---

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
     
     March 31, 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 100Princeton, 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: May 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 - March 31, 2007 (Unaudited) and December 31, 2006 (1)                           | 3 
|                                         |         | Condensed Consolidated Statements of
     Operations - Three months ended March 31, 2007 and March 31, 2006 (1) (Unaudited) | 4 
|                                         |         | Condensed Consolidated Statements of
     Cash Flows - Three months ended March 31, 2007 and March 31, 2006 (1) (Unaudited) | 5 
|                                         |         | Notes to Condensed Consolidated Financial
     Statements (Unaudited) (1)                                                   | 6 
|                                         | Item 2. | Management's Discussion and
     Analysis or Plan of Operation                                                              | 20
|                                         | Item 3. | Controls and
     Procedures                                                                                                | 32
|Part II - Other Information             
|                                         | Item 1. | Legal
     Proceedings                                                                                                      | 33
|                                         | Item 6. | Exhibits                                                                                                                    | 33

(1)    
          The Companys previously issued financial statements for the quarter ended
          March 31, 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                                      
|                                                                            |  | March 31,      | December 31,
|                                                                            |  | 2007           | 2006        
|                                                                            |  | (Unaudited)    |             
|                                                                           
|Current Assets                                                              | 
|Cash and cash equivalents                                                   |  | $   1,607,918  |              | $   1,285,943  |  
|Accounts receivable, net                                                    |  | 2,049,785      |              | 2,270,552      |  
|Inventories                                                                 |  | 6,014,609      |              | 4,678,107      |  
|Prepaid expenses and other current assets                                   |  | 356,253        |              | 279,864        |  
|                                                                           
|Total current assets                                                        |  | 10,028,565     |              | 8,514,466      |  
|Equipment and improvements, net                                             |  | 4,118,818      |              | 4,133,595      |  
|Goodwill                                                                    |  | 2,441,542      |              | 2,441,542      |  
|Other intangible assets, net                                                |  | 3,060,327      |              | 3,197,365      |  
|Other assets, net                                                           |  | 205,043        |              | 218,953        |  
|                                                                           
|Total Assets                                                                |  | $ 19,854,295   |              | $ 18,505,921   |  
|                                                                           
|LIABILITIES AND SHAREHOLDERS' EQUITY                                        | 
|                                                                           
|Current Liabilities                                                         | 
|Current maturities of long-term debt                                        |  | $      276,509 |              | $      338,155 |  
|Accounts payable                                                            |  | 1,924,577      |              | 1,645,575      |  
|Accrued expenses and other current liabilities                              |  | 1,735,253      |              | 762,687        |  
|                                                                           
|Total current liabilities                                                   |  | 3,936,339      |              | 2,746,417      |  
|                                                                           
|Long-term debt, net of current portion                                      |  | 537,363        |              | 546,268        |  
|Other long-term liabilities                                                 |  | 304,653        |              | 235,224        |  
|                                                                           
|Total Liabilities                                                           |  | 4,778,355      |              | 3,527,909      |  
|                                                                           
|Shareholders' Equity                                                        | 
|Convertible preferred stock, $.01 par value; 11,750,000 shares              | 
|authorized; issued and outstanding:  2,280,407 shares at March 31, 2007     | 
|and December 31, 2006 (liquidation preference of $4,210,231 at              | 
|March 31, 2007)                                                             |  | 22,804         |              | 22,804         |  
|Common stock, $.01 par value, 50,000,000 shares authorized at March 31,     | 
|2007 and December 31, 2006, respectively; issued and outstanding:           | 
|25,258,335 shares at March 31, 2007 and 24,906,160 at December 31,          | 
|2006                                                                        |  | 252,583        |              | 249,062        |  
|Additional paid-in capital                                                  |  | 27,447,260     |              | 27,272,440     |  
|Accumulated other comprehensive income - cumulative translation adjustments |  | 909,527        |              | 850,987        |  
|Accumulated deficit                                                         |  | (13,556,234    | )            | (13,417,281    | )
|                                                                           
|Total Shareholders' Equity                                                  |  | 15,075,940     |              | 14,978,012     |  
|                                                                           
|Total Liabilities and Shareholders' Equity                                  |  | $ 19,854,295   |              | $ 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
|                                                                  |  | March 31,         
|                                                                  |  | 2007               | 2006      (Restated)
|                                                                 
|Net sales                                                         |  | $   7,965,797      |                      | $   5,469,244   |  
|Cost of sales                                                     |  | 5,161,369          |                      | 3,564,913       |  
|                                                                 
|Gross Profit                                                      |  | 2,804,428          |                      | 1,904,331       |  
|                                                                 
|Operating expenses                                                |  | 2,793,154          |                      | 1,864,330       |  
|Interest expense                                                  |  | 50,246             |                      | 82,050          |  
|Other expense (income), net                                       |  | 26,557             |                      | (69,521         | )
|                                                                 
|Total Expenses                                                    |  | 2,869,957          |                      | 1,876,859       |  
|                                                                 
|(Loss) income before provision for income taxes                   |  | (65,529            | )                    | 27,472          |  
|Provision for income taxes                                        |  | 73,424             |                      | -               |  
|                                                                 
|Net (Loss) Income                                                 |  | $    (138,953      | )                    | $        27,472 |  
|                                                                 
|(Loss) income per common share - basic                            |  | ($0.01             | )                    | $0.00           |  
|                                                                 
|(Loss) income per common share - diluted                          |  | ($0.01             | )                    | $0.00           |  
|                                                                 
|Shares used in computing (loss) income per common share - basic   |  | 25,246,596         |                      | 12,285,768      |  
|                                                                 
|Shares used in computing (loss) income per common share - diluted |  | 25,246,596         |                      | 15,659,185      |  
|                                                                 

See accompanying notes to
condensed consolidated financial statements.

4

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                            |  |                    |                      |               |  
|----------------------------------------------------------- |  | ------------------ | -------------------- | ------------- | -
|Condensed Consolidated Statements of Cash Flows (Unaudited) | 
|                                                            |  | Three months ended
|                                                            |  | March 31,         
|                                                            |  | 2007               | 2006      (Restated)
|                                                           
|Operating Activities                                        |  |                    |                      |               |  
|Net (loss) income                                           |  | $  (138,953        | )                    | $      27,472 |  
|Adjustments to reconcile net (loss) income                  | 
|to net cash provided by (used in) operating activities:     | 
|Depreciation of equipment and improvements                  |  | 171,305            |                      | 138,077       |  
|Amortization of intangible assets                           |  | 137,038            |                      | 20,997        |  
|Amortization of deferred financing costs                    |  | 15,393             |                      | 18,161        |  
|Provision for bad debts                                     |  | (8,609             | )                    | 2,651         |  
|Allowance for sales adjustments                             |  | 588,157            |                      | 290,420       |  
|Provision for inventory obsolescence                        |  | 35,718             |                      | 24,489        |  
|Deferred rent                                               |  | (2,627             | )                    | 5,976         |  
|Share based compensation expense                            |  | 178,341            |                      | 38,625        |  
|Deferred tax provision                                      |  | 73,424             |                      | -             |  
|Gain on settlement of accounts payable                      |  | -                  |                      | (64,971       | )
|Changes in operating assets and liabilities:                | 
|Accounts receivable                                         |  | 842,494            |                      | (349,589      | )
|Inventories                                                 |  | (1,335,955         | )                    | (911,179      | )
|Prepaid expenses and other current assets                   |  | (90,169            | )                    | (132,049      | )
|Other assets                                                |  | 12,498             |                      | 10,769        |  
|Accounts payable                                            |  | 268,271            |                      | 377,148       |  
|Accrued expenses and other current liabilities              |  | (251,101           | )                    | (104,431      | )
|                                                           
|Net cash provided by (used in) operating activities         |  | 495,225            |                      | (607,434      | )
|                                                           
|Investing Activities                                        | 
|Costs of acquiring Western Medical, Inc.                    |  | -                  |                      | (51,352       | )
|Purchase of equipment and improvements                      |  | (124,376           | )                    | (76,908       | )
|                                                           
|Net cash used in investing activities                       |  | (124,376           | )                    | (128,260      | )
|                                                           
|Financing Activities                                        | 
|Net change in bank lines of credit                          |  | -                  |                      | (226,417      | )
|Long-term debt repayments                                   |  | (72,681            | )                    | (72,820       | )
|                                                           
|Net cash used in financing activities                       |  | (72,681            | )                    | (299,237      | )
|                                                           
|Effect of exchange rate changes on cash                     |  | 23,807             |                      | (2,153        | )
|                                                           
|Net increase (decrease) in cash and cash equivalents        |  | 321,975            |                      | (1,037,084    | )
|Cash and cash equivalents                                   | 
|Beginning of period                                         |  | 1,285,943          |                      | 1,105,330     |  
|                                                           
|End of period                                               |  | $ 1,607,918        |                      | $      68,246 |  
|                                                           

See accompanying notes to
condensed consolidated financial statements.

5

---



|                                                                     
|---------------------------------------------------------------------
|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 March 31, 2006 and on the consolidated statement of operations for the three
months ended March 31, 2006 is outlined below:

|                                          |  |                       |  |             | 
|----------------------------------------- |  | --------------------- |  | ----------- | 
|                                          |  | March 31, 2006       
|                                          |  | As PreviouslyReported |  | As Restated | 
|                                         
|                                          |  | (Unaudited)          
|Selected consolidated balance sheet data: |  |                       |  |             | 
|Total current assets                      |  | $6,453,411            |  | $6,135,290  | 
|Total assets                              |  | $10,568,598           |  | $10,250,477 | 
|Total current liabilities                 |  | $3,027,808            |  | $2,941,576  | 
|Total liabilities                         |  | $3,444,864            |  | $3,358,632  | 
|Total shareholders equity                 |  | $7,123,734            |  | $6,891,845  | 

6

---



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

|                                                                          |  |                             |   |                 |  
|------------------------------------------------------------------------- |  | --------------------------- | - | --------------- | -
|                                                                          |  | Quarter EndedMarch 31, 2006
|                                                                          |  | As PreviouslyReported       |   | As Restated     |  
|                                                                         
|                                                                          |  | (Unaudited)                
|Consolidated statements of    operations data:                            | 
|                                                                         
|Net Sales                                                                 |  | $   5,756,914               |   | $   5,469,244   |  
|Cost of sales                                                             |  | 3,564,913                   |   | 3,564,913       |  
|Gross profit                                                              |  | 2,192,001                   |   | 1,904,331       |  
|                                                                         
|Operating expenses                                                        |  | 2,121,752                   |   | 1,864,330       |  
|Interest                                                                  |  | 82,050                      |   | 82,050          |  
|Other income, net                                                         |  | (69,521                     | ) | (69,521         | )
|                                                                         
|Total expense                                                             |  | 2,134,281                   |   | 1,876,859       |  
|                                                                         
|Income before provision for                                               |  | 57,720                      |   | 27,472          |  
|income taxes                                                              | 
|Provision for income taxes                                                |  | -                           |   | -               |  
|                                                                         
|Net income                                                                |  | $        57,720             |   | $        27,472 |  
|                                                                         
|Income per common share - basic                                           |  | $0.00                       |   | $0.00           |  
|Income per common share - diluted                                         |  | $0.00                       |   | $0.00           |  
|                                                                         
|Shares used in computing income
               per common share - basic   |  | 12,285,768                  |   | 12,285,768      |  
|Shares used in computing income
               per common share - diluted |  | 15,659,185                  |   | 15,659,185      |  

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 month period ended March 31, 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:

7

---



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

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 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 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 months ended March 31, 2007.

As
of January 1, 2007 and March 31, 2007, the Company had no unrecognized tax benefits, and
no adjustment to its financial position, results of operations and 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 expenses 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 has been notified that it will be
subject to an examination by the State of New Jersey for tax years 2002-2005. The Companys 2003 and
2002 Canadian tax returns were subject to examination and adjustment by the Canada Customs and Revenue Agency.
Those adjustments will not have a material impact on the Companys financial position, results of operation or
cash flows. Tax years prior to 2004 are no longer subject to examination.

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 months ended March 31, 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 months ended March 31, 2007 and 2006 are outlined below:

|                                                      |  |                              |  |            | 
|----------------------------------------------------- |  | ---------------------------- |  | ---------- | 
|                                                      |  | Three Months Ended March 31, | 
|                                                      |  | 2007                         |  | 2006       | 
|                                                     
|Weighted average common shares    outstanding - basic |  | 25,246,596                   |  | 12,285,768 | 
|Dilutive shares attributable to:                      | 
|Convertible preferred stock                           |  | -                            |  | 2,280,407  | 
|Warrants                                              |  | -                            |  | 155,723    | 
|Stock options                                         |  | -                            |  | 937,287    | 
|                                                     
|Sub-total dilutive shares                             |  | -                            |  | 3,373,417  | 
|                                                     
|Weighted average common                               | 
|shares outstanding - diluted                          |  | 25,246,596                   |  | 15,659,185 | 

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

|                            |  |                              |  |           | 
|--------------------------- |  | ---------------------------- |  | --------- | 
|                            |  | Three Months Ended March 31, | 
|                            |  | 2007                         |  | 2006      | 
|Dilutive shares:            |  |                              |  |           | 
|Convertible preferred stock |  | 2,280,407                    |  | -         | 
|Restricted common stock     |  | 175,000                      |  | -         | 
|Stock options               |  | 6,545,280                    |  | 2,409,155 | 
|Warrants                    |  | 6,169,904                    |  | 2,760,000 | 
|                           
|Total dilutive shares       |  | 15,170,591                   |  | 5,169,155 | 

Reclassifications
 Certain reclassifications have been made to prior period reported amounts to conform
with the 2007 presentation.

8

---



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

2.     
          Acquisition of Western Medical, Inc.

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:

|                                                 |  |              |  
|------------------------------------------------ |  | ------------ | -
|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.

9

---



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

3.     Inventories

Inventories
include the following:

|                    |  |               |  |                  | 
|------------------- |  | ------------- |  | ---------------- | 
|                    |  | March 31,2007 |  | December 31,2006 | 
|                   
|Finished goods      |  | $3,913,043    |  | $2,784,612       | 
|Work in process     |  | 107,046       |  | 92,780           | 
|Packaging materials |  | 1,006,376     |  | 777,046          | 
|Raw materials       |  | 988,144       |  | 1,023,669        | 
|                   
|Total inventories   |  | $6,014,609    |  | $4,678,107       | 

4.     Line of Credit
Borrowings

Short-term
borrowings include the following:

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 March 31, 2007 and 2006, the outstanding
balances under the Agreement were zero. Advances will be utilized to fund general working
capital requirements, new product development and 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 March 31, 2007, the effective interest rate
was 10.25%. In addition, the Company pays a monthly collateral management fee at the rate
of 1.5% 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
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. By the end of 2007, the subject financial covenants will
return to their pre-amendment levels. No fee was charged by the U.S. lender for this
amendment. At March 31, 2007, the Company was not in compliance with its amended minimum
EBITDA financial covenants. The U.S. lender agreed to waive these covenant violations.

10

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

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 $433,000 ($500,000
Canadian) with its Canadian lender. At March 31, 2007 and 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 $346,000 ($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 March 31, 2007. The line of credit also provides for
direct advances in U.S. dollars limited to the U.S. dollar equivalent of $346,000
($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 $433,000 ($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 March 31, 2007 the
Company was in compliance with its Canadian line of credit covenants.

5.     Long-Term Debt

Long-term
debt includes the following:

|                          |  |               |  |                  | 
|------------------------- |  | ------------- |  | ---------------- | 
|                          |  | March 31,2007 |  | December 31,2006 | 
|                         
|Canadian term loan        |  | $238,888      |  | $295,881         | 
|Promissory note           |  | 500,000       |  | 500,000          | 
|Capital lease obligations |  | 74,984        |  | 88,542           | 
|                         
|Total debt                |  | 813,872       |  | 884,423          | 
|                         
|Less:  current maturities |  | 276,509       |  | 338,155          | 
|                         
|Long-term debt            |  | $537,363      |  | $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 March 31, 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).

11

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

In
addition, the Canadian lender has granted in 2006 Derma Sciences Canada Inc. a $650,000
($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 March 31, 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 distribution and computer
equipment totaling $74,984 as of March 31, 2007. The capital lease obligations bear
interest at annual rates ranging from 3.9% to 10.2% with the longest lease term expiring
in April 2009.

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 March 31, 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 March 31, 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 March 31, 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.

12

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

There
are 1,071,346 shares of series D convertible preferred stock outstanding at March 31,
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 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
March 31, 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.

13

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

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 730,000 shares of common stock were granted to officers, directors,
agents and employees in the three months ended March 31, 2007 at an exercise price of
$0.80 per share. As of March 31, 2007, options to purchase 4,331,625 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
three months ended March 31, 2007, 23,000 non-plan options expired. As of March 31, 2007,
non-plan options to purchase 2,213,655 shares of the Companys common stock were
issued and outstanding.

For
the three months ended March 31, 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 three months ended March 31, 2007 and 2006 were as
follows:

|                             |  |       |  |       | 
|---------------------------- |  | ----- |  | ----- | 
|                             |  | 2007  |  | 2006  | 
|                            
|Risk-free interest rate      |  | 4.72% |  | 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 three months ended March 31, 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 three months ended March 31,
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 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 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 three
months ended March 31, 2007 and 2006 follows:

14

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

|                        |  |           |  |                                       |  |           |  |                                       | 
|----------------------- |  | --------- |  | ------------------------------------- |  | --------- |  | ------------------------------------- | 
|                        |  | 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                 |  | 730,000   |  | $       0.80                          |  | 390,000   |  | $     0.70                            | 
|Forfeited/Expired       |  | (23,000)  |  | $     11.67                           |  | -         |  | -                                     | 
|                       
|Outstanding - March 31  |  | 6,545,280 |  | $       0.88                          |  | 6,163,280 |  | $     0.90                            | 
|                       
|Exercisable at March 31 |  | 5,730,280 |  | $       0.90                          |  | 5,889,530 |  | $     0.91                            | 

The
weighted average fair value per share of options granted during the three months ended
March 31, 2007 and 2006 was $0.70 and $0.42, respectively.

For
the three months ended March 31, 2007 and 2006, no income tax benefit was recognized
related to stock option activity.

During
the three months ended March 31, 2007 and 2006, stock option compensation expense was
recorded using the fair value method under SFAS 123R as follows:

|                                        |  |           |  |          | 
|--------------------------------------- |  | --------- |  | -------- | 
|                                        |  | 2007      |  | 2006     | 
|                                       
|Cost of sales                           |  | $  16,364 |  | $  6,251 | 
|Operating expenses                      |  | 149,872   |  | 32,374   | 
|                                       
|Total stock option compensation expense |  | $166,236  |  | $38,625  | 

As
of March 31, 2007, there was $536,662 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 2.5 years.

Shares
Reserved for Future Issuance

At
March 31, 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         |  | 668,375    | 
|Common stock options outstanding                 |  | 6,545,280  | 
|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               |  | 18,163,966 | 

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.

15

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

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 three months ended March
31, 2007, $12,105 was recorded in operating expenses for these grants.

At
March 31, 2007, the weighted-average remaining contractual term for the restricted common
stock grant is 2.11 years.

7.     Comprehensive (Loss)
Income

The
Companys comprehensive (loss) income was as follows:

|                                        |  |                             |   |                |  
|--------------------------------------- |  | --------------------------- | - | -------------- | -
|                                        |  | Three Months EndedMarch 31, |  
|                                        |  | 2007                        |   | 2006(Restated) |  
|                                       
|Net (loss) income as reported           |  | $ (138,953                  | ) | $ 27,472       |  
|Other comprehensive income (loss):      | 
|Foreign currency translation adjustment |  | 58,540                      |   | (23,052        | )
|                                       
|Comprehensive (loss) income             |  | $   (80,413                 | ) | $   4,420      |  

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. 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.

16

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

Segment
net sales, gross profit and other related information for the three months ended March 31,
2007 and 2006 were as follows:

|               |  |                                   |   |                                                    |  |           |  |             |   |                  |  
|-------------- |  | --------------------------------- | - | -------------------------------------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Three Months Ended March 31, 2007 |   |                                                    |  |          
|              
|               |  | Wound Care                        |   | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $ 7,076,239                       |   | $672,186                                           |  | $217,372  |  | -           |   | $ 7,965,797      |  
|              
|Gross profit   |  | 2,401,842                         |   | 375,939                                            |  | 26,647    |  | -           |   | 2,804,428        |  
|Total expenses |  | -                                 |   | -                                                  |  | -         |  | $(2,943,381 | ) | (2,943,381       | )
|              
|Net loss       |  | $  (138,953                       | )

|               |  |                                   |  |                                                    |  |           |  |             |   |                  |  
|-------------- |  | --------------------------------- |  | -------------------------------------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Three Months Ended March 31, 2006 |  |                                                    |  |          
|              
|               |  | Wound Care                        |  | Wound Closure-Specialty      Securement    Devices |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $4,623,265                        |  | $561,981                                           |  | $283,998  |  | -           |   | $ 5,469,244      |  
|              
|Gross profit   |  | 1,620,418                         |  | 282,935                                            |  | 978       |  | -           |   | 1,904,331        |  
|Total expenses |  | -                                 |  | -                                                  |  | -         |  | $(1,876,859 | ) | (1,876,859       | )
|              
|Net income     |  | $     27,472                      | 

The
following table presents net sales by geographic region.

|              |  |                              |  |                | 
|------------- |  | ---------------------------- |  | -------------- | 
|              |  | Three Months Ended March 31, | 
|              |  | 2007                         |  | 2006(Restated) | 
|             
|United States |  | 57%                          |  | 46%            | 
|Canada        |  | 39%                          |  | 50%            | 
|Other         |  | 4%                           |  | 4%             | 

The increase
in the three month period ended March 31, 2007 U.S. net sales and decrease in Canada net
sales expressed as percentages of total net sales versus the comparable 2006 period 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 three months ended March 31, 2007 and 2006, a major U.S. customer represented 17% and
16% of U.S. sales, respectively. The Companys wholly owned Canadian subsidiary sells
to one customer that serves as its exclusive third party distributor.

17

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

9.     Income Taxes

The
Company recorded a $73,424 foreign income tax provision for the first quarter 2007 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 first 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 first quarter 2006 due to a net operating loss in
the U.S. in the first quarter 2006 and the availability of U.S. and 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 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, the Agreement calls for minimum sales achievement
targets beginning in the second year of the Agreement and each year thereafter to maintain
exclusivity. The agreement will commence upon regulatory approval of the first product
which had not occurred as of March 31, 2007.

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, a component of operating expense
in the consolidated statement of operations.

18

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

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.

12.    Subsequent Events

Capital
Lease

On
April 5, 2007, the Company signed a three year capital lease for the purchase of new
furniture in connection with the Companys June 2007 headquarters office relocation.
The lease calls for 36 monthly payments of $5,185 and bears interest at an annual rate of
9.23%.

Amendment
to U.S. Revolving Credit and Security 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.

19

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Index

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

Quarter Ended March 31, 2007 Compared
to Quarter Ended March 31, 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 term Canadian operations is used throughout this
discussion in reference to the operations of Derma Sciences Canada Inc. and the term U.S.
operations is used throughout this discussion in reference to the Companys U.S.
operations.

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 March 31, 2007 versus 2006 operating
results:

|                                  |  |                         |   |                           |   |             |   |        |  
|--------------------------------- |  | ----------------------- | - | ------------------------- | - | ----------- | - | ------ | -
|                                  |  | Quarter Ended March 31, |  
|                                  |  | 2007                    |   | 2006           (Restated) |   | Variance    |  
|                                 
|Gross Sales                       |  | $ 10,179,980            |   | $ 6,764,766               |   | $ 3,415,214 |   | 50.5%  |  
|Sales adjustments                 |  | (2,214,183              | ) | (1,295,522                | ) | (918,661    | ) | 70.9%  |  
|                                 
|Net sales                         |  | 7,965,797               |   | 5,469,244                 |   | 2,496,553   |   | 45.7%  |  
|Cost of sales                     |  | 5,161,369               |   | 3,564,913                 |   | 1,596,456   |   | 44.8%  |  
|                                 
|Gross profit                      |  | 2,804,428               |   | 1,904,331                 |   | 900,097     |   | 47.3%  |  
|Gross profit percentage           |  | 35.2                    | % | 34.8                      | %
|Operating expenses                |  | 2,793,154               |   | 1,864,330                 |   | 928,824     |   | 49.8%  |  
|Interest expense                  |  | 50,246                  |   | 82,050                    |   | (31,804     | ) | (38.8% | )
|Other expense/(income), net       |  | 26,557                  |   | (69,521                   | ) | 96,078      |   | 138.2% |  
|                                 
|Total expenses                    |  | 2,869,957               |   | 1,876,859                 |   | 993,098     |   | 52.9%  |  
|(Loss) income before income taxes |  | (65,529                 | ) | 27,472                    |   | (93,001     | ) | -      |  
|Provision for income taxes        |  | 73,424                  |   | -                         |   | 73,424      |   | -      |  
|                                 
|Net (loss) income                 |  | $    (138,953           | ) | $      27,472             |   | $  (166,425 | ) | -      |  

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 two to three 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
March 31, 2007, the trade rebate reserve would be overstated by approximately $230,000.
If the normal rebate cycle were one

20

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Index

month greater than
estimated at March 31, 2007, the trade rebate reserve would be understated by
approximately $460,000. 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 March 31, |  
|                       |  | 2007                    |   | 2006(Restated) |  
|                      
|Gross Sales            |  | $ 10,179,980            |   | $ 6,764,766    |  
|                      
|Trade rebates          |  | (1,754,282              | ) | (966,128       | )
|Distribution fees      |  | (289,138                | ) | (256,710       | )
|Sales incentives       |  | (57,168                 | ) | (17,879        | )
|Medicaid rebates       |  | (1,515                  | ) | (6,450         | )
|Returns and allowances |  | (43,517                 | ) | (12,255        | )
|Cash discounts         |  | (68,563                 | ) | (36,100        | )
|                      
|Total adjustments      |  | (2,214,183              | ) | (1,295,522     | )
|                      
|Net sales              |  | $   7,965,797           |   | $ 5,469,244    |  

Trade rebates
increased significantly in the first quarter 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. These increases were partially offset by a decrease in
the level of sales subject to rebate (contract business) in other areas of the
Companys business. 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 allowances were up
in 2007 due to the higher level of sales and timing. Cash discounts as a percentage of
sales increased in 2007 as a larger portion of the sales growth continues to come from
customers that have historically taken advantage of the Companys discount terms.

21

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Index

Rebate Reserve Roll
Forward

A
quarterly roll forward of the trade rebate accruals at March 31, 2007 and 2006 is outlined
below:

|                              |  |                         |   |                |  
|----------------------------- |  | ----------------------- | - | -------------- | -
|                              |  | Quarter Ended March 31, |  
|                              |  | 2007                    |   | 2006(Restated) |  
|                             
|Beginning balance - January 1 |  | $ 1,817,558             |   | $ 1,566,590    |  
|Rebates paid                  |  | (1,204,036              | ) | (747,673       | )
|Rebates accrued               |  | 1,754,282               |   | 966,128        |  
|                             
|Ending balance - March 31     |  | $ 2,367,804             |   | $ 1,785,045    |  

The
$550,246 increase in the first quarter 2007 trade rebate reserve reflects a $442,174
increase to $1,916,242 in the Canadian rebate reserve due to higher sales coupled with an
increase in the overall rebate percentage due to renewal of buying group contracts at
lower selling prices coupled with incremental reserve requirements associated with the
Western Medical business acquired in April 2006. 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 $218,455 increase in the first quarter 2006 trade
rebate reserve reflects the continued growth of the rebate intensive Canadian and U.S.
private label businesses.

Net Sales and Gross Margin

The
following table highlights the March 31, 2007 versus 2006 product line net sales and gross
profit:

|                          |  |                         |  |                           |  |              |   |        |  
|------------------------- |  | ----------------------- |  | ------------------------- |  | ------------ | - | ------ | -
|                          |  | Quarter Ended March 31, | 
|                          |  | 2007                    |  | 2006           (Restated) |  | Variance     |  
|                         
|Product Line Net Sales   
|                         
|Wound care                |  | $7,076,239              |  | $4,623,265                |  | $ 2,452,974  |   | 53.1%  |  
|Wound closure-specialty   |  | 672,186                 |  | 561,981                   |  | 110,205      |   | 19.6%  |  
|securement devices        | 
|Skin care                 |  | 217,372                 |  | 283,998                   |  | (66,626      | ) | (23.5% | )
|                         
|Total                     |  | $7,965,797              |  | $5,469,244                |  | $ 2,496,553  |   | 45.7%  |  
|                         
|Product Line Gross Profit
|                         
|Wound care                |  | $2,401,842              |  | $1,620,418                |  | $    781,424 |   | 48.2%  |  
|Wound closure- specialty  |  | 375,939                 |  | 282,935                   |  | 93,004       |   | 32.9%  |  
|securement devices        | 
|Skin care                 |  | 26,647                  |  | 978                       |  | 25,669       |   | -      |  
|                         
|Total                     |  | $2,804,428              |  | $1,904,331                |  | $    900,097 |   | 47.3%  |  

Company
net sales increased $2,496,553, or 45.7%, to $7,965,797 in 2007 from $5,469,244 in 2006.
Canadian net sales increased $366,427, or 13.5%, to $3,090,257 in 2007 from $2,723,830 in
2006. This increase was driven by growth of $409,175 less unfavorable exchange of $42,748
associated with a 1.6% weakening of the Canadian dollar. The increase was principally
attributable to higher sales to the Companys exclusive Canadian distributor to
rebalance its inventory (ostensibly to improve its customer service performance) coupled
with modest real growth (as measured by sales of the Company products reported by the
distributor) 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. U.S. net sales increased $2,130,126, or 77.6%, to
$4,875,540 in 2007 from $2,745,414 in 2006. The increase was driven by the addition of
incremental Western Medical sales of approximately $1,452,000, continued growth of the
private label business and a strong wound closure-specialty securement device quarter in
2007 due principally to backorder fulfillment partially offset by a continued decline in
skin care sales due to competitive pressure and softening demand for the Derma line of
advanced wound care products. Excluding Western Medical sales, U.S. sales increased
$1,044,645, or 19.1%.

22

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Index

Company
gross profit increased $900,097, or 47.3%, to $2,804,428 in 2007 from $1,904,331 in 2006.
Company gross profit margin percentage increased to 35.2% in 2007 from 34.8% in 2006.
Canadian gross profit increased $259,030, or 29.2%, to $1,147,095 in 2007 from $888,065 in
2006. Canadian gross profit margin percentage increased to 37.1% in 2007 from 32.6% 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
$641,067, or 63.1%, to $1,657,333 in 2007 from $1,016,266 in 2006. Gross profit margin
percentage decreased to 34.0% in 2007 from 37.0% 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 $260,384, or 13.7%, and the gross profit margin percentage
would have been 33.2%.

Wound
care sales consisting of basic and advanced wound care products increased $2,452,974, or
53.1%, in 2007 versus 2006. Basic wound care sales increased $1,366,334, or 42.3%. This
increase was driven by an increase in Canadian basic wound care sales of $366,427 together
with a U.S. sales increase of $999,907. The Canadian sales growth was driven by higher
sales to the Companys exclusive Canadian distributor to rebalance its inventory
coupled with modest real growth partially offset by price erosion and lower private label
sales to the distributor. The U.S. sales performance reflects incremental Western Medical
sales of approximately $1,044,000 partially offset by a softening of demand for other
basic wound care products. Advanced wound care sales increased $1,086,640 or 78.1%. This
increase was principally driven by continued growth of the Companys private label
sales to U.S. customers (including approximately $408,000 related to Western Medical)
together with improving silver product sales partially offset by softening demand for the
Derma line of advanced wound care products. Sales of the Companys new Silver
Alginate product launched in November 2006 were $94,178 in the first quarter 2007.

Wound
care gross profit increased $781,424, or 48.2%, in 2007 versus 2006. Gross profit margin
percentage decreased to 33.9% in 2007 from 35.1% in 2006. The gross profit margin dollar
increase is attributable to the higher sales partially offset by the declining gross
profit margin percentage. The decrease in gross profit margin percentage is principally
attributable to unfavorable product mix.

Wound
closure-specialty securement device sales increased $110,205, or 19.6%, in 2007 versus
2006. The increase is principally due to backorder fulfillment.

Wound
closure-specialty securement device gross profit increased $93,004, or 32.9%, in 2007
versus 2006. Gross profit margin percentage increased to 55.9% 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 $66,626, or 23.5%, in 2007 versus 2006 due to continuing competitive
pressure. Skin care gross profit improved $25,669 to a $26,647 profit in 2007 from a $978
profit 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 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.

23

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Index

Operating Expense

The
following table highlights March 31, 2007 versus 2006 operating expenses by type:

|                       |  |                         |  |                           |  |           |  |        | 
|---------------------- |  | ----------------------- |  | ------------------------- |  | --------- |  | ------ | 
|                       |  | Quarter Ended March 31, | 
|                       |  | 2007                    |  | 2006           (Restated) |  | Variance  | 
|                      
|Distribution           |  | $   228,019             |  | $   158,996               |  | $  69,023 |  | 43.4%  | 
|Marketing              |  | 288,227                 |  | 141,621                   |  | 146,606   |  | 103.5% | 
|Sales                  |  | 557,556                 |  | 505,422                   |  | 52,134    |  | 10.3%  | 
|General administrative |  | 1,719,352               |  | 1,058,291                 |  | 661,061   |  | 62.5%  | 
|                      
|Total                  |  | $2,793,154              |  | $1,864,330                |  | $928,824  |  | 49.8%  | 

Operating
expense increased $928,824, or 49.8%, to $2,793,154 in 2007 from $1,864,330 in 2006
including a decrease of $7,670 attributable to exchange associated with a 1.6% weakening
of the Canadian dollar on the Canadian operations.

Distribution
expense increased $69,023, or 43.4%, in 2007 versus 2006. Expenses in Canada increased
$35,039 while expenses in the U.S increased $33,984. The increase in Canada was
principally attributable to higher lease, real estate taxes and weather related utility
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. 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.

Marketing
expense increased $146,606, or 103.5%, 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 and product development expense in
support of the Companys growth initiatives, higher share based compensation expense
due to 2007 grants and recruiting costs for the new position.

Sales
expense increased $52,134, or 10.3%, in 2007 versus 2006. Expenses in Canada decreased
$957 (including a benefit $2,162 related to exchange) while expenses in the U.S. increased
$53,091. Excluding exchange the $1,205 increase in Canada was due to higher compensation
and benefit, buying group administrative (sales volume related) and sample expenses
effectively offset by lower timing related promotion expenses and lower bid expenses. The
U.S. increase was attributable to incremental consulting and customer service (personnel
related ) expenses associated with the integration of the Western Medical business into
the Company, higher share based compensation expense, higher sales volume related
administrative fees and recruiting costs associated with the planned expansion of the
sales force.

General
administrative expense increased $661,061, or 62.5%, in 2007 versus 2006. Expenses in
Canada increased $98,545 (including a benefit of $4,917 related to exchange) while
expenses in the U.S. increased $562,516. The increase in Canada principally reflects
higher audit and Sarbanes Oxley consulting (compliance program commenced in December 2006)
expenses, planned year-on-year compensation and benefit increases and higher share based
compensation expense, partially offset by lower bad debt expense and timing related travel
and software expense. The U.S. increase principally reflects incremental technology
licensing expense of $125,000, intangible amortization expense of approximately $116,000
related to the Western Medical acquisition, share based employee and board compensation
expense of approximately $115,000, Sarbanes Oxley consulting expenses of approximately
$77,000, higher audit and related expense of approximately $46,000, one-time professional
fees for a compensation study of approximately $26,000, higher travel expenses of
approximately $26,000 and higher investor relations and public relations related expenses
of approximately $22,000.

24

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Index

Interest Expense

Interest
expense decreased $31,804, or 38.8%, to $50,246 in 2007 from $82,050 in 2006. Interest
expense in Canada decreased $3,517 while interest expense in the U.S. decreased $28,287.
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 interest (despite higher interest rates) 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 $96,078 to $26,557 expense in 2007 from $69,521 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 partially offset by lower
foreign exchange expense, also contributed.

Income Taxes

The
Company recorded a $73,424 foreign income tax provision for the first 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 first 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 first 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 will approximate 34% in 2007. For the most part, tax expense in Canada is projected
to be deferred in nature as net operating loss carry forward related deferred tax assets
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 $138,953, or $0.01 per share (basic and diluted), in the
first quarter 2007 compared to net income of $27,472, or $0.00 income per share (basic and
diluted), in the first quarter 2006.

Liquidity and Capital
Resources

Operational Overview

Net
sales increased 45.7%, (46.4% adjusted for foreign exchange), in 2007 over 2006. This
growth was driven by a sales increase in the U.S. of 77.6%, together with an increase in
Canadian sales of 13.5% (15.0% 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 $1,452,000 and the continued growth of the private label business.
Sales of the Companys new silver alginate product launched in November 2006 were
approximately $94,000 in the first quarter. 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 19.1%. Adjusted for sales related
to the Companys exclusive Canadian distributors rebalancing of its inventory,
first quarter Canada sales growth was modest. This reflects a very competitive marketplace
for the Companys line of traditional wound care products that make up the majority
of Canada 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.

25

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Index

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 49.8% (49.1% 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), non-cash share based compensation expense commencing in 2006,
planned increases in 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 $138,953 for the first quarter 2007. With the addition of the
Western Medical business, anticipated Canadian sales improvement, 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
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 make 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 anticipates this device will
represent a near term commercial opportunity.

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 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

26

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Index

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.

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
licensee at agreed upon pricing, will pay the licensee an agreed upon sales based royalty
and is obligated to achieve specified minimum sales targets to maintain exclusivity. The
agreement will commence with regulatory approval of the first product. The Company
anticipates use of this technology will provide a significant near term commercial
opportunity.

Cash Flow and Working
Capital

At
March 31, 2007 and December 31, 2006, the Company had cash and cash equivalents on hand of
$1,607,918 and $1,285,943, respectively. The $321,975 increase in cash reflects net cash
provided by operating activities of $495,225, net cash used in investing activities of
$124,376, net cash used in financing activities of $72,681 and cash provided as a result
of exchange rate changes of $23,807. The March 31, 2007 cash balance reflects overall
improved cash flow due to improving operations and the addition of the Western Medical
business in April 2006, which was successfully absorbed into the Company while adding only
a modest amount of incremental overhead expense.

Net
cash provided by operating activities of $495,225 stems from $1,049,187 cash provided from
operations (net loss plus non-cash items), partially offset by $553,962 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 and lower accrued liabilities,
partially offset by a decrease in receivables and higher accounts payable, were the main
drivers behind the net change in ongoing operating assets and liabilities. 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 were an OEM customer component and
finished goods inventory build in the first quarter to meet agreed upon safety stock
requirements and timing related excess finished goods in Canada due to early delivery of
product from China. The reduction in accrued liabilities principally reflects the payment
of accrued bonus in the first quarter. The reduction in receivables reflects improved
collections in the U.S. and Canada. Higher accounts payable reflects the increased level
of inventory related purchase activity and a higher level of non-inventory related
activity in support of the Companys growth initiatives and regulatory requirements.

Net
cash used in investing activities of $124,376 principally reflects funds 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.

Net
cash used in financing activities of $72,681 reflects cash used to make regularly
scheduled debt payments.

27

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Index

Working
capital increased $324,177, or 5.6%, at March 31, 2007 to $6,092,226 from $5,768,049 at
December 31, 2006. The increase is principally attributable to the net cash flow from
operations during the quarter. 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 $433,000 ($500,000 Canadian). Maximum
potential advances under the agreement at March 31, 2007 were $290,000. Advances
outstanding against the agreement were zero at March 31, 2007, leaving $290,000 available
for borrowing.

In
addition, the Canadian lender has granted Derma Sciences Canada Inc. a $650,000 ($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 March 31, 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 March 31, 2007 were $3,060,000. Advances
outstanding against the line were zero at March 31, 2007, leaving an additional $3,060,000
available for borrowing.

Prospective Assessment

The
Companys objective is to continue to grow sales in 2007 and maintain 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 to
date, and is expected to continue to have, 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 and improved operational efficiencies are expected to lower the Companys
overall internal cost of manufacturing going forward. The plan to bring the manufacture of
the Companys wound closure-specialty securement device line in-house at a savings
versus existing third party sourced product costs was completed in late 2006. 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.

28

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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 continue to closely monitor 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 15,170,591 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 $138,953 (unaudited) in the first quarter 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 March 31, 2007, the Company had an accumulated deficit of
$13,556,234. 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 four months of 2007 are set forth in
the table below:

29

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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 |  | $0.88 | 
| |                                                           |  |       |  |       | 
| | (*) January 1 through April 30.                           | 

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
March 31, 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 $178,341 and $38,625 in the three months ended March 31, 2007 and 2006,
respectively, under SFAS 123R.

31

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Index

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 March 31, 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.

The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2006. Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that, as a
result of a material weakness related to the lack of a formal process to evaluate and
document all of the accounting implications that may be associated with new and
non-routine contracts, the Companys disclosure controls and procedures were not
effective as of that date 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.

In
order to remediate the aforementioned material weakness, management has taken the
following actions:

|1. |  | Management has prepared and implemented a formal policy outlining the process
          for review and approval of all material contractual obligations entered into, or
          amended, by the Company;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | All new material contracts or amendments thereto will be reviewed and approved
          by the Companys Chief Financial Officer prior to execution thereof.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Other
than as described above, during the three months ended March 31, 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.

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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: May 14, 2007 | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

33

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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