has agreed to comply with certain financial
covenants. As it pertains to the Companys U.S. operations, cash collections may not
be less than a defined amount each calendar month. In addition, at all times the
Companys cash on hand (including unused borrowing capacity under the Agreement) must
not be less than $200,000. Additional covenants governing permitted indebtedness, liens,
payments of dividends and protection of collateral are included in the Agreement.

On
May 14, 2007, the Companys U.S. lender agreed to waive the Companys covenant
violations as of March 31, 2007 and to amend the Companys monthly minimum EBITDA and
fixed charge coverage ratios effective April 1, 2007. The covenant amendments were
requested and approved by the U.S. lender in light of the Companys projected
operating results. A waiver and amendment fee of $5,000 was charged by the U.S. lender. At
June 30, 2007, the Company was in compliance with its financial covenants.

On
March 12, 2007, the Company and its U.S. lender agreed to amend the Companys monthly
minimum EBITDA and certain of the monthly fixed charge coverage ratio financial covenants
for 2007, effective January 1, 2007. The changes were requested and approved by the U.S.
lender in light of the Companys 2007 business plan and its overall existing and
projected financial condition. No fee was charged by the U.S. lender for this amendment.

The
Company may terminate the Agreement at any time by paying all outstanding indebtedness and
any other payments due the U.S. lender and paying the U.S. lender a yield maintenance
based early termination fee equal to the product of: (a) the effective yield on the
facility for the six months prior to termination (expressed as an annual percentage rate),
(b) $3,500,000, and (c) the quotient of the months remaining in the term of the Agreement
divided by 12.

Canadian
Line of Credit

In
December 2006, the Company finalized the annual renewal of its revolving credit facility
(the Canadian Agreement) for a maximum principal amount of $469,000 ($500,000
Canadian) with its Canadian lender. At June 30, 2007 and December 31, 2006, the
outstanding balances under the Canadian Agreement were zero. Derma Sciences Canada Inc.
may request advances under the Canadian Agreement up to the value of 75% of eligible
receivables (as defined) plus the lesser of $375,000 ($400,000 Canadian) or 40% of
eligible inventory (as defined), less priority claims. Interest on outstanding advances is
payable monthly in arrears at the prime rate (as defined) plus 1.0%, or 7.0% for Canadian
dollar advances and 9.75% for U.S. dollar denominated advances at June 30, 2007. The line
of credit also provides for direct advances in U.S. dollars limited to the U.S. dollar
equivalent of $375,000 ($400,000 Canadian). Outstanding advances are secured by all
tangible and intangible assets of Derma Sciences Canada Inc. In addition, the Company has
accorded the Canadian lender its guarantee of payment together with a second lien security
interest in the Companys assets located in the U.S.

Over
the term of the Canadian Agreement, the Company has agreed to comply with certain
financial covenants. Additional covenants governing permitted indebtedness, liens,
payments of dividends and protection of collateral are included in the Canadian Agreement.
In the event of a margin deficiency (as defined) or covenant violation, the Company is
required to advance up to an additional $469,000 ($500,000 Canadian) of working capital to
Derma Sciences Canada Inc. in order to correct the deficiency. This additional working
capital may be repaid to the Company 45 days after the margin deficiency or covenant
violation has been cured upon the condition that such repayment not result in a margin
deficiency, covenant violation or any other event of default. At June 30, 2007 the Company
was in compliance with its Canadian line of credit covenants.

12

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

5.     Long-Term Debt

Long-term
debt includes the following:

|                          |  |              |  |                  | 
|------------------------- |  | ------------ |  | ---------------- | 
|                          |  | June 30,2007 |  | December 31,2006 | 
|                         
|Canadian term loan        |  | $194,124     |  | $295,881         | 
|Promissory note           |  | 500,000      |  | 500,000          | 
|Capital lease obligations |  | 223,023      |  | 88,542           | 
|                         
|Total debt                |  | 917,147      |  | 884,423          | 
|                         
|Less:  current maturities |  | 279,777      |  | 338,155          | 
|                         
|Long-term debt            |  | $637,370     |  | $546,268         | 

Canadian
Term Loan

In
connection with the acquisition of Dumex Medical Inc. in August 2002, the Company entered
into a five-year term loan agreement with its Canadian lender. The loan is repayable in
monthly payments consisting of principal and interest. Interest on the outstanding
principal balance is payable monthly at the banks prime rate (as defined) plus
1.25%, or 7.25% at June 30, 2007. The term loan is secured by all tangible and intangible
assets of Derma Sciences Canada Inc. and is subject to the same conditions applicable to
the Canadian operating line of credit (see Note 4).

In
addition, the Canadian lender has granted in 2006 Derma Sciences Canada Inc. a $704,000
($750,000 Canadian) non-revolving term line of credit to finance equipment purchases and
equipment upgrades to Derma Sciences Canada Inc.s manufacturing facility. Advances
against the line are limited to 75% of the actual cost of the capital expenditure.
Interest on outstanding advances is payable monthly in arrears at prime (as defined), plus
1.25%. Each advance shall be amortized and repaid over sixty months. Prepayment of
advances in whole or in part is not permitted during the eighteen months following initial
disbursement. Prepayment thereafter is permitted in whole or once per annum in part with
thirty days written notice and payment of the greater of the following premium: (i) 3% of
the principal amount prepaid; or (ii) three months interest on such principal at the loan
interest rate in effect on the date prepayment is made. As of June 30, 2007, there were no
outstanding advances against the line.

Promissory
Note

In
connection with the acquisition of Western Medical in April 2006, a portion of the
purchase price was paid via a three-year unsecured promissory note issued to the seller.
The principal amount of the promissory note, together with simple interest of 12%, is
payable in 11 quarterly installments of interest only in the amount of $15,000 and a final
payment of accrued interest of $15,000 and the principal balance of $500,000 on April 18,
2009. The promissory note may be prepaid in part or in full at any time without penalty.

Capital
Lease Obligations

The
Company has three capital lease obligations for certain office furniture, distribution and
computer equipment totaling $223,023 as of June 30, 2007. The capital lease obligations
bear interest at annual rates ranging from 3.9% to 10.2% with the longest lease term
expiring in June 2010.

13

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|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

U.S.
Term Loan

In
connection with the acquisition of Western Medical (see Note 2) in April 2006, the Company
entered into a three-year term loan agreement for $1,000,000 with its U.S. lender.
Utilizing funds received from the sale of common stock (see Note 6) on August 4 and
December 14, 2006, the Company accelerated, without penalty, repayment of the $1,000,000
loan. Upon full repayment of the loan, the Company paid the U.S. lender a $10,000
termination fee.

6.     Shareholders
Equity

Convertible
Preferred Stock

There
are 150,003 shares of series A convertible preferred stock outstanding at June 30, 2007.
The series A preferred stock is convertible into common stock on a one-for-one basis,
bears no dividend, maintains a liquidation preference of $4.00 per share, votes as a class
on matters affecting the series A preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 440,003 shares of series B convertible preferred stock outstanding at June 30, 2007.
The series B preferred stock is convertible into common stock on a one-for-one basis,
bears no dividend, maintains a liquidation preference of $6.00 per share, votes as a class
on matters affecting the series B preferred stock and maintains voting rights identical to
the common stock on all other matters.

There
are 619,055 shares of series C convertible preferred stock outstanding at June 30, 2007.
The series C preferred stock is convertible into common stock on a one-for-one basis,
bears no dividend, maintains a liquidation preference averaging $0.70 per share, votes as
a class on matters affecting the series C preferred stock and maintains voting rights
identical to the common stock on all other matters.

There
are 1,071,346 shares of series D convertible preferred stock outstanding at June 30, 2007.
The series D preferred stock is convertible into common stock on a one-for-one basis,
bears no dividend, maintains a liquidation preference averaging $0.50 per share, votes as
a class on matters affecting the series D preferred stock and maintains voting rights
identical to the common stock on all other matters.

Common
Stock

In
accordance with the series F warrant agreement, effective January 4, 2007, the owners
effected a cashless exercise of all issued and outstanding series F warrants comprising
1,309,441 warrants with an exercise price of $0.57 per warrant. Based on the thirty day
trailing average closing price of $0.78 per share, the warrants had a calculated value of
$0.21 each ($0.78  $0.57), or $274,983 in the aggregate, and were exchanged for
352,175 shares of common stock.

On
August 3, 2006, the Company entered into an agreement to sell 2,000,000 shares of its
common stock at $0.75 per share for a total sales price of $1,500,000 to an existing
shareholder (the Purchaser). The Purchaser paid $500,000 on August 3, 2006 and
paid the balance due of $1,000,000, together with interest thereon at the annual rate of
2.5%, or $8,500, on December 5, 2006. The Company raised $1,478,525 (net of $21,475 in
offering expenses) related to this offering. A portion of the proceeds from this offering
was used to pay off the U.S. term loan entered into in connection with the acquisition of
Western Medical (see Notes 2 and 5).

On
May 11, 2006, the Company increased the number of authorized shares of common stock from
30,000,000 to 50,000,000.

In
April 2006, the Company raised $5,803,304 (net of $568,932 in commission and other
offering expenses) from a private offering of 2,655,098 units (10,620,392 shares in
total) at $2.40 per unit, each unit consisting of four shares of the Companys
common stock and one five-year Series H warrant (2,655,098 warrants in total) to purchase
one share of common stock at the price of $1.00. In addition, the placement agent
received

14

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|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

754,806 five-year Series I warrants
to purchase one share of common stock at $0.72. The funds were used for the acquisition
of certain assets of Western Medical.

Stock
Purchase Warrants

At
June 30, 2007, the Company had warrants outstanding to purchase 6,169,904 shares of the
Companys common stock as outlined below:

| |        |  |                   |  |                |  |                   |  | 
| | ------ |  | ----------------- |  | -------------- |  | ----------------- |  | 
| | Series |  | Number ofWarrants |  | Exercise Price |  | Expiration Date   |  | 
|
| | G      |  | 2,760,000         |  | $1.05          |  | December 31, 2008 |  | 
| | H      |  | 2,655,098         |  | $1.00          |  | April 30, 2011    |  | 
| | I      |  | 754,806           |  | $0.72          |  | April 30, 2011    |  | 
|
| | Total  |  | 6,169,904         | 

Stock
Options

The
Company has a stock option plan under which options to purchase a maximum of 5,000,000
shares of common stock may be issued. The plan permits the granting of both incentive
stock options and nonqualified stock options to employees and directors of the Company and
certain outside consultants and advisors to the Company. The option exercise price may not
be less than the fair market value of the stock on the date of the grant of the option.
The duration of each option may not exceed 10 years from the date of grant. Options under
the plan to purchase 1,040,000 shares of common stock were granted to officers, directors,
agents and employees in the six months ended June 30, 2007 at a weighted average exercise
price of $0.79 per share. As of June 30, 2007, options to purchase 4,641,625 shares of the
Companys common stock were issued and outstanding under the plan. No options granted
under the plan have been exercised.

The
Company has previously granted nonqualified stock options to officers, directors, agents
and employees outside of the stock option plan (non-plan options). All
non-plan options were granted at the fair market value at the date of grant. During the
six months ended June 30, 2007, 94,800 non-plan options expired. As of June 30, 2007,
non-plan options to purchase 2,141,855 shares of the Companys common stock were
issued and outstanding.

For
the six months ended June 30, 2007 and 2006 the fair value of each option award was
estimated at the date of grant using the Black-Scholes option pricing model. The
weighted-average assumptions for the six months ended June 30, 2007 and 2006 were as
follows:

|                             |  |       |  |       | 
|---------------------------- |  | ----- |  | ----- | 
|                             |  | 2007  |  | 2006  | 
|                            
|Risk-free interest rate      |  | 4.73% |  | 4.56% | 
|Volatility factor            |  | 118%  |  | 127%  | 
|Dividend yield               |  | 0%    |  | 0%    | 
|Expected option life (years) |  | 6.25  |  | 6.25  | 
|Contractual life (years)     |  | 10    |  | 10    | 

In
the six months ended June 30, 2007 and 2006, the risk-free rate utilized represents the
U.S. Treasury yield curve rate which approximates the risk-free rate for the expected
option life at the time of grant. In the six months ended June 30, 2007 and 2006, the
volatility factor was calculated based on the seventy-five month-end closing prices of
the Companys common stock preceding the month of stock option grant. Effective
January 1, 2006, the Company adopted based on guidance from Staff Accounting Bulletin
107, a stock option life of 6.25 years. As a result, the Company also adopted on January
1, 2006, a seventy-five month volatility period to coincide with the expected stock
option life. The dividend yield is 0% since the Company does not anticipate paying

15

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|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

dividends in the near future. Based
on the Companys historical experience of options that cancel before becoming fully
vested, the Company effective January 1, 2006 has assumed an annualized forfeiture rate
of 1.0% for all employee options. Under the true-up provision of SFAS 123R, the Company
will record additional expense if the actual forfeiture rate is lower than estimated, and
will record a recovery of prior expense if the actual forfeiture rate is higher than
estimated.

A
summary of the Companys stock option activity and related information for the six
months ended June 30, 2007 and 2006 follows:

|                        |  |           |   |                                       |  |           |  |                                       | 
|----------------------- |  | --------- | - | ------------------------------------- |  | --------- |  | ------------------------------------- | 
|                        |  | 2007      |   | 2006                                  | 
|                       
|                        |  | Options   |   | Weighted    Average    Exercise Price |  | Options   |  | Weighted    Average    Exercise Price | 
|                       
|Outstanding  January 1 |  | 5,838,280 |   | $0.94                                 |  | 5,773,280 |  | $0.92                                 | 
|Granted                 |  | 1,040,000 |   | $0.79                                 |  | 585,000   |  | $0.74                                 | 
|Forfeited/Expired       |  | (94,800   | ) | $7.05                                 |  |          |  |                                      | 
|                       
|Outstanding - June 30   |  | 6,783,480 |   | $0.83                                 |  | 6,358,280 |  | $0.90                                 | 
|                       
|Exercisable at June 30  |  | 5,775,980 |   | $0.84                                 |  | 5,964,530 |  | $0.91                                 | 

The
weighted average fair value per share of options granted during the six months ended June
30, 2007 and 2006 was $0.69 and $0.45, respectively.

For
the six months ended June 30, 2007 and 2006, no income tax benefit was recognized related
to stock option activity.

During
the six months ended June 30, 2007 and 2006, stock option compensation expense was
recorded using the fair value method under SFAS 123R as follows:

|                                        |  |           |  |          | 
|--------------------------------------- |  | --------- |  | -------- | 
|                                        |  | 2007      |  | 2006     | 
|                                       
|Cost of sales                           |  | $  29,962 |  | $  7,845 | 
|Operating expenses                      |  | 264,989   |  | 84,439   | 
|                                       
|Total stock option compensation expense |  | $294,951  |  | $92,284  | 

As
of June 30, 2007, there was $613,657 of total unrecognized compensation cost related to
nonvested share-based awards granted under the Plan. That cost is expected to be
recognized over the options remaining weighted average vesting period of 2.4 years.

16

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|                                                                      
|----------------------------------------------------------------------
|Index                                                                 
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                            
|Notes To Condensed
     Consolidated Financixal Statements (Unaudited)

Shares
Reserved for Future Issuance

At
June 30, 2007, the Company had reserved the following shares of common stock for future
issuance:

|                                                 |  |            | 
|------------------------------------------------ |  | ---------- | 
|Convertible preferred shares (series A - D)      |  | 2,280,407  | 
|Common stock options available for grant         |  | 358,375    | 
|Common stock options outstanding                 |  | 6,783,480  | 
|Common stock warrants outstanding (series G - I) |  | 6,169,904  | 
|Restricted common stock available for grant      |  | 2,325,000  | 
|Restricted common stock outstanding              |  | 175,000    | 
|                                                
|Total common stock shares reserved               |  | 18,092,166 | 

Restricted
Common Stock

On
May 11, 2006, the Company adopted a restricted common stock plan and reserved 2,500,000
shares of common stock for issuance.

On
May 12, 2006, 175,000 shares of restricted common stock were granted to non-employee
members of the Companys board of directors and will vest three years from the date
of the grant. The fair market value at the date of grant, determined by the quoted market
price, was $145,250. The fair market value of the grant is being recognized to
compensation expense over the three-year service period. For the six months ended June 30,
2007, $24,210 was recorded in operating expenses for these grants.

At
June 30, 2007, the weighted-average remaining contractual term for the restricted common
stock grant is 1.86 years.

7.     Comprehensive Income

The
Companys comprehensive income was as follows:

|                                                    |  |                            |   |                          |  |           |   |                | 
|--------------------------------------------------- |  | -------------------------- | - | ------------------------ |  | --------- | - | -------------- | 
|                                                    |  | Three Months EndedJune 30, |   | Six Months EndedJune 30, | 
|                                                    |  | 2007                       |   | 2006(Restated)           |  | 2007      |   | 2006(Restated) | 
|                                                   
|Net (loss) income as reported                       |  | $(109,563                  | ) | $346,167                 |  | $(248,516 | ) | $373,639       | 
|Other comprehensive income:                         | 
|Foreign currency translation
            adjustment |  | 505,794                    |   | 232,982                  |  | 564,334   |   | 209,930        | 
|                                                   
|Comprehensive income                                |  | $ 396,231                  |   | $579,149                 |  | $ 315,818 |   | $583,569       | 

8.     Operating Segments

The Company
consists of three operating segments: wound care, wound closure-specialty securement
devices and skin care. Products in the wound care segment consist of basic and advanced
dressings, ointments and sprays. Wound closure-specialty securement device products
include wound closure strips and a variety of catheter fasteners. The skin care segment
consists of bath sponges, antibacterial skin cleansers, hair and body soaps, lotions and
moisturizers.

Products
in all three operating segments are marketed to long-term care facilities, hospitals,
physicians, clinics, home health care agencies and other healthcare institutions. Basic
and advanced wound care products are manufactured both internally and outsourced, while
the manufacture of skin care products is totally outsourced.

17

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|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

Wound closure-specialty securement
devices are for the most part manufactured in-house. Internally, the segments are managed
at the gross profit level. The aggregation or allocation of other costs by segment is not
practical.

Segment
net sales, gross profit and other related information for the three and six months ended
June 30, 2007 and 2006 were as follows:

|               |  |                                             |   |                                                    |  |           |  |             |   |                  |  
|-------------- |  | ------------------------------------------- | - | -------------------------------------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Three Months Ended June 30, 2007            |   |                                                    |  |          
|              
|               |  | Wound Care                                  |   | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $   6,559,732                               |   | $   670,555                                        |  | $230,971  |  |            |   | $   7,461,258    |  
|              
|Gross profit   |  | 2,233,101                                   |   | 396,071                                            |  | 36,026    |  |            |   | 2,665,198        |  
|Total expenses |  |                                            |   |                                                   |  |          |  | $(2,774,761 | ) | (2,774,761       | )
|              
|Net loss       |  | $    (109,563                               | )
|              
|              
|               |  | Three Months Ended June 30, 2006 (Restated) |   |                                                    |  |          
|              
|               |  | Wound Care                                  |   | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $   6,204,581                               |   | $   612,690                                        |  | $307,016  |  |            |   | $   7,124,287    |  
|              
|Gross profit   |  | 2,132,465                                   |   | 308,770                                            |  | 13,933    |  |            |   | 2,455,168        |  
|Total expenses |  |                                            |   |                                                   |  |          |  | $(2,109,001 | ) | (2,109,001       | )
|              
|Net income     |  | $      346,167                              |  
|              
|              
|               |  | Six Months Ended June 30, 2007              |   |                                                    |  |          
|              
|               |  | Wound Care                                  |   | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $ 13,716,040                                |   | $1,262,672                                         |  | $448,343  |  |            |   | $ 15,427,055     |  
|              
|Gross profit   |  | 4,673,363                                   |   | 733,590                                            |  | 62,673    |  |            |   | 5,469,626        |  
|Total expenses |  |                                            |   |                                                   |  |          |  | $(5,718,142 | ) | (5,718,142       | )
|              
|Net loss       |  | $    (248,516                               | )

18

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|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

|               |  |                                           |  |                                                    |  |           |  |             |   |                  |  
|-------------- |  | ----------------------------------------- |  | -------------------------------------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Six Months Ended June 30, 2006 (Restated) |  |                                                    |  |          
|              
|               |  | Wound Care                                |  | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $ 10,827,846                              |  | $1,174,671                                         |  | $591,014  |  |            |   | $ 12,593,531     |  
|              
|Gross profit   |  | 3,752,883                                 |  | 591,705                                            |  | 14,911    |  |            |   | 4,359,499        |  
|Total expenses |  |                                          |  |                                                   |  |          |  | $(3,985,860 | ) | (3,985,860       | )
|              
|Net income     |  | $      373,639                            | 

The
following table presents net sales by geographic region.

|              |  |                             |  |                           |  |      |  |                | 
|------------- |  | --------------------------- |  | ------------------------- |  | ---- |  | -------------- | 
|              |  | Three Months Ended June 30, |  | Six Months Ended June 30, | 
|              |  | 2007                        |  | 2006(Restated)            |  | 2007 |  | 2006(Restated) | 
|             
|United States |  | 59%                         |  | 58%                       |  | 58%  |  | 53%            | 
|Canada        |  | 34%                         |  | 38%                       |  | 36%  |  | 43%            | 
|Other         |  | 7%                          |  | 4%                        |  | 6%   |  | 4%             | 

The increase
in U.S. and decrease in Canada net sales in the three and six month periods ended June 30,
2007, expressed as percentages of total net sales versus the comparable 2006 periods, is
attributable to the April 2006 acquisition of the Western Medical business and the growth
of the United States private label wound care business.

For
the six months ended June 30, 2007 and 2006, the Company has a major U.S. customer
comprising 16% and 18% of U.S. sales, respectively. The Companys wholly owned
Canadian subsidiary sells to one customer who serves as its exclusive third party
distributor.

9.     Income Taxes

The
Company recorded a $114,099 and $187,523 foreign income tax provision for the three and
six months ended June 30, 2007, respectively, based on the operating results of the
Companys wholly owned Canadian subsidiary. No benefit was made for the
Companys U.S. operations in the three months and six months ended June 30, 2007 due
to a net operating loss for the three and six months and uncertainties surrounding the
Companys ability to utilize its U.S. net operating loss carry forwards. No provision
for U.S. or foreign income taxes was made for the three and six months ended June 30, 2006
due to a net operating loss in the U.S. and the availability of foreign net operating loss
carry forwards.

As
noted above, due to uncertainties surrounding the Companys ability to use its U.S.
net operating loss carry forwards and net deferred assets, a full valuation allowance has
been provided. Effective December 31, 2006 the Companys wholly owned Canadian
subsidiary, based on recent operating profitability and the prospect of future profitable
operations, realized its net operating loss carry forward and deferred tax assets and
liabilities.

10.   Comvita Licensing,
Manufacturing and Sales Agreement

On
February 13, 2006 the Company entered into an exclusive five year licensing,
manufacturing and sales agreement (the Agreement) with Comvita New Zealand
Limited whereby the Company will manufacture and sell

19

---



|                                                                     
|---------------------------------------------------------------------
|Index                                                                
|DERMA SCIENCES, INC. AND
     SUBSIDIARIES                           
|Notes To Condensed
     Consolidated Financial Statements (Unaudited)

a line of Manuka Honey based wound
care products developed by Comvita. These products are supported by proprietary
intellectual property that will serve to provide a competitive advantage in the market
place. Access to this technology and these products represents a significant milestone in
the Companys strategy to build a larger presence in the advanced wound care market
segment. Under the Agreement, the Company receives exclusive rights to manufacture and
sell its branded products throughout North and South America within the professional
medical-surgical marketplace (i.e. extended care, acute care, home care, etc). Comvita
retains the right to these products in the consumer marketplace and has the option to
purchase its branded consumer product requirements from the Company at agreed upon
pricing.

In
accordance with the Agreement, the Company will purchase its requirements for active honey
from Comvita at agreed upon pricing. As consideration for the grant of the license, the
Company will pay Comvita a royalty based on sales. The Agreement calls for the Company to
spend a minimum of either $200,000 or 8% of sales per year on advertising and promotion in
support of these products. Further, effective for twelve-month periods beginning July 23,
2008 and thereafter, the Agreement requires that the Company meet minimum sales targets in
order to maintain exclusivity. On July 23, 2007, the Food and Drug Administration granted
clearance to the Company to market and sell in the United States its Active Manuka Honey
Absorbent Dressings.

11.   Quick-Med
Technologies, Inc.  License Agreement

On
March 23, 2007, the Company entered into a patent and technology license agreement (the
Agreement) with Quick-Med Technologies, Inc. (QMT) relating to
QMTs proprietary anti-microbial technology (the Technology). The Company
anticipates utilizing the Technology in a series of wound care products, including
conforming gauze, gauze sponges, gauze bandage rolls, gauze packing strips, oil emulsion
acetate and Unna boot dressings. Initiation of the marketing and sale of products
incorporating the Technology is dependent upon the grant by the Food and Drug
Administration of approval for use of the Technology in primary and secondary wound
dressings. The fact and timing of such approval are uncertain.

The
initial term of the Agreement extends from March 23, 2007 (the Effective Date)
for a period equal to the shorter of five years from the first commercial sale of products
under the Agreement or seven years from the Effective Date. Under the Agreement, QMT
grants to the Company an exclusive, royalty-bearing right and license to make, use and
sell products incorporating the Technology in the United States and Canada (with the
exception of sales to the United States government and agencies thereof in which case the
license will be non-exclusive).

In
consideration for the license to the Technology, the Company paid QMT a license fee in the
amount of $50,000 and is committed to make additional advance royalty payments in the
amount of $25,000 each, three months, six months and nine months after the Effective Date.
The foregoing advance royalty payments are creditable against future royalties that become
due under the Agreement. The total non-refundable license and advance royalty payments of
$125,000 were charged to general administrative expense in March 2007, a component of
operating expense in the consolidated statement of operations. The Company made no
payments during the second quarter 2007 with respect to this Agreement.

Royalties
are payable upon the Companys net sales of products utilizing the Technology at the
rate of 20% for sales within exclusive territories and 10% for sales within non-exclusive
territories. The Agreement provides for escalating minimum royalty payments for each
contract year. In the event for a given contract year the Company fails to make the
required minimum royalty payments, but makes at least 50% of the required minimum royalty
payments, QMTs exclusive remedy would be the termination of the Companys
exclusive rights to the Technology. In the event for a given contract year the Company
fails to make at least 50% of the required minimum royalty payments, or if the Company
fails to make the required minimum royalty payments for three contract years, QMTs
exclusive remedies would be the termination of the Companys exclusive rights to the
Technology or termination of the Agreement.

20

---



Index

|Item  2. |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
|-------- |  | --------------------------------------------------------------------------------

QUARTER ENDED JUNE 30, 2007
COMPARED TO QUARTER ENDED JUNE 30, 2006.

Results of Operations

Overview

The
2007 and 2006 operating results include Derma Sciences, Inc. and its subsidiaries. Unless
otherwise indicated by the context, the terms U.S. operations and Canadian operations are
used throughout this discussion in reference to the Companys U.S. operations and the
operations of Derma Sciences Canada Inc., respectively.

The
Company engages in the manufacture, marketing and sale of three dermatological product
lines consisting of wound care, wound closure-specialty securement devices and skin care.
The wound care line is composed of basic and advanced wound care products. Basic wound
care consists of gauze dressings, packing strips, impregnated gauze dressings, abdominal
pads, laparotomy sponges, burn dressings and bandages. Advanced wound care products
consist of ointments, silver dressings, calcium alginate dressings, hydrogel dressings,
hydrocolloid dressings and foam dressings. The wound closure-specialty securement device
line consists of wound closure strips and a variety of catheter fasteners. The skin care
line consists of bath sponges, skin cleansers, soaps, hair and body washes and
moisturizers.

The
following table highlights the quarters ended June 30, 2007 versus 2006 operating results:

|                           |  |                        |   |                                    |   |           |   |        |  
|-------------------------- |  | ---------------------- | - | ---------------------------------- | - | --------- | - | ------ | -
|                           |  | Quarter Ended June 30, |  
|                           |  | 2007                   |   | 2006           
        (Restated) |   | Variance  |  
|                          
|Gross Sales                |  | $ 9,174,976            |   | $ 8,742,744                        |   | $ 432,232 |   | 4.9%   |  
|Sales adjustments          |  | (1,713,718             | ) | (1,618,457                         | ) | (95,261   | ) | 5.9%   |  
|                          
|Net sales                  |  | 7,461,258              |   | 7,124,287                          |   | 336,971   |   | 4.7%   |  
|Cost of sales              |  | 4,796,060              |   | 4,669,119                          |   | 126,941   |   | 2.7%   |  
|                          
|Gross profit               |  | 2,665,198              |   | 2,455,168                          |   | 210,030   |   | 8.6%   |  
|Gross profit percentage    |  | 35.7                   | % | 34.5                               | %
|Operating expenses         |  | 2,589,957              |   | 1,976,941                          |   | 613,016   |   | 31.0%  |  
|Interest expense           |  | 47,564                 |   | 110,145                            |   | (62,581   | ) | (56.8% | )
|Other expense, net         |  | 23,141                 |   | 21,915                             |   | 1,226     |   | 5.6%   |  
|                          
|Total expenses             |  | 2,660,662              |   | 2,109,001                          |   | 551,661   |   | 26.2%  |  
|Income before income taxes |  | 4,536                  |   | 346,167                            |   | (341,631  | ) |       |  
|Provision for income taxes |  | 114,099                |   |                                   |   | 114,099   |   |       |  
|                          
|Net (loss) income          |  | $  (109,563            | ) | $    346,167                       |   | $(455,730 | ) |       |  

Gross to Net Sales
Adjustments

Gross
sales are adjusted for trade rebates, distribution fees (in Canada), sales incentives,
Medicaid rebates, returns and allowances and cash discounts to derive net sales. Trade
rebates are trued-up monthly based upon an analysis of historical sales subject to rebate
and actual rebates received from distributors. The normal rebate cycle is one month.
Non-exclusive distributors generally carry one months inventory. The Companys
exclusive distributor in Canada normally carries three to four months inventory. As
distributor inventory is depleted via sales, it is replenished via purchases from the
Company. Rebates are processed and submitted for credit on a timely basis consistent with
distributor sales. If the normal rebate cycle were one-half month less than estimated at
June 30, 2007, the trade rebate reserve would be overstated by approximately $239,000. If
the normal rebate cycle were one

21

---



Index

month greater than estimated at June
30, 2007, the trade rebate reserve would be understated by approximately $478,000. To
minimize its cash outflow invested in rebates, distributors generally strive to optimize
the rebate credit submission process.

Given
the nature of the Companys products and business, there is no external information
available to further validate the reasonableness of the trade rebate accrual balance.
Historical trends of sales subject to rebate and rebates received are evaluated monthly,
by distributor, on a 3 month, 6 month and 12 month rolling basis to update the continued
reasonableness of the assumptions used to quantify the trade rebate accrual balance.
Deviations in the trends resulting, among other causes, from distributors not submitting
their rebates on a timely basis are analyzed and factored in determining the required
accrual balance.

The
Company currently pays its exclusive Canadian distributor a fixed fee of 10% on net sales
subject to the fee (as defined) for distribution services in Canada. The distribution fee
is accrued each month based on net sales to the distributor times the ratio of estimated
percentage of distribution fee expense to net sales based on past history. The percentage
of distributor fee expense to net sales is re-evaluated quarterly for reasonableness.

Sales
incentives are credits granted to specific customers based upon attainment of
pre-determined sales objectives. The agreements are generally for a period of one year.

Medicaid
rebates are accrued monthly based upon recent historical activity and reconciled quarterly
based upon receipt of rebate reports from participating state agencies. Returns and
allowances and cash discounts are accrued monthly based on recent historical activity.

Gross
to net sales adjustments comprise the following:

|                       |  |                        |   |                |  
|---------------------- |  | ---------------------- | - | -------------- | -
|                       |  | Quarter Ended June 30, |  
|                       |  | 2007                   |   | 2006(Restated) |  
|                      
|Gross Sales            |  | $ 9,174,976            |   | $ 8,742,744    |  
|                      
|Trade rebates          |  | (1,274,563             | ) | (1,275,991     | )
|Distribution fees      |  | (216,338               | ) | (232,971       | )
|Sales incentives       |  | (52,485                | ) | (48,319        | )
|Medicaid rebates       |  | (1,616                 | ) | (677           | )
|Returns and allowances |  | (108,070               | ) | (18,310        | )
|Cash discounts         |  | (60,646                | ) | (42,189        | )
|                      
|Total adjustments      |  | (1,713,718             | ) | (1,618,457     | )
|                      
|Net sales              |  | $ 7,461,258            |   | $ 7,124,287    |  

Trade rebates
were essentially flat in the second quarter 2007 versus 2006 due to lower rebate intensive
Canadian sales partially offset by an increase in the overall rebate percentage due to
renewal of buying group contracts at lower selling prices coupled with a stable level of
sales subject to rebate (contract business) in other areas of the
Companys business. The decrease in distribution fee expense is commensurate with the
decrease in Canadian net sales upon which it is based. The increase in sales incentive
expense principally relates to the acquisition of the Western Medical business in April
2006, which utilizes sales incentives to a greater degree than in the Companys other
product lines. Medicaid rebates have been insignificant given a continuing trend towards
lower levels of Medicaid reimbursed sales. Sales returns and allowances increased in 2007
due to the higher level of sales and the Companys decision to accept certain returns
during the quarter from a customer. Cash discounts increased commensurate with the sales
increase and as a result of a slight increase in the percentage of cash discounts to
sales, as a larger portion of the sales growth continues to come from customers that have
historically taken advantage of the Companys discount terms.

22

---



Index

Rebate Reserve Roll
Forward

A
quarterly roll forward of the trade rebate accruals at June 30, 2007 and 2006 is outlined
below:

|                             |  |                        |   |                |  
|---------------------------- |  | ---------------------- | - | -------------- | -
|                             |  | Quarter Ended June 30, |  
|                             |  | 2007                   |   | 2006(Restated) |  
|                            
|Beginning balance - March 31 |  | $ 2,367,804            |   | $ 1,785,045    |  
|Rebates paid                 |  | (1,362,557             | ) | (697,872       | )
|Rebates accrued              |  | 1,274,563              |   | 1,275,991      |  
|                            
|Ending balance  June 30     |  | $ 2,279,810            |   | $ 2,363,164    |  

The
$87,994 decrease in the second quarter 2007 trade rebate reserve reflects a slight
decrease in the Canadian rebate reserve due to higher sales of the Companys products
by its exclusive distributor to its customers versus Company sales to the distributor, as
the distributor worked down higher first quarter inventories coupled with higher
principally timing related US rebate payments. There has been no other discernable change
in the nature of the Companys business as it relates to the accrual and subsequent
payment of rebates. The $578,119 increase in the second quarter 2006 trade rebate reserve
reflects a $432,814 increase in the Canadian reserve due principally to higher sales,
lower U.S. rebate payments due to continuation of extended payment terms with one large
customer and incremental reserve requirements associated with the acquisition of the
Western Medical business in April 2006.

Net Sales and Gross Margin

The
following table highlights the June 30, 2007 versus 2006 product line net sales and gross
profit:

|                                                 |  |                        |  |                                    |  |           |   |        |  
|------------------------------------------------ |  | ---------------------- |  | ---------------------------------- |  | --------- | - | ------ | -
|                                                 |  | Quarter Ended June 30, | 
|                                                 |  | 2007                   |  | 2006           
        (Restated) |  | Variance  |  
|                                                
|Product Line Net Sales                           | 
|                                                
|Wound care                                       |  | $6,559,732             |  | $6,204,581                         |  | $ 355,151 |   | 5.7%   |  
|Wound closure-specialty       securement devices |  | 670,555                |  | 612,690                            |  | 57,865    |   | 9.5%   |  
|Skin care                                        |  | 230,971                |  | 307,016                            |  | (76,045   | ) | (24.8% | )
|                                                
|Total                                            |  | $7,461,258             |  | $7,124,287                         |  | $ 336,971 |   | 4.7%   |  
|                                                
|Product Line Gross Profit                        | 
|                                                
|Wound care                                       |  | $2,233,101             |  | $2,132,465                         |  | $ 100,636 |   | 4.7%   |  
|Wound closure-specialty      securement devices  |  | 396,071                |  | 308,770                            |  | 87,301    |   | 28.3%  |  
|Skin care                                        |  | 36,026                 |  | 13,933                             |  | 22,093    |   | 158.6% |  
|                                                
|Total                                            |  | $2,665,198             |  | $2,455,168                         |  | $ 210,030 |   | 8.6%   |  

Company
net sales increased $336,971, or 4.7%, to $7,461,258 in 2007 from $7,124,287 in 2006.
Canadian net sales decreased $197,195, or 7.3%, to $2,524,255 in 2007 from $2,721,450 in
2006. This decrease was driven by erosion of $253,502 partially offset by favorable
exchange of $56,307 associated with a 2.0% strengthening of the Canadian dollar. The
decrease was principally attributable to lower sales to the Companys exclusive
Canadian distributor as a result of higher than normal first quarter purchases to
rebalance its inventory coupled with price erosion associated with the renewal of bid
contracts beginning in the fourth quarter 2006 at lower overall selling prices and lower
private label sales to the distributor. Real growth as measured by sales of the Companys
products reported by the distributor, adjusted for foreign exchange, approximated 1%.
U.S. net sales

23

---



Index

increased $534,166, or 12.1%, to
$4,937,003 in 2007 from $4,402,837 in 2006. The increase was driven by incremental
Western Medical sales of $364,160, continued private label growth, one-time wound
closure-specialty securement device sales and new product (silver alginate) sales growth
partially offset by a continued sales decline in the skin care and the Derma line of
products. Excluding Western Medical sales, U.S. sales increased $170,006, or 5.4%.

Company
gross profit increased $210,030, or 8.6%, to $2,665,198 in 2007 from $2,455,168 in 2006.
Company gross profit margin percentage increased to 35.7% in 2007 from 34.5% in 2006.
Canadian gross profit decreased $39,086, or 4.5%, to $827,290 in 2007 from $866,376 in
2006. Canadian gross profit margin percentage increased to 32.8% in 2007 from 31.8% in
2006. The decrease in Canadian 2007 gross profit dollars reflects the impact of lower
sales and ongoing sales price erosion in the Canadian traditional wound care market,
partially offset by continuing improvement in manufacturing performance and the benefit of
lower negotiated basic wound care costs. U.S. gross profit increased $249,116, or 15.7%,
to $1,837,908 in 2007 from $1,588,792 in 2006. U.S. gross profit margin percentage
increased to 37.2% in 2007 from 36.1% in 2006. The improvement in U.S. gross profit margin
dollars reflects the impact of higher sales and the improved gross profit margin
percentage. The increase in gross profit margin percentage is principally attributable to
favorable product mix. Higher margined specialty fixation device and new product sales
together with improved traditional wound care margins due to lower product costs were the
primary contributors. Excluding Western Medical, U.S. gross profit increased $106,006, or
10.0%, and the gross profit margin percentage would have been 35.3%.

Wound
care sales consisting of basic and advanced wound care products increased $355,151, or
5.7%, in 2007 versus 2006. Basic wound care sales increased $122,748, or 2.9%. This
increase was driven by an increase in U.S. basic wound care sales of $319,943 partially
offset by a Canadian sales decrease of $197,195. The U.S. sales performance reflects
incremental Western Medical sales of approximately $173,000 coupled with modest growth for
the balance of the basic wound care line. The Canadian sales decrease was principally
attributable to timing related lower sales to the Companys exclusive Canadian
distributor as a result of higher than normal first quarter purchases to rebalance its
inventory, price erosion and lower private label sales to the distributor. Advanced wound
care sales increased $232,403, or 11.6%. The increase was principally driven by U.S.
private label, silver dressings and new product sales growth, partially offset by lower
demand for the Derma line of products. The Companys new silver alginate product
launched in November 2006 generated sales of approximately $159,000 in the second quarter
versus $99,000 in the first quarter 2007.

Wound
care gross profit increased $100,636, or 4.7%, in 2007 versus 2006. Gross profit margin
percentage decreased to 34.0% in 2007 from 34.4% in 2006. The gross profit margin dollar
increase reflects the sales increase and margin decrease. The margin percentage decrease
is principally attributable to unfavorable product mix partially mitigated by favorable
product cost improvement.

Wound
closure-specialty securement device sales increased $57,865, or 9.5%, in 2007 versus 2006.
The increase is principally due to the one-time sale of residual product in connection
with the discontinuation of a private label agreement. Core sales were essentially flat
period-to-period.

Wound
closure-specialty securement device gross profit increased $87,301, or 28.3%, in 2007
versus 2006. Gross profit margin percentage increased to 59.1% in 2007 from 50.4% in 2006.
The increase in gross profit margin dollars reflects the higher sales and improved gross
profit margin percentage. The gross profit margin percentage improvement is due to the
flow through of lower product costs associated with bringing the manufacture of these
products in-house in the second half of 2006.

Skin
care sales decreased $76,045, or 24.8%, in 2007 versus 2006 due to continuing competitive
pressure. Skin care gross profit improved $22,093, or 158.6%, in 2007 versus 2006. The
main driver for the gross profit dollar improvement was the elimination of the monthly
carrying costs associated with the lease on the former skin care manufacturing facility
that expired in January 2007. Outsourcing production to lower cost third parties has
allowed this business to continue to operate at slightly above break even in terms of
gross profit.

24

---



Index

Operating Expense

The
following table highlights June 30, 2007 versus 2006 operating expenses by type:

|                       |  |                        |  |                                    |  |           |  |        | 
|---------------------- |  | ---------------------- |  | ---------------------------------- |  | --------- |  | ------ | 
|                       |  | Quarter Ended June 30, | 
|                       |  | 2007                   |  | 2006           
        (Restated) |  | Variance  | 
|                      
|Distribution           |  | $   208,052            |  | $   174,394                        |  | $  33,658 |  | 19.3%  | 
|Marketing              |  | 379,703                |  | 127,553                            |  | 252,150   |  | 197.7% | 
|Sales                  |  | 680,358                |  | 550,150                            |  | 130,208   |  | 23.7%  | 
|General administrative |  | 1,321,844              |  | 1,124,844                          |  | 197,000   |  | 17.5%  | 
|                      
|Total                  |  | $2,589,957             |  | $1,976,941                         |  | $613,016  |  | 31.0%  | 

Operating
expense increased $613,016, or 31.1%, to $2,589,957 in 2007 from $1,976,941 in 2006
including an increase of $9,803 attributable to exchange associated with a 2.0%
strengthening of the Canadian dollar on the Canadian operations.

Distribution
expense increased $33,658, or 19.3%, in 2007 versus 2006. Expenses in Canada increased
$34,517 while expenses in the U.S decreased $859. The increase in Canada was principally
attributable to higher lease, real estate taxes, utility and maintenance expenses. In
December 2006, the Company leased additional square footage adjacent to its existing
facility to accommodate increased manufacturing and warehousing requirements. The U.S.
decrease was due to the non-recurrence of one-time third party Western Medical transition
related distribution fees, for the most part offset by higher inflation related
compensation and benefit, rent (effective March 2007), utility and other operating costs.

Marketing
expense increased $252,150, or 197.7%, in 2007 versus 2006. The increase was principally
attributable to higher compensation and benefits associated with an employee promotion in
2006 and the hiring of a Director of Clinical Affairs (new position) in February 2007.
Also contributing were planned increases in promotion, product development and clinical
advisory board expense in support of the Companys growth initiatives.

Sales
expense increased $130,208, or 23.7%, in 2007 versus 2006. Expenses in Canada increased
$10,224 (including $2,761 expense related to exchange) while expenses in the U.S.
increased $119,984. Excluding exchange, the $7,463 increase in Canada was due to higher
compensation and benefits, promotion and sample expenses partially offset by lower travel
expenses. The U.S. increase was attributable to $70,500 of incremental recruiting expense
associated with the planned expansion of the sales force and relocation of customer
service to corporate headquarters, together with normal year-on-year compensation and
benefit increases, higher commission, bonus, sample, travel and sales volume related
administrative expenses, partially offset by lower Western Medical related sales
consulting expense due to a lower fee structure (versus 2006).

General
administrative expense increased $197,000, or 17.5%, in 2007 versus 2006. Expenses in
Canada increased $12,885 (including $6,303 expense related to exchange) while expenses in
the U.S. increased $184,115. The increase in Canada principally reflects normal
year-on-year compensation and benefit increases, higher share based compensation expense
and Sarbanes Oxley costs, partially offset by timing related travel expense. The U.S.
increase principally reflects share based compensation expense of $36,000, bonuses of
$27,000, incremental directors fees of $26,000, intangible amortization expense of
$25,000 related to the Western Medical acquisition, higher travel expenses of
approximately $23,000, higher investor relations and public relations related expenses of
approximately $21,000 together with normal year-on-year compensation and benefit and
inflation related increases, partially offset by the non-recurrence of $32,000 of one-time
Western Medical transition related expenses incurred in 2006.

Interest Expense

Interest
expense decreased $62,581, or 56.8%, to $47,564 in 2007 from $110,145 in 2006. Interest
expense in Canada decreased $3,967 while interest expense in the U.S. decreased $58,614.
The decrease in Canada reflects lower outstanding term loan balances in 2007 versus 2006
partially offset by higher interest rates. The U.S. decrease

25

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Index

is principally due to lower line of
credit (despite higher interest rates) and term loan (fully paid off in December 2006)
interest due to lower borrowing balances in 2007 versus 2006 as a result of the Companys
improved U.S. cash flow. Partially offsetting these decreases were incremental promissory
note interest and deferred finance fee amortization expense related to the Western
Medical acquisition in April 2006.

Other Income/Expense

Other
expense, net increased $1,226 to $23,141 in 2007 from $21,915 in 2006. The main driver for
the other expense increase was higher foreign exchange expense partially offset by lower
temporary container storage costs.

Income Taxes

The
Company recorded a $114,099 foreign income tax provision for the second quarter 2007 based
on the Companys Canadian operating results. No income tax benefit was made for the
Companys U.S. operations in the second quarter 2007 due to a net operating loss for
the quarter and uncertainties surrounding the Companys ability to utilize its U.S.
net operating loss carry forwards. No provision for U.S. or foreign income taxes was made
in the second quarter of 2006 due to available net operating loss carry forwards.

Based
on projected operating results and available net operating loss carry forwards, the U.S.
effective tax rate is projected to be insignificant in 2007. In Canada, the effective tax
rate is projected to be 34% in 2007. For the most part, tax expense in Canada is projected
to be deferred in nature as net operating loss carry forwards are utilized to offset taxes
payable.

As
noted above, due to uncertainties surrounding the Companys ability to use its U.S.
net operating loss carry forwards and net deferred tax assets, a full valuation allowance
has been provided. Effective December 31, 2006 the Companys Canadian subsidiary,
based on recent operating profitability and projected profitable operations going forward,
realized its net operating loss carry forwards and deferred tax assets and liabilities.

Net Income (Loss)

The
Company generated a net loss of $109,563, or $0.00 per share (basic and diluted), in the
second quarter 2007 compared to net income of $346,167, or $0.02 income per share basic
and $0.01 per share diluted, in the second quarter 2006.

26

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Index

Six Months Ended
June 30, 2007 Compared to Six Months Ended June 30, 2006.

Results of Operations

Overview

The
following table highlights the six months ended June 30, 2007 versus 2006 operating
results:

|                                  |  |                           |   |                                    |   |             |   |        |  
|--------------------------------- |  | ------------------------- | - | ---------------------------------- | - | ----------- | - | ------ | -
|                                  |  | Six Months Ended June 30, |  
|                                  |  | 2007                      |   | 2006           
        (Restated) |   | Variance    |  
|                                 
|Gross Sales                       |  | $ 19,354,955              |   | $ 15,507,510                       |   | $ 3,847,445 |   | 24.8%  |  
|Sales adjustments                 |  | (3,927,900                | ) | (2,913,979                         | ) | (1,013,921  | ) | 34.8%  |  
|                                 
|Net sales                         |  | 15,427,055                |   | 12,593,531                         |   | 2,833,524   |   | 22.5%  |  
|Cost of sales                     |  | 9,957,429                 |   | 8,234,032                          |   | 1,723,397   |   | 20.9%  |  
|                                 
|Gross profit                      |  | 5,469,626                 |   | 4,359,499                          |   | 1,110,127   |   | 25.5%  |  
|Gross profit percentage           |  | 35.5                      | % | 34.6                               | % |             |   |        |  
|Operating expenses                |  | 5,383,111                 |   | 3,841,271                          |   | 1,541,840   |   | 40.1%  |  
|Interest expense                  |  | 97,810                    |   | 192,195                            |   | (94,385     | ) | (49.1% | )
|Other expense/(income), net       |  | 49,698                    |   | (47,606                            | ) | 97,304      |  
|                                 
|Total expenses                    |  | 5,530,619                 |   | 3,985,860                          |   | 1,544,759   |   | 38.8%  |  
|(Loss) income before income taxes |  | (60,993                   | ) | 373,639                            |   | (434,632    | ) |       |  
|Provision for income taxes        |  | 187,523                   |   |                                   |   | 187,523     |   |       |  
|                                 
|Net (loss) income                 |  | $    (248,516             | ) | $      373,639                     |   | $  (622,155 | ) |       |  

Gross to Net Sales
Adjustments

Gross
to net sales adjustments comprise the following:

|                       |  |                           |   |                |  
|---------------------- |  | ------------------------- | - | -------------- | -
|                       |  | Six Months Ended June 30, |  
|                       |  | 2007                      |   | 2006(Restated) |  
|                      
|Gross Sales            |  | $ 19,354,955              |   | $ 15,507,510   |  
|                      
|Trade rebates          |  | (3,028,432                | ) | (2,242,119     | )
|Distribution fees      |  | (505,889                  | ) | (489,681       | )
|Sales incentives       |  | (109,653                  | ) | (66,197        | )
|Medicaid rebates       |  | (3,131                    | ) | (7,128         | )
|Returns and allowances |  | (151,586                  | ) | (30,565        | )
|Cash discounts         |  | (129,209                  | ) | (78,289        | )
|                      
|Total adjustments      |  | (3,927,900                | ) | (2,913,979     | )
|                      
|Net sales              |  | $ 15,427,055              |   | $ 12,593,531   |  

Trade
rebates increased significantly in the first six months 2007 versus 2006 due to higher
rebate intensive Canadian sales coupled with an increase in the overall rebate percentage
due to renewal of buying group contracts at lower selling prices and continuing growth of
rebate intensive U.S. private label sales. The increase in distribution fee expense is
commensurate with the increase in Canadian net sales upon which it is based. The increase
in sales incentive expense principally relates to the acquisition of the Western Medical
business in April 2006, which utilizes sales incentives to a greater degree than in the
Companys other product lines. A continuing trend towards lower levels of Medicaid
reimbursed sales is responsible for the lower level of Medicaid rebates. Sales returns and

27

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Index

allowances increased in 2007 due to
the higher level of sales and the Companys decision to accept certain returns
during the six month period from a customer. Cash discounts increased commensurate with
the sales increase and as a result of a slight increase in the percentage of cash
discounts to sales, as a larger portion of the sales growth continues to come from
customers that have historically taken advantage of the Companys discount terms.

Rebate Reserve Roll
Forward

A
six month roll forward of the trade rebate accruals at June 30, 2007 and 2006 is outlined
below:

|                              |  |                           |   |                |  
|----------------------------- |  | ------------------------- | - | -------------- | -
|                              |  | Six Months Ended June 30, |  
|                              |  | 2007                      |   | 2006(Restated) |  
|                             
|Beginning balance  January 1 |  | $ 1,817,558               |   | $ 1,566,590    |  
|Rebates paid                  |  | (2,566,180                | ) | (1,445,545     | )
|Rebates accrued               |  | 3,028,432                 |   | 2,242,119      |  
|                             
|Ending balance  June 30      |  | $ 2,279,810               |   | $ 2,363,164    |  

The
$462,252 increase in the first six months 2007 trade rebate reserve reflects a $386,169
increase to $1,860,237 in the Canadian rebate reserve. This increase is due to the impact
of a high level of sales to the Companys exclusive distributor in the first quarter
coupled with an increase in the distributors inventory level that resulted in a
build-up of the reserve. An increase in the overall rebate percentage in Canada due to
renewal of buying group contracts at lower selling prices coupled with incremental U.S.
reserve requirements associated with the growing rebate related private label business
also contributed. There has been no other discernable change in the nature of the
Companys business as it relates to the accrual and subsequent payment of rebates.
The $796,574 increase in the first six months 2006 trade rebate reserve reflects a
$605,023 increase in the Canadian reserve due principally to higher sales, lower U.S.
rebate payments due to continuation of extended payment terms with a large customer and
incremental reserve requirements associated with the acquisition of the Western Medical
business in April 2006.

Net Sales and Gross Margin

The
following table highlights the June 30, 2007 versus 2006 product line net sales and gross
profit:

|                                                 |  |                           |  |                                    |  |              |   |        |  
|------------------------------------------------ |  | ------------------------- |  | ---------------------------------- |  | ------------ | - | ------ | -
|                                                 |  | Six Months Ended June 30, | 
|                                                 |  | 2007                      |  | 2006           
        (Restated) |  | Variance     |  
|                                                
|Product Line Net Sales                           | 
|                                                
|Wound care                                       |  | $13,716,040               |  | $10,827,846                        |  | $ 2,888,194  |   | 26.7%  |  
|Wound closure-specialty       securement devices |  | 1,262,672                 |  | 1,174,671                          |  | 88,001       |   | 7.5%   |  
|Skin care                                        |  | 448,343                   |  | 591,014                            |  | (142,671     | ) | (24.1% | )
|                                                
|Total                                            |  | $15,427,055               |  | $12,593,531                        |  | $ 2,833,524  |   | 22.5%  |  
|                                                
|Product Line Gross Profit                        | 
|                                                
|Wound care                                       |  | $  4,673,363              |  | $  3,752,883                       |  | $    920,480 |   | 24.5%  |  
|Wound closure-specialty      securement devices  |  | 733,590                   |  | 591,705                            |  | 141,885      |   | 24.0%  |  
|Skin care                                        |  | 62,673                    |  | 14,911                             |  | 47,762       |   | 320.3% |  
|                                                
|Total                                            |  | $  5,469,626              |  | $  4,359,499                       |  | $ 1,110,127  |   | 25.5%  |  

28

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Index

Company
net sales increased $2,833,524, or 22.5%, to $15,427,055 in 2007 from $12,593,531 in 2006.
Canadian net sales increased $169,232, or 3.1%, to $5,614,512 in 2007 from $5,445,280 in
2006. This increase was driven by growth of $179,259 less unfavorable exchange of $10,027
associated with a de-minimus weakening of the Canadian dollar. The increase was
principally attributable to higher sales to the Companys exclusive Canadian
distributor to rebalance its inventory, partially offset by price erosion associated with
the renewal of bid contracts beginning in the fourth quarter 2006 at lower overall selling
prices and lower private label sales to the distributor. Real growth as measured by sales
of the Companys products reported by the distributor, adjusted for foreign exchange,
approximated 6%. U.S. net sales increased $2,664,292, or 37.3%, to $9,812,543 in 2007 from
$7,148,251 in 2006. The increase was driven by the addition of incremental Western Medical
sales of approximately $1,839,000, continued private label growth, one-time wound
closure-specialty securement device sales and new product (silver alginate) sales growth
partially offset by continued sales decline in the skin care and the Derma line of
products. Excluding Western Medical sales, U.S. sales increased $825,354, or 14.0%.

Company
gross profit increased $1,110,127, or 25.5%, to $5,469,626 in 2007 from $4,359,499 in
2006. Company gross profit margin percentage increased to 35.5% in 2007 from 34.6% in
2006. Canadian gross profit increased $219,944, or 12.5%, to $1,974,385 in 2007 from
$1,754,441 in 2006. Canadian gross profit margin percentage increased to 35.2% in 2007
from 32.2% in 2006. The improvement in Canadian 2007 gross profit dollars and margin
percentage reflects the combined impact of higher sales, continuing improvement in
manufacturing performance and the benefit of lower negotiated basic wound care costs
partially offset by ongoing price erosion in the Canadian traditional wound care market.
U.S. gross profit increased $890,182, or 34.2%, to $3,495,240 in 2007 from $2,605,058 in
2006. Gross profit margin percentage decreased to 35.6% in 2007 from 36.4% in 2006. The
improvement in U.S. gross profit margin dollars reflects the impact of higher sales. The
decrease in gross profit margin percentage is principally attributable to unfavorable
product mix. Continued growth of the lower margined private label business is the primary
contributor. Excluding Western Medical, gross profit increased $84,490, or 4.1%, and the
gross profit margin percentage would have been 32.2%.

Wound
care sales consisting of basic and advanced wound care products increased $2,888,194, or
26.7%, in 2007 versus 2006. Basic wound care sales increased $1,489,081, or 20.0%. This
increase was driven by an increase in Canadian basic wound care sales of $169,232 together
with a U.S. sales increase of $1,319,849. The Canadian sales growth was driven principally
by higher sales to the Companys exclusive Canadian distributor in the first quarter
to rebalance its inventory, partially offset by price erosion and lower private label
sales to the distributor. Sales are expected to resume a normal trend consistent with the
distributors sale of Company product to its customers going forward. The U.S. sales
performance reflects incremental Western Medical sales of approximately $1,217,000 coupled
with modest growth for the balance of the basic wound care line. Advanced wound care sales
increased $1,399,113 or 41.2%. This increase was principally driven by U.S. private label,
silver dressings and new product sales growth, partially offset by lower demand for the
Derma line of products. Sales of the Companys new silver alginate product launched
in November 2006 were approximately $258,000 in the first six months of 2007.

Wound
care gross profit increased $920,480, or 24.5%, in 2007 versus 2006. Gross profit margin
percentage decreased to 34.1% in 2007 from 34.7% in 2006. The gross profit margin dollar
increase reflects the sales increase and margin decrease. The margin percentage decrease
is principally attributable to unfavorable product mix partially mitigated by favorable
product cost improvement.

Wound
closure-specialty securement device sales increased $88,001, or 7.5%, in 2007 versus 2006.
The increase is principally due to the one-time sale of residual product in connection
with the discontinuation of a private label supply agreement and prior year backorder
fulfillment in the first quarter 2007.

Wound
closure-specialty securement device gross profit increased $141,885, or 24.0%, in 2007
versus 2006. Gross profit margin percentage increased to 58.1% in 2007 from 50.4% in 2006.
The increase in gross profit margin dollars reflects the higher sales and improved gross
profit margin percentage. The gross profit margin percentage improvement is due to the
flow through of lower product costs associated with bringing the manufacture of these
products in-house in the second half of 2006.

Skin
care sales decreased $142,671, or 24.1%, in 2007 versus 2006 due to continuing
competitive pressure. Skin care gross profit improved $47,762 to $62,673 in 2007 from
$14,911 in 2006. The main driver for the gross profit dollar improvement was the
elimination of the monthly carrying costs associated with the lease on the former

29

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Index

skin care manufacturing facility
that expired in January 2007. Outsourcing production to lower cost third parties have
allowed this business to continue to operate at slightly above break even in terms of
gross profit.

Operating Expense

The
following table highlights June 30, 2007 versus 2006 operating expenses by type:

|                       |  |                           |  |                                    |  |             |  |        | 
|---------------------- |  | ------------------------- |  | ---------------------------------- |  | ----------- |  | ------ | 
|                       |  | Six Months Ended June 30, | 
|                       |  | 2007                      |  | 2006           
        (Restated) |  | Variance    | 
|                      
|Distribution           |  | $   436,071               |  | $   333,390                        |  | $   102,681 |  | 30.8%  | 
|Marketing              |  | 667,930                   |  | 269,174                            |  | 398,756     |  | 148.1% | 
|Sales                  |  | 1,237,914                 |  | 1,055,572                          |  | 182,342     |  | 17.4%  | 
|General administrative |  | 3,041,196                 |  | 2,183,135                          |  | 858,061     |  | 39.3%  | 
|                      
|Total                  |  | $5,383,111                |  | $3,841,271                         |  | $1,541,840  |  | 40.1%  | 

Operating
expense increased $1,541,840, or 40.1%, to $5,383,111 in 2007 from $3,841,271 in 2006
including a decrease of $2,062 attributable to exchange associated with a de-minimus
weakening of the Canadian dollar on the Canadian operations.

Distribution
expense increased $102,681, or 30.8%, in 2007 versus 2006. Expenses in Canada increased
$69,556 while expenses in the U.S increased $33,125. The increase in Canada was
principally attributable to higher lease, real estate taxes, utility and maintenance
expenses. In December 2006, the Company leased additional space adjacent to its existing
facility to accommodate increased manufacturing and warehousing requirements. The U.S.
increase was principally attributable to incremental warehouse personnel (compensation and
benefits) and operating costs associated with the increased resources required to
integrate the Western Medical acquisition into the Companys existing business
beginning in April 2006, less the non-recurrence of one-time third party Western Medical
transition related distribution fees.

Marketing
expense increased $398,756, or 148.1%, in 2007 versus 2006. The increase was principally
attributable to higher compensation and benefits associated with an employee promotion in
2006 and the hiring of a Director of Clinical Affairs (new position) in February 2007.
Also contributing were planned increases in promotion, product development and clinical
advisory board expense in support of the Companys growth initiatives and higher
share based compensation expense due to 2007 grants and recruiting costs for the new
position.

Sales
expense increased $182,342, or 17.4%, in 2007 versus 2006. Expenses in Canada increased
$9,267 while expenses in the U.S. increased $173,075. The Canada increase was due to
higher compensation and benefit, buying group administrative (sales volume related) and
sample expenses partially offset by lower timing related travel expenses and lower bid
expenses. The U.S. increase was attributable to $81,600 of recruiting costs associated
with the planned expansion of the sales force and relocation of customer service to
corporate headquarters, higher commission, stock based compensation, bonuses, higher sales
volume related administrative, and sample expense. Incremental consulting and customer
service (personnel related) expenses associated with the integration of the Western
Medical business into the Company and the relocation of the customer service department,
also contributed.

General
administrative expense increased $858,061, or 39.3%, in 2007 versus 2006. Expenses in
Canada increased $113,418 while expenses in the U.S. increased $744,643. The increase in
Canada principally reflects Sarbanes Oxley consulting (compliance program commenced in
December 2006) expenses of approximately $52,000, higher accounting, tax and audit fees
of approximately $48,000, stock based compensation expense of approximately $25,000 and
normal year-to-year compensation and benefit cost increases, partially offset by lower
bad debt and timing related travel expense. The U.S. increase principally reflects
intangible amortization expense of approximately $141,000 related to the Western Medical
acquisition, share based employee and director compensation expense of approximately
$141,000, incremental technology licensing expense of $125,000, Sarbanes Oxley consulting
expenses of approximately $91,000, higher accounting, tax and audit fees of approximately
$85,000, higher travel expenses of approximately $47,000, higher investor relations and
public relations related expenses of approximately $40,000, incremental directors fees
of approximately $29,000, bonuses of $27,000 and

30

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Index

normal year-to-year compensation and
benefit cost increases, partially offset by the non-recurrence of $32,000 worth of
one-time Western Medical transition related expense incurred in 2006.

Interest Expense

Interest
expense decreased $94,385, or 49.1%, to $97,810 in 2007 from $192,195 in 2006. Interest
expense in Canada decreased $7,484 while interest expense in the U.S. decreased $86,901.
The decrease in Canada reflects lower outstanding term loan balances in 2007 versus 2006
partially offset by higher interest rates. The U.S. decrease is principally due to lower
line of credit (despite higher interest rates) and term loan (fully paid off in December
2006) interest due to lower borrowing balances in 2007 versus 2006 as a result of the
Companys improved U.S. cash flow and the non-recurrence of a one-time fee of $20,000
paid in March 2006 for loan covenant violation waivers. Partially offsetting these
decreases were incremental promissory note interest and deferred finance fee amortization
expense related to the Western Medical acquisition in April 2006.

Other Income/Expense

Other
expense, net increased $97,304 to $49,698 expense in 2007 from $47,606 income in 2006. The
main driver for the other expense increase was the non-recurrence of a $64,971 gain
recorded in 2006 associated with the favorable settlement of a supplier liability. Higher
temporary container storage costs and lower royalty income, also contributed.

Income Taxes

The
Company recorded a $187,523 foreign income tax provision for the first six months of 2007
based on the Companys Canadian operating results. No income tax benefit was made for
the Companys U.S. operations in the first six months of 2007 due to a net operating
loss for the period and uncertainties surrounding the Companys ability to utilize
its U.S. net operating loss carry forwards. No provision for U.S. or foreign income taxes
was made in the first six months of 2006 due to available net operating loss carry
forwards.

Based
on projected operating results and available net operating loss carry forwards, the U.S.
effective tax rate is projected to be insignificant in 2007. In Canada, the effective tax
rate is projected to be 34% in 2007. For the most part, tax expense in Canada is projected
to be deferred in nature as net operating loss carry forwards are utilized to offset taxes
payable.

As
noted above, due to uncertainties surrounding the Companys ability to use its U.S.
net operating loss carry forwards and net deferred tax assets, a full valuation allowance
has been provided. Effective December 31, 2006 the Companys Canadian subsidiary,
based on recent operating profitability and projected profitable operations going forward,
realized its net operating loss carry forwards and deferred tax assets and liabilities.

Net Income (Loss)

The
Company generated a net loss of $248,516, or ($0.01) per share (basic and diluted), in the
first six months of 2007 compared to net income of $373,639, or $0.02 income per share
(basic and diluted), in the first six months of 2006.

Liquidity and Capital
Resources

Operational Overview

Net
sales increased 22.5%, (22.6% adjusted for foreign exchange), in 2007 over 2006. This
growth was driven by a sales increase in the U.S. of 37.3%, together with an increase in
Canadian sales of 3.1% (3.3% adjusted for foreign exchange). Sales growth in the U.S. was
driven by incremental sales associated with the Western Medical business (acquired April
18, 2006) of $1,839,000 and continued growth of the private label business. Sales of the
Companys new silver alginate product were approximately $258,000 in the first six
months of 2007. The product has exhibited steady quarter-to quarter growth since its
launch in November 2006. Skin care sales continue to deteriorate in the face of
competitive pressure and a reduction of resources allocated to support the line. Sales
for the balance of the U.S. product lines were essentially flat year-on-year. Excluding
Western Medical sales, U.S. sales growth was 14.0%. Canadian sales growth in the first
six months of 2007 was modest. This reflects a very

31

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Index

competitive marketplace for the
Companys line of traditional wound care products that make up the majority of
Canadian sales. Unit volume growth and successful product cost reduction efforts have
enabled the Company to remain competitive in an environment of declining prices for its
products. In Canada, the Company continues to focus on contract compliance, exploring
opportunities in other market segments (other than its traditional strength in the acute
care segment) and working closely with its exclusive distributor to capitalize on sales
growth opportunities presented by this relationship. Canadian market growth, as measured
by sales of the Companys products reported by its exclusive distributor, was 6% in
the first six months of 2007.

As
expected, the Company continues to realize the benefit of its ongoing manufacturing and
sourcing initiatives. Incremental unit volume throughput associated with commencement of
manufacturing for several new private label customers are contributing to improved
efficiencies in the Companys Canadian manufacturing operation. Notwithstanding the
impact of sales pricing and mix on margins, the Company has realized a significant
improvement in gross profit dollars and margin percentage from its ongoing product cost
reduction initiatives.

Operating
expenses increased 40.1% (40.2% adjusted for foreign exchange) in 2007 over 2006 in line
with expectations. The increase is attributable to incremental technology licensing
expense, Western Medical costs (intangible asset amortization, planned sales and marketing
and integration expenses), planned increases in distribution, marketing and sales expenses
in support of the Companys growth initiatives and higher professional service fees
as a result of increasing regulatory requirements. Excluding these expenses, growth in the
balance of operating expenses is in line with inflation and continues to be closely
monitored.

The
Company reported a loss of $248,516 for the first six months of 2007. With the addition of
the Western Medical business, anticipated stable Canadian sales, continued growth of the
private label business in the U.S. and the introduction of new products coupled with
ongoing manufacturing cost reduction initiatives and operating expense management, the
Company anticipates a return to profitability going forward.

On
July 23, 2007, the Company received clearance from the U.S. Food and Drug Administration
to market and sell its Active Manuka Absorbent Dressing. On June 14, 2007, the Company
announced that it had obtained clearance from Health Canada to market and sell its line of
Active Manuka Honey based dressings. The Company is presently preparing for the near term
launch of these products. On February 13, 2006, the Company entered into an exclusive
licensing, manufacturing and sales agreement to manufacture and sell a line of Manuka
Honey based wound care products in North and South America within the medical-surgical
marketplace. In accordance with the agreement, the Company will purchase its requirements
for active Manuka honey from the licensor at agreed upon pricing and will pay the licensor
an agreed upon sales based royalty. Further, effective for twelve-month periods beginning
July 23, 2008 and thereafter, the agreement requires that the Company meet minimum sales
targets in order to maintain exclusivity.

On
March 23, 2007 (the effective date), the Company entered into an exclusive patent and
technology license agreement for the rights in the U.S. and Canada to certain proprietary
anti-microbial technology. The Company anticipates utilizing this technology in a series
of its wound care products. In consideration for the license, the Company paid a license
fee of $50,000 and agreed to make additional advance royalty payments in the amount of
$25,000 each, three months, six months and nine months after the effective date of the
agreement and is obligated to pay sales based royalties upon commercial launch of the
product(s) employing this technology and meet certain minimum sales thresholds to maintain
exclusivity. The $125,000 non-refundable license and advanced royalty payments were
expensed. The Company anticipates use of this technology will provide a significant near
term commercial opportunity.

On
November 8, 2006, the Company entered into an exclusive license and distribution agreement
for the rights in the U.S. and Canada to an intermittent pneumatic compression device
representing a significant advancement in the treatment of patients with various vascular
diseases or lymphedema. In consideration for the license, the Company is obligated to
purchase the product from the licensee at agreed upon prices and meet certain minimum
purchase thresholds to maintain exclusivity. The Company is presently working to obtain
reimbursement code approval for this product and undertaking studies to
support the features and benefits of the device in support of an anticipated near term
commercial launch.

On
August 3, 2006, the Company entered into an agreement to sell 2,000,000 shares of its
common stock at $0.75 per share for a total selling price of $1,500,000 to an existing
shareholder. The shareholder paid $500,000 on

32

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Index

August 3, 2006 and the balance due
of $1,000,000 with interest on December 5, 2006. The $500,000 received on August 3, 2006
was used to prepay (as permitted, without penalty) the U.S. term loan entered into in
connection with the acquisition of Western Medical in April 2006. The $1,000,000 received
on December 5, 2006 was used to repay the balance of the U.S. term loan outstanding with
the balance to be used prospectively for general working capital purposes.

On
April 18, 2006, the Company acquired certain assets and assumed the trade payables and the
business of Western Medical for $6,500,000 of which $6,000,000 was paid in cash and
$500,000 was paid via a three-year promissory note issued to Western Medical by the
Company. In addition, the Company incurred a total of $819,052 of transaction costs
related to the acquisition. The purchased assets consist of trade receivables, inventory,
equipment and certain identifiable intangibles. To fund the purchase, the Company raised
$5,803,304 (net of $568,952 in commissions and other offering expenses) from the private
sale of 2,655,098 units at $2.40 per unit each unit consisting of four shares of common
stock and one five-year warrant to purchase one share of common stock at $1.00 per share.
In addition, the placement agent for the units received 754,806 five-year warrants to
purchase one share of common stock at $0.72 per share. The Company also received
$1,000,000 in cash from a new three-year term loan that bears interest at prime plus 5%
from its U.S. lender through an amendment to its existing three-year revolving credit
facility. The amendment amends and restates various loan covenants of the revolving credit
facility and increases the revolving credit facility cap from $2,000,000 to $3,500,000.

Western
Medical was a privately held manufacturer and marketer of a line of specialty medical
textile compression, support and protective dressing products. In 2005, Western Medical
reported audited sales of $6,684,160, gross profit of $2,664,997 and pre-tax income of
$838,865. Western Medicals product line is complementary to, and will serve to
expand, the Companys existing basic wound care line. The Company anticipates being
able to leverage cross selling opportunities presented by the purchase to grow sales. In
addition, the Company absorbed Western Medicals business within its existing
operating infrastructure incurring only modest incremental cost increases. Both of these
initiatives are expected to increase the contribution of the Western Medical product line
going forward.

Cash Flow and Working
Capital

At
June 30, 2007 and December 31, 2006, the Company had cash and cash equivalents on hand of
$768,888 and $1,285,943, respectively. The $517,055 decrease in cash reflects net cash
used by operating activities of $120,631, net cash used in investing activities of
$315,153, net cash used in financing activities of $152,198 and cash provided as a result
of exchange rate changes of $70,927.

Net
cash used in operating activities of $120,631 stems from $1,268,430 cash provided from
operations (net loss plus non-cash items), partially offset by $1,389,061 cash used from
the net change in operating assets and liabilities. The increase in cash provided from
operations is associated with significant capital expenditures over the last couple of
years (resulting in higher levels of depreciation expense), a significant increase in
amortizable intangibles in connection with the Western Medical acquisition, higher rebate
reserves in the U.S. and Canada due to increases in rebate intensive sales and the
commencement of expensing of share based compensation beginning in 2006 thereby increasing
the magnitude of non-cash charges. Higher inventory partially offset by a decrease in
receivables, were the main drivers behind the net change in ongoing operating assets and
liabilities. The changes in prepaid expenses, accounts payable and accrued liabilities
resulting in a net use of funds are for the most part timing related. The significant
increase in inventory reflects an increase and rebalancing of the U.S. finished goods
inventory to improve customer service and replenish inventory levels that were lower than
normal due to unexpected production delays caused by the equipment and facility
improvements activities that took place at the Companys manufacturing operation in
Canada in the second half of 2006. Also contributing was an OEM customer component and
finished goods inventory build in Canada to meet agreed upon safety stock requirements,
new product inventory builds and timing related excess finished goods in Canada due to
early delivery of product from China.

Net
cash used in investing activities of $315,153 principally reflects $267,108 cash used for
purchases of equipment at the Companys manufacturing operation in Canada to expand
manufacturing capability in response to growth and/or efficiency opportunities and a new
trade show booth to support the Companys growing sales and marketing activities and
$48,045 of out-of-pocket business acquisition costs.

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Index

Net
cash used in financing activities of $152,198 reflects cash used to make regularly
scheduled debt payments.

Working
capital increased $779,738, or 13.5%, at June 30, 2007 to $6,547,787 from $5,768,049 at
December 31, 2006. Working capital of this magnitude is considered sufficient to support
ongoing operations.

Financing Arrangements

In
December 2006, the Company renewed its annual revolving credit facility agreement with its
Canadian lender for a maximum principal amount of $469,000 ($500,000 Canadian). Maximum
potential advances under the agreement at June 30, 2007 were $300,000. Advances
outstanding against the agreement were zero at June 30, 2007, leaving $300,000 available
for borrowing.

In
addition, the Canadian lender has granted Derma Sciences Canada Inc. a $704,000 ($750,000
Canadian) non-revolving term line of credit to finance equipment purchases and equipment
upgrades to Derma Sciences Canada Inc.s manufacturing facility. Advances against the
line are limited to 75% of the actual cost of the capital expenditure. Interest on
outstanding advances is payable monthly in arrears at prime (as defined), plus 1.25%. Each
advance shall be amortized and repaid over sixty months. Prepayment of advances, in whole
or in part, is not permitted during the eighteen months following initial disbursement.
Prepayment thereafter is permitted in whole or once per annum in part with thirty days
written notice and payment of the greater of the following premium: (i) 3% of the
principal amount prepaid; or (ii) three months interest on such principal at the loan
interest rate in effect on the date prepayment is made. As of June 30, 2007, there were no
outstanding advances against the line.

On
April 18, 2006 the Company entered into an amended three-year revolving credit facility
agreement with its U.S. lender for a maximum principal amount of $3,500,000. Maximum
potential advances under the agreement at June 30, 2007 were $3,098,000. Advances
outstanding against the line were zero at June 30, 2007, leaving an additional $3,098,000
available for borrowing.

Prospective Assessment

The
Companys objective is to continue to grow sales in 2007 and return to profitability
while utilizing cash flow to fund the development of novel technologies. Beginning in
2005, the Company expanded its product development efforts. As a result of these efforts,
the Company launched one new product in late 2006 and plans to launch additional new
products in 2007. The April 2006 acquisition of the Western Medical business has had a
positive impact on the Companys U.S. business going forward. Growth of the
Companys private label business is anticipated to continue as the existing business
expands and new customers are brought on board. Plans are in place to better leverage
existing opportunities in the Companys basic and advanced wound care lines in the
U.S. by working more closely with several key existing and potential new customers to
increase business. In Canada, the exclusive distribution agreement continues to represent
an opportunity for sales growth. In addition, in 2006 the Company renewed a five-year
basic wound care supply agreement with a major Canadian buying group.

The
Company plans to build upon its recent success in the area of product cost savings. Higher
throughput, expanded capability and improved operational efficiencies are expected to
lower the Companys overall cost of manufacturing going forward. The Company also
anticipates realizing incremental savings in 2007 as the percentage of China sourced
product sterilized in China increases. Subject to commodity driven cotton prices and
fluctuations in foreign exchange, the Company anticipates continuing to build on its
successful relationships in China to keep its basic wound care costs competitive.

Given
the recent Western Medical acquisition and planned growth over the foreseeable future, the
Company is presently re-evaluating its personnel and infrastructure requirements needed to
support the business going forward. Increases in personnel are anticipated in order to
execute and manage planned business growth. In the area of information technology, the
Company presently is in the midst of a two to three year program to upgrade its
capabilities. In addition, as a non-accelerated filer (as defined by the SEC), the Company
is required to be in compliance with Sarbanes-Oxley regulations as of December 31, 2007.
The Company is closely monitoring its requirements under Sarbanes-Oxley and will incur
incremental one-time costs to comply during 2007 and through the first quarter 2009, with
modest ongoing incremental cost thereafter. Steps will continue to be taken to monitor
operating expenses and to limit spending in this area to that necessary to support
existing operations.

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Index

Going
forward, capital expenditures will continue to be limited to those projects capable of
generating an acceptable level of return and those necessary to support ongoing
operations. The Company plans to renew its focus on inventory levels with the objective of
properly balancing customer service requirements while minimizing its investment in
inventory wherever possible.

The
Company believes that available funds from operations and available lines of credit will
be sufficient to satisfy the Companys foreseeable liquidity requirements through the
next twelve months. In addition, the Company will continue to evaluate external
opportunities to leverage its core capabilities for growth.

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

Update of Factors
Affecting Future Prospects

The
following factors affecting future prospects update the related factors set forth in the
Companys annual report on Form 10-KSB filed with the Securities and Exchange
Commission on March 31, 2007:

The potential increase in common
shares due to the conversion, exercise or vesting of outstanding derivative securities may
have a depressive effect upon the market value of the Companys shares.

Up
to 15,408,791 shares of the Companys common stock are potentially issuable upon the
conversion, exercise or vesting of outstanding convertible preferred stock, warrants,
options and restricted stock awards (derivative securities). The shares of
common stock potentially issuable upon conversion, exercise or vesting of derivative
securities are substantial compared to the 25,258,335 shares of common stock currently
outstanding.

Earnings
per share relative to the Companys common stock, as and when generated, will be
calculated assuming the issuance of all dilutive derivative securities. Earnings per share
of common stock will be substantially diluted by the existence of these derivative
securities regardless of whether they are converted, exercised or issued. This dilution of
earnings per share could have a depressive effect upon the market value of the
Companys common stock.

The Company has generated only
nominal income and it cannot guarantee future profitability.

The
Company incurred a net loss of $248,516 (unaudited) in the first six months of 2007,
earned net income of $668,739 in 2006, $22,241 in 2003, $61,368 in 2002 and $192,398 in
2001 and incurred losses of $1,099,990 in 2005, $2,338,693 in 2004, $2,581,337 in 2000 and
$2,998,919 in 1999. At June 30, 2007, the Company had an accumulated deficit of
$13,665,797. Although the Company achieved profitability in 2006, 2003, 2002 and 2001, the
Company cannot offer any assurance that it will be able to generate sustained or
significant earnings.

The Companys stock price has
been volatile and this volatility is likely to continue.

Historically,
the market price of the Companys common stock has been volatile. The high and low
prices for the years 2001 through 2006 and the first seven months of 2007 are set forth in
the table below:

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Index

| |                                                           |  |       |  |       | 
| | --------------------------------------------------------- |  | ----- |  | ----- | 
| | Derma Sciences, Inc.
        Trading Range  Common Stock | 
|
| | Year                                                      |  | Low   |  | High  | 
|
| | 2001                                                      |  | $0.22 |  | $0.80 | 
| | 2002                                                      |  | $0.35 |  | $0.85 | 
| | 2003                                                      |  | $0.35 |  | $2.30 | 
| | 2004                                                      |  | $0.43 |  | $1.90 | 
| | 2005                                                      |  | $0.42 |  | $0.78 | 
| | 2006                                                      |  | $0.45 |  | $0.90 | 
| | 2007(*)                                                   |  | $0.65 |  | $0.95 | 
| |                                                           |  |       |  |       | 
| | (*) January 1 through July 31.                            | 

Events
that may affect the Companys common stock price include:

|  |                                                                                       
|- | --------------------------------------------------------------------------------------
| | Quarter to quarter variations in its operating results;                               
| | Changes in earnings estimates by securities analysts;                                 
| | Changes in interest rates or other general economic conditions;                       
| | Changes in market conditions in the wound care and skin care
     industries;         
| | The introduction of new products either by the Company or by its
     competitors; and
| | The loss of a major customer.                                                         

Although
all publicly traded securities are subject to price and volume fluctuations, it is likely
that the Companys common stock will experience these fluctuations to a greater
degree than the securities of more established and better capitalized organizations.

Additional Financial
Information

Forward Looking Statements

Statements
that are not historical facts, including statements about the Companys confidence,
strategies, expectations about new or existing products, technologies, opportunities,
market demand or acceptance of new or existing products are forward-looking statements
that involve risks and uncertainties. These uncertainties include, but are not limited to,
product demand and market acceptance risk, impact of competitive products and prices,
product development, commercialization or technological delays or difficulties, and trade,
legal, social, financial and economic risks.

Critical Accounting
Policies

Estimates
and assumptions are required in the determination of sales deductions for trade rebates,
sales incentives, discounts and allowances. Significant estimates and assumptions are also
required in determining the appropriateness of amortization periods for identifiable
intangible assets, the potential impairment of goodwill and the valuation of inventory.
Some of these judgments can be subjective and complex and, consequently, actual results
may differ from these estimates. For any individual estimate or assumption made by the
Company, there may also be other reasonable estimates or assumptions. The Company
believes, however, that given current facts and circumstances, it is unlikely that
applying any such other reasonable judgment would cause a material adverse effect on the
consolidated results of operations, financial position or cash flows for the periods
presented. The Companys most critical accounting policies are described below.

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Index

Revenue Recognition and
Adjustments to Revenue

Revenue
is recognized when product is shipped and title passes to the customer and collectability
is reasonably assured. When the Company recognizes revenue from the sale of its products,
it simultaneously adjusts revenue for estimated trade rebates and distribution fees (in
Canada). A trade rebate represents the difference between the invoice price to the
wholesaler and the indirect customers contract price. These rebates are estimated
based on historical experience, estimated future trends, estimated customer inventory
levels, current contract sales terms with wholesale and indirect customers and other
competitive factors. The Company pays its exclusive Canadian distributor a fixed fee based
on sales subject to the fee (as defined) for distribution services in Canada. The
distribution fee is accrued monthly based on the estimated percentage of distribution fee
expense to net sales. If the assumptions used to calculate these rebates and fees do not
appropriately reflect future activity, the Companys financial position, results of
operations and cash flows could be impacted. The Company continually monitors the factors
that influence these rebates and fees and makes adjustments as necessary.

Goodwill

At
June 30, 2007, the Company had $2,441,542 of goodwill relating to the Western Medical
acquisition in April 2006. The goodwill is included in the wound care segment for
reporting purposes. The Company tests goodwill for impairment in the fourth quarter of
each year or when impairment indicators are present. The process of evaluating the
potential impairment of goodwill is highly subjective and requires significant judgments
and assumptions in estimating future cash flows to determine the fair value of each
reporting unit. These assumptions include future growth rates, discount factors, future
tax rates and other factors. The Companys cash flow forecasts are based on
assumptions that are consistent with the plans and estimates used to manage the underlying
business. In addition, the Company makes certain judgments about allocating shared assets
to the balance sheet for this segment. If the expected cash flows are not realized,
impairment losses may be recorded in the future.

Inventory

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

Stock-Based Compensation

Effective
January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123R,
Share-Based Payment (SFAS 123R), which revises SFAS 123
Accounting for Stock-Based Compensation (SFAS 123) and supercedes
Accounting Principles Board Opinion 25 Accounting for Stock Issued to
Employees. Under APB 25, the Company used the intrinsic value method for
employee stock options and did not record any expense because option exercise prices
equaled the market value at the date of grant. SFAS 123R requires that new, modified and
unvested share-based payment transactions with employees, such as grants of stock options
and restricted stock, be recognized in the financial statements based on their fair value
at the grant date and recognized as compensation expense over their vesting periods. The
Company estimates the fair value of stock options as of the date of grant using the
Black-Scholes pricing model and restricted stock based on the quoted market price. The
Company adopted SFAS 123R using the modified prospective method and, accordingly, prior
period financial statements were not revised. The Company recognized stock-based employee
compensation of $319,161 and $98,337 in the six months ended June 30, 2007 and 2006,
respectively, under SFAS 123R.

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Item 3.  CONTROLS AND PROCEDURES

The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures as of June 30, 2007. Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information the Company is required to disclose in the reports it files
under the Securities Exchange Act of 1934, within the time periods specified in the
SECs rules and forms.

During
the three months ended June 30, 2007, there was no change in the Companys internal
controls over financial reporting that materially affected, or is reasonably likely to
materially affect, the Companys internal controls over financial reporting.

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

The
annual meeting of shareholders of the Company was held on May 17, 2007. At the annual
meeting, the following matters were submitted to a vote of the Companys security
holders with the results indicated:

Proposal
1  Election of Directors

The
following director-nominees, consisting of all director-nominees, were elected directors
to serve as such for one year or until their successors have been elected and qualify:
Edward J. Quilty, Stephen T. Wills, CPA, MST, Srini Conjeevaram, James T. OBrien,
Richard J. Keim, C. Richard Stafford, Esq., Robert G. Moussa and Bruce F. Wesson.

Proposal
2  Ratification of Appointment of Independent Registered Public Accounting Firm

Shareholders
ratified the appointment of Ernst & Young LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2007. Details
concerning the vote on proposal 2 are set forth below:

|                 |  |            | 
|---------------- |  | ---------- | 
|In favor         |  | 17,005,569 | 
|Against          |  | 2,621      | 
|Abstentions      |  | 20,254     | 
|Broker non-votes |  | 0          | 

The
Company solicited proxies relative to both of the foregoing proposals and, as to proposal
1, each director-nominee pursuant to Regulation 14A under the Securities Exchange Act of
1934. No proxies were solicited in opposition to either of the proposals.

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Index

Part II  Other
Information

Item 1. Legal Proceedings

None.

Item 6. Exhibits

All
exhibits required by Item 601 of Regulation S-B and required hereunder, as filed with the
Securities and Exchange Commission in Form 10-KSB on March 31, 2007, are incorporated
herein by reference.

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

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

|                       |  |                      |                                            | 
|---------------------- |  | -------------------- | ------------------------------------------ | 
|                       |  | DERMA SCIENCES, INC. |                                           
|Dated: August 14, 2007 |  | By:                  | /s/ John E. Yetter                         | 
|                       |  |                      | John E. Yetter, CPAChief Financial Officer

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EXHIBIT INDEX

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