---

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
     
     September 30, 2006Commission 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 outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.

|                       |        |                                       
|---------------------- | ------ | --------------------------------------
|Date: October 31, 2006 | Class: | Common Stock, par value $.01 per share
|                       |        | Shares Outstanding: 24,906,160        

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 - September 30, 2006 (Unaudited) and December 31, 2005                 | 3
|                                         |                                                                         | Condensed Consolidated Statements of
     Operations - Three months ended September 30, 2006 and 2005 (Unaudited) | 4
|                                         |                                                                         | Condensed Consolidated Statements of
     Operations - Nine months ended September 30, 2006 and 2005 (Unaudited)  | 5
|                                         |                                                                         | Condensed Consolidated Statements of
     Cash Flows - Nine months ended September 30, 2006, and 2005 (Unaudited) | 6
|                                         |                                                                         | Notes to Condensed Consolidated Financial
     Statements (Unaudited)                                             | 7
|                                         | Item 2.  Management's Discussion and
     Analysis or Plan of Operation | 21                                                                                                               
|                                         | Item 3.  Controls and
     Procedures                                   | 39                                                                                                               
|Part II - Other Information             
|                                         | Item 1.  Legal
     Proceedings                                         | 40                                                                                                               
|                                         | Item 6.  Exhibits                                                       | 40                                                                                                               

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                                 
|                                                                       |  | September 30,  | December 31,
|                                                                       |  | 2006           | 2005        
|                                                                       |  | (Unaudited)    | (Note 1)    
|ASSETS                                                                 | 
|                                                                      
|Current Assets                                                         | 
|Cash and cash equivalents                                              |  | $   1,088,778  |              | $   1,105,330 |  
|Accounts receivable, net                                               |  | 2,410,793      |              | 1,225,639     |  
|Inventories                                                            |  | 4,455,229      |              | 3,868,663     |  
|Prepaid expenses and other current assets                              |  | 285,193        |              | 210,288       |  
|Total current assets                                                   |  | 8,239,993      |              | 6,409,920     |  
|Equipment and improvements, net                                        |  | 4,271,473      |              | 3,385,862     |  
|Goodwill                                                               |  | 3,800,072      |              | 200,000       |  
|Other intangible assets, net                                           |  | 2,145,521      |              | 349,152       |  
|Other assets, net                                                      |  | 256,202        |              | 250,312       |  
|Total Assets                                                           |  | $ 18,713,261   |              | $ 10,595,246  |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                   | 
|Current Liabilities                                                    | 
|Line of credit borrowings                                              |  | $      471,752 |              | $   1,080,561 |  
|Current maturities of long-term debt                                   |  | 750,442        |              | 285,945       |  
|Accounts payable                                                       |  | 1,454,682      |              | 1,197,062     |  
|Accrued expenses and other current liabilities                         |  | 729,817        |              | 491,559       |  
|Total current liabilities                                              |  | 3,406,693      |              | 3,055,127     |  
|Long-term debt, net of current portion                                 |  | 721,681        |              | 388,473       |  
|Other long-term liabilities                                            |  | 108,577        |              | 99,982        |  
|Total Liabilities                                                      |  | 4,236,951      |              | 3,543,582     |  
|Commitments                                                            | 
|Shareholders' Equity                                                   | 
|Convertible preferred stock, $.01 par value; 11,750,000 shares         | 
|authorized; issued and outstanding:  2,280,407 shares at September 30, | 
|2006 and December 31, 2005 (liquidation preference of $4,210,231 at    | 
|September 30, 2006 and December 31, 2005)                              |  | 22,804         |              | 22,804        |  
|Common stock, $.01 par value, 50,000,000 and 30,000,000 shares         | 
|authorized at September 30, 2006 and December 31, 2005, respectively;  | 
|issued and outstanding:  24,906,160 shares at September 30, 2006 and   | 
|12,285,768 shares at December 31, 2005                                 |  | 249,062        |              | 122,858       |  
|Additional paid-in capital                                             |  | 27,222,847     |              | 19,905,059    |  
|Common stock subscription receivable                                   |  | (1,000,000     | )            |              |  
|Accumulated other comprehensive income                                 |  | 1,108,027      |              | 896,077       |  
|Accumulated deficit                                                    |  | (13,126,430    | )            | (13,895,134   | )
|Total Shareholders' Equity                                             |  | 14,476,310     |              | 7,051,664     |  
|Total Liabilities and Shareholders' Equity                             |  | $ 18,713,261   |              | $ 10,595,246  |  
|                                                                      

See accompanying notes to
condensed consolidated financial statements.

3

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                            |  |                    |      |                  | 
|----------------------------------------------------------- |  | ------------------ | ---- | ---------------- | 
|Condensed Consolidated Statements of Operations (Unaudited) | 
|                                                            |  | Three months ended
|                                                            |  | September 30,     
|                                                            |  | 2006               | 2005
|Net Sales                                                   |  | $  7,876,307       |      | $  5,712,457     | 
|Cost of sales                                               |  | 4,959,232          |      | 3,750,384        | 
|Gross Profit                                                |  | 2,917,075          |      | 1,962,073        | 
|Operating expenses                                          |  | 2,389,818          |      | 1,831,780        | 
|Interest expense, net                                       |  | 106,505            |      | 75,929           | 
|Other expense, net                                          |  | 21,558             |      | 11,259           | 
|Total Expenses                                              |  | 2,517,881          |      | 1,918,968        | 
|Income before provision for income taxes                    |  | 399,194            |      | 43,105           | 
|Provision for income taxes                                  |  | 19,000             |      |                 | 
|Net Income                                                  |  | $     380,194      |      | $       43,105   | 
|Income per common share - basic                             |  | $           0.02   |      | $           0.00 | 
|Income per common share - diluted                           |  | $           0.01   |      | $           0.00 | 
|Shares used in computing income per common share - basic    |  | 24,188,769         |      | 12,285,768       | 
|Shares used in computing income per common share - diluted  |  | 27,959,757         |      | 15,804,912       | 
|                                                           

See accompanying notes to
condensed consolidated financial statements.

4

---



Index

DERMA SCIENCES, INC. AND
SUBSIDIARIES

|                                                                  |  |                   |      |                   |  
|----------------------------------------------------------------- |  | ----------------- | ---- | ----------------- | -
|Condensed Consolidated Statements of Operations (Unaudited)      
|                                                                  |  | Nine months ended
|                                                                  |  | September 30,    
|                                                                  |  | 2006              | 2005
|Net sales                                                         |  | $ 21,019,902      |      | $ 17,540,122      |  
|Cost of sales                                                     |  | 13,193,264        |      | 11,866,443        |  
|Gross Profit                                                      |  | 7,826,638         |      | 5,673,679         |  
|Operating expenses                                                |  | 6,766,282         |      | 5,564,605         |  
|Interest expense, net                                             |  | 298,700           |      | 255,782           |  
|Other income, net                                                 |  | (26,048           | )    | (134,945          | )
|Total Expenses                                                    |  | 7,038,934         |      | 5,685,442         |  
|Income (loss) before provision for income taxes                   |  | 787,704           |      | (11,763           | )
|Provision for income taxes                                        |  | 19,000            |      |                  |  
|Net Income (Loss)                                                 |  | $      768,704    |      | $       (11,763   | )
|Income (loss) per common share - basic                            |  | $            0.04 |      | $            0.00 |  
|Income (loss) per common share - diluted                          |  | $            0.03 |      | $            0.00 |  
|Shares used in computing income (loss) per common share - basic   |  | 19,136,921        |      | 12,193,816        |  
|Shares used in computing income (loss) per common share - diluted |  | 22,880,812        |      | 12,193,816        |  
|                                                                 

See accompanying notes to
condensed consolidated financial statements.

5

---



Index

DERMA SCIENCES, INC. AND SUBSIDIARIES

|                                                                      |  |                   |      |              |  
|--------------------------------------------------------------------- |  | ----------------- | ---- | ------------ | -
|Condensed Consolidated Statements of Cash Flows (Unaudited)          
|                                                                      |  | Nine months ended
|                                                                      |  | September 30,    
|                                                                      |  | 2006              | 2005
|Operating Activities                                                  |  |                   |      |              |  
|Net income (loss)                                                     |  | $    768,704      |      | $   (11,763  | )
|Adjustments to reconcile net income (loss) to                         | 
|net cash provided by (used in) operating activities:                  | 
|Depreciation of equipment and improvements                            |  | 445,770           |      | 376,994      |  
|Amortization of intangible assets                                     |  | 262,498           |      | 63,105       |  
|Amortization of deferred financing costs                              |  | 64,536            |      | 53,791       |  
|Provision for rebates                                                 |  | 499,189           |      | 1,200,909    |  
|Bad debt recoveries                                                   |  | (25,120           | )    |             |  
|Provision for inventory obsolescence                                  |  | 8,574             |      | 71,918       |  
|Deferred rent expense                                                 |  | 6,615             |      | 30,575       |  
|Compensation charge for employee stock options                        |  | 128,033           |      | 1,000        |  
|Compensation charge for restricted stock                              |  | 18,158            |      |             |  
|Gain on settlement of accounts payable                                |  | (64,971           | )    |             |  
|Loss on disposal of equipment                                         |  | 24,469            |      | 14,927       |  
|Changes in operating assets and liabilities, net of amounts acquired  | 
|from Western Medical asset purchase:                                  | 
|Accounts receivable                                                   |  | (1,198,519        | )    | (269,664     | )
|Inventories                                                           |  | 679,668           |      | 995,571      |  
|Prepaid expenses and other current assets                             |  | (100,858          | )    | (121,414     | )
|Other assets                                                          |  | 32,033            |      | (131,031     | )
|Accounts payable                                                      |  | (252,256          | )    | (157,107     | )
|Accrued expenses and other liabilities                                |  | 216,105           |      | (107,547     | )
|Net cash provided by operating activities                             |  | 1,512,628         |      | 2,010,264    |  
|Investing Activities                                                  | 
|Acquisition of Western Medical, Inc. assets                           |  | (6,000,000        | )    |             |  
|Costs of acquiring Western Medical, Inc.                              |  | (758,866          | )    |             |  
|Purchases of equipment and improvements                               |  | (755,489          | )    | (136,001     | )
|Proceeds from sale of equipment                                       |  | 9,952             |      | 35,629       |  
|Net cash used in investing activities                                 |  | (7,504,403        | )    | (100,372     | )
|Financing Activities                                                  | 
|Loan proceeds                                                         |  | 1,000,000         |      |             |  
|Net change in bank lines of credit                                    |  | (608,809          | )    | (1,433,934   | )
|Deferred financing costs                                              |  | (48,722           | )    | (116,590     | )
|Long-term debt repayments                                             |  | (722,620          | )    | (377,449     | )
|Proceeds from issuance of stock, net of issuance costs                |  | 6,297,801         |      | 539,307      |  
|Net cash provided by (used in) financing activities                   |  | 5,917,650         |      | (1,388,666   | )
|Effect of exchange rate changes on cash                               |  | 57,573            |      | 56,487       |  
|Net (decrease) increase in cash and cash equivalents                  |  | (16,552           | )    | 577,713      |  
|Cash and cash equivalents                                             | 
|Beginning of period                                                   |  | 1,105,330         |      | 46,508       |  
|End of period                                                         |  | $ 1,088,778       |      | $    624,221 |  
|Supplemental cash flow information:                                   | 
|Issuance of promissory note in connection with acquisition of Western | 
|Medical, Inc. (see Note 2)                                            |  | $    500,000      |      |             |  
|Common stock subscription receivable (see Note 6)                     |  | $ 1,000,000       |      |             |  
|                                                                     

See accompanying notes to
condensed consolidated financial statements.

6

---



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

1.     Organization and
Summary of Significant Accounting Policies

Derma
Sciences, Inc. and its subsidiaries (the Company) are full line providers of
wound care, wound closure-fastener 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 is outsourced to a third party. The Company
has manufacturing facilities in Toronto, Canada and Nantong, China.

Basis
of Presentation

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September 30, 2006,
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2006. Information included in the condensed balance sheet as of December 31,
2005 has been derived from the consolidated financial statements and footnotes thereto for
the year ended December 31, 2005, 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:

The
accounting policies of the Company are unchanged from those disclosed in the Form 10-KSB
with the exception of the adoption of Statement of Financial Accounting Standards No.
123R, Share-Based Payment (SFAS 123R) described below:

Stock-Based
Compensation  Effective January 1, 2006 the Company adopted SFAS 123R which revises
SFAS 123 Accounting for Stock-Based Compensation (SFAS 123) and
supersedes 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. SFAS 123R requires that the Company elect an
approved method to calculate the historical pool of windfall tax benefits upon adoption of
SFAS 123R within one year of its adoption. As of September 30, 2006, the Company has not
made that election.

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 nine months ended September 30, 2005 as the effect would be anti-dilutive.

7

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

Total
dilutive shares that have or would have been used to compute diluted income per common
share for the three and nine months ended September 30, 2006 and 2005 are outlined below:

|                                 |  |                                     |  |                                    |  |            |  |            | 
|-------------------------------- |  | ----------------------------------- |  | ---------------------------------- |  | ---------- |  | ---------- | 
|                                 |  | Three Months Ended    September 30, |  | Nine Months Ended    September 30, | 
|                                 |  | 2006                                |  | 2005                               |  | 2006       |  | 2005       | 
|Weighted average common shares   | 
|outstanding - basic              |  | 24,188,769                          |  | 12,285,768                         |  | 19,136,921 |  | 12,193,816 | 
|Dilutive shares attributable to: | 
|Convertible preferred stock      |  | 2,280,407                           |  | 2,280,407                          |  | 2,280,407  |  |           | 
|Restricted common stock          |  | 175,000                             |  |                                   |  | 91,026     |  |           | 
|Warrants                         |  | 261,012                             |  | 185,373                            |  | 278,403    |  |           | 
|Stock options                    |  | 1,054,569                           |  | 1,053,364                          |  | 1,094,055  |  |           | 
|                                
|Sub-total dilutive shares        |  | 3,770,988                           |  | 3,519,144                          |  | 3,743,891  |  |           | 
|                                
|Weighted average common          | 
|shares outstanding  diluted     |  | 27,959,757                          |  | 15,804,912                         |  | 22,880,812 |  | 12,193,816 | 

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

|              |  |                                     |  |                                    |  |           |  |           | 
|------------- |  | ----------------------------------- |  | ---------------------------------- |  | --------- |  | --------- | 
|              |  | Three Months Ended    September 30, |  | Nine Months Ended    September 30, | 
|              |  | 2006                                |  | 2005                               |  | 2006      |  | 2005      | 
|             
|Stock options |  | 2,161,155                           |  | 2,059,655                          |  | 2,161,155 |  | 2,059,655 | 
|Warrants      |  | 5,415,098                           |  | 2,760,000                          |  | 5,415,098 |  | 2,760,000 | 
|             
|Total         |  | 7,576,253                           |  | 4,819,655                          |  | 7,576,253 |  | 4,819,655 | 

Reclassifications
 Certain reclassifications have been made to prior year reported amounts to conform
with the 2006 presentation.

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 anticipates incurring a total
of approximately $820,000 of transaction costs related to the purchase of which $808,243
had been paid or accrued as of September 30, 2006. The purchased assets consist of trade
receivables, inventories, equipment and certain identifiable intangibles. To fund the
purchase, the Company raised $5,814,999 (net of $557,237 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.

8

---



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

Western
Medical was a privately held manufacturer and marketer of a line of specialty medical
textile compression, support and protective dressing products. For 2005, Western Medical
reported audited sales of $6,684,160, gross profit of $2,664,997 and net 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 anticipates being able to absorb Western Medicals business within its
existing operating infrastructure. 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
operation of Western Medical have been included in the consolidated financial statements
commencing April 18, 2006. A preliminary allocation of the approximate purchase price is outlined
below:

| |                                                          |   |           |  
| | -------------------------------------------------------- | - | --------- | -
| | Purchase Price:                                          |   |           |  
| | Cash paid                                                | $ | 6,000,000 |  
| | Promissory note bearing
        interest at 12%          |   | 500,000   |  
| | Estimated transaction costs                              |   | 820,000   |  
|
| | Total                                                    | $ | 7,320,000 |  
|
| | Allocation of Purchase Price:                            |  
|
| | Trade receivables                                        | $ | 461,000   |  
| | Inventory                                                |   | 1,222,000 |  
| | Equipment                                                |   | 484,000   |  
| | Goodwill                                                 |   | 3,600,000 |  
| | Identifiable intangibles
        subject to amortization |   | 2,120,000 |  
| | Accounts payable                                         |   | (567,000  | )
|
| | Total                                                    | $ | 7,320,000 |  

The
allocation of the preliminary purchase price to the estimated fair values of the assets
acquired and liabilities assumed as reflected in the unaudited condensed consolidated
financial statements is preliminary and subject to change based on finalization of the
Companys valuation. The Company is currently assessing the fair value of the
identifiable tangible and intangible assets acquired and liabilities assumed. A valuation
study is presently being conducted to establish the fair market value of the assets,
liabilities and the identifiable intangibles acquired. The identifiable intangible assets
acquired consist primarily of customer lists, trademarks, non-compete agreements and
product rights. Since the date of acquisition, the estimated identifiable intangibles have
been amortized to general administrative expense assuming a useful life of five years. The
final purchase price allocation to reflect the fair values of the assets acquired and
liabilities assumed will be based on managements ongoing evaluation and is expected
to be completed prior to the Companys 2006 year-end. Accordingly, the final
allocation of the purchase price may differ significantly from the preliminary allocation
and as such may have a significant impact on the amount of goodwill recorded and the
Companys future operating results.

The
Company retained certain Western Medical personnel through May 31, 2006 to perform sales
and marketing transition services with respect to the products acquired from Western
Medical. In addition, the Company entered into a one year sales and marketing agreement
with an affiliate of Western Medical to provide sales and marketing consulting services
relative to the products acquired by the Company. The sales and marketing agreement
requires payments of $15,000 monthly for the first four months and $7,500 for the last
eight months of the agreements term.

9

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

The
unaudited pro forma information below presents combined results of operations as if the
acquisition had occurred at the beginning of the periods presented instead of April 18,
2006. The pro forma information is based on historical results and is not necessarily
indicative of the results of operations of the combined entity had the acquisition
occurred at the beginning of the periods presented, nor is it necessarily indicative of
future results.

| |                               |                                      |  |  | 
| | ----------------------------- | ------------------------------------ |  |  | 
| |                               | Three Months EndedSeptember 30, 2005 | 
|
| | Revenues                      | $7,530,210                           | 
|
| | Net income                    | $343,329                             | 
| | Net income per common  share: |                                      | 
|
| | Basic                         | $0.01                                | 
| | Diluted                       | $0.01                                | 

| |                               |                                |  |             | 
| | ----------------------------- | ------------------------------ |  | ----------- | 
| |                               | Nine Months EndedSeptember 30, | 
| |                               | 2006                           |  | 2005        | 
|
| | Revenues                      | $22,820,435                    |  | $22,522,269 | 
|
| | Net income                    | $977,657                       |  | $647,127    | 
| | Net income per common  share: |                                | 
|
| | Basic                         | $0.04                          |  | $0.03       | 
| | Diluted                       | $0.04                          |  | $0.03       | 

Based
on the preliminary allocation of the purchase price, expected amortization of
identifiable intangible assets for each year ended September 30, 2007 through September
30, 2012 is $424,000.

3.     Inventories

Inventories
include the following:

| |                     |  |                   |  |                  |  | 
| | ------------------- |  | ----------------- |  | ---------------- |  | 
| |                     |  | September 30,2006 |  | December 31,2005 |  | 
|
| | Finished goods      |  | $2,653,846        |  | $2,516,114       |  | 
| | Work in process     |  | 83,809            |  | 144,390          |  | 
| | Packaging materials |  | 677,747           |  | 398,463          |  | 
| | Raw materials       |  | 1,039,827         |  | 809,696          |  | 
|
| | Total inventories   |  | $4,455,229        |  | $3,868,663       |  | 

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. At September 30, 2006 and December 31, 2005, $471,752 and
$1,080,561, respectively, were outstanding under the Agreement. Advances will be utilized
to fund strategic initiatives and general working capital requirements.

10

---



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

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 7.75% per annum. At September 30, 2006, 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. At
September 30, 2006, the Company was not in compliance with its U.S. line of credit
fixed charge ratio covenants due to planned capital spending in the Company's Canadian
manufacturing facility and partial repayment of the U.S. term loan. The U.S. lender
agreed to waive this covenant violation.

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
November 2005, the Company finalized the annual renewal of its revolving credit facility
(the Canadian Agreement) for a maximum principal amount of $716,000 ($800,000
Canadian) with its Canadian lender. The next annual review is expected to be completed in
the fourth quarter of 2006. At September 30, 2006 and December 31, 2005, the outstanding
balance under the Canadian Agreement was 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 $358,000 ($400,000 Canadian) or 40% of eligible inventory (as
defined), less priority claims. Interest on outstanding advances is payable monthly in
arrears at prime rate (as defined) plus 1.0%, or 7.0% for Canadian dollar advances and
9.75% for U.S. dollar denominated advances at September 30, 2006. 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 a number of
financial covenants governing minimum working capital, current ratios, tangible net worth,
interest coverage, total indebtedness to tangible net worth and total indebtedness to
adjusted pre-tax earnings. 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 $447,000 ($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 September 30, 2006, the
Company was in compliance with its Canadian line of credit debt covenants.

11

---



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

5.     Long-Term Debt

Long-term
debt includes the following:

| |                           |  |                   |  |                  |  | 
| | ------------------------- |  | ----------------- |  | ---------------- |  | 
| |                           |  | September 30,2006 |  | December 31,2005 |  | 
|
| | U.S. term loan            |  | $ 500,000         |  |                 |  | 
| | Promissory note           |  | 500,000           |  |                 |  | 
| | Canadian term loan        |  | 370,243           |  | $ 533,809        |  | 
| | Capital lease obligations |  | 101,880           |  | 140,609          |  | 
|
| | Total debt                |  | 1,472,123         |  | 674,418          |  | 
|
| | Less:  current maturities |  | 750,442           |  | 285,945          |  | 
|
| | Long-term debt            |  | $ 721,681         |  | $ 388,473        |  | 

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.
Interest on the outstanding principal balance is payable monthly in arrears at the prime
rate (as defined) plus 5.0%, but not less than 7.75 % per annum. At September 30, 2006,
the effective interest rate was 13.25%. The term loan is secured by all of the
Companys existing and after-acquired tangible and intangible U.S. assets and is
subject to the same conditions applicable to the U.S. operating line of credit (see Note
4). Until such time as the term loan is fully repaid, the Company is obligated to apply
annually its excess cash flow (as defined) and the proceeds from the sale of any assets or
stock to prepay the term loan. Upon full repayment of the loan, the Company is obligated
to pay the U.S. lender a termination fee of $10,000. The termination fee is being
amortized to interest expense over the three-year term of the loan.

Utilizing
funds received from the sale of common stock (see Note 6  Common Stock), on August
4, 2006 the Company accelerated the repayment of the U.S. term loan by making a payment of
$500,000 (without penalty). The payment was applied as a permanent reduction in reverse
order to the scheduled principal payments due under the terms of the loan. The balance of
the loan is repayable commencing October 1, 2006 in 18 monthly installments of $27,777
with a final payment on March 1, 2008.

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 each 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.

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 September 30, 2006. 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).

12

---



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

In
addition, the Canadian lender has granted Derma Sciences Canada Inc. a $447,000 ($500,000
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. As of September 30, 2006, there
were no outstanding advances against the line.

Capital
Lease Obligations

The
Company has three capital lease obligations for certain distribution and computer
equipment totaling $101,880 as of September 30, 2006. 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.

6.     Shareholders
Equity

Preferred
Stock

There
are 150,003 shares of series A convertible preferred stock outstanding at September 30,
2006. 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 September 30,
2006. 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 September 30,
2006. The series C preferred stock is convertible into common stock on a one-for-one
basis, bears no dividend, maintains a liquidation preference averaging $0.70 per share,
votes as a class on matters affecting the series C preferred stock and maintains voting
rights identical to the common stock on all other matters.

There
are 1,071,346 shares of series D convertible preferred stock outstanding at September 30,
2006. 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

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

During
the second and third quarters of 2006, the Company raised $5,814,999 (net of $557,237 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. Total common shares outstanding increased from 12,285,768 before
the transaction to 22,906,160 afterwards. The funds were used for the acquisition of
certain assets of Western Medical.

13

---



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

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
shall pay the balance due of $1,000,000, together with interest thereon at the annual rate
of 2.5%, not later than February 13, 2007. Through September 30, 2006, the Company has
incurred $17,198 of expenses related to this offering. The balance due is secured by a
promissory note issued to the Company by the Purchaser. During the period that there
remains any principal or interest due the Company under the promissory note, the Purchaser
shall be precluded from selling, transferring, pledging or otherwise alienating any shares
of the common stock. Further, in the event all principal and interest due under the
promissory note is not paid when due, the Company may, at its option, either enforce
payment in accordance with the promissory note or cancel any and all shares of common
stock for which payment has not been made.

The
$500,000 received on August 3, 2006 was used to pay down the U.S. term loan entered into
in connection with the acquisition of Western Medical (see Note 5). At September 30, 2006,
the note receivable for $1,000,000 was recorded as a reduction to shareholders
equity on the balance sheet.

Stock
Options

The
Company adopted the Stock Option Plan (the Plan) July 18, 1991 and has amended
the Plan several times, the latest being May 11, 2006. The number of shares of Common
Stock reserved for issuance pursuant to the Plan is 5,000,000 shares. The Plan authorizes
the Company to grant two types of equity incentives: (i) options intended to qualify as
incentive stock options (ISOs) as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, and (ii) nonqualified stock options
(NQSOs). The Plan authorizes options to be granted to directors, officers, key
employees and consultants of the Company, except that ISOs may be granted only to
employees. The Plan is administered by a committee of disinterested directors designated
by the Board of Directors (the Compensation Committee). Subject to the
provisions of the Plan, the Compensation Committee determines who is eligible to receive
stock options, together with the nature, amount, timing, exercise price, vesting schedule
and all other terms and conditions of the options to be granted.

Under
the Plan, ISOs and NQSOs may have a term of up to ten years. Stock options are not
assignable or transferable except by will or the laws of descent and distribution. Stock
options granted under the Plan which have lapsed or terminated revert to the status of
unissued and become available for reissuance. Stock options granted generally
vest 25% at the date of grant and 25% on each anniversary date of grant until fully
vested. The option exercise price is invariably established as the fair market value of
the common stock on the date of grant.

At
September 30, 2006, options to purchase 3,621,625 shares of the Companys Common
Stock at prices in the range of $0.37 to $5.00 per share were issued and outstanding under
the Plan. In addition to options granted under the Plan, at September 30, 2006 there are
2,236,655 options granted outside the Plan that were not approved by shareholders.

During
the nine-month period ended September 30, 2006 and 2005, the Company issued stock options
as outlined below:

|                                |                                                                     |  |         |  |           |  | 
|------------------------------- | ------------------------------------------------------------------- |  | ------- |  | --------- |  | 
|                                |                                                                     |  | 2006    |  | 2005      |  | 
|Number of stock options issued 
|                                | First quarter                                                       |  | 390,000 |  | 1,021,000 |  | 
|                                | Second quarter                                                      |  | 195,000 |  | 465,000   |  | 
|                                | Third quarter                                                       |  |        |  | 40,000    |  | 
|                               
|                               
|                                | Total nine months ended
                September 30, 2006 and 2005 |  | 585,000 |  | 1,526,000 |  | 
|                               
|Weighted-average exercise price
|                                | First quarter                                                       |  | $0.70   |  | $0.50     |  | 
|                                | Second quarter                                                      |  | $0.83   |  | $0.42     |  | 
|                                | Third quarter                                                       |  |        |  | $0.69     |  | 
|                                | Nine months ended September 30, 2006 and 2005                       |  | $0.74   |  | $0.48     |  | 

14

---



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

For
the nine-month period ended September 30, 2006 and 2005 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 nine-month period ended September 30, 2006 and 2005
were as follows:

| |                              |  |       |  |       |  | 
| | ---------------------------- |  | ----- |  | ----- |  | 
| |                              |  | 2006  |  | 2005  |  | 
| | Risk-free interest rate      |  |       |  |       |  | 
| | First quarter                |  | 4.60% |  | 4.25% |  | 
| | Second quarter               |  | 5.10% |  | 3.90% |  | 
| | Third quarter                |  |      |  | 3.90% |  | 
| | Volatility factor            |  |      
| | First quarter                |  | .675  |  | 1.376 |  | 
| | Second quarter               |  | .662  |  | 1.353 |  | 
| | Third quarter                |  |      |  | 1.326 |  | 
| | Dividend yield               |  | 0%    |  | 0%    |  | 
| | Expected option life (years) |  | 8.5   |  | 5     |  | 
| | Contractual life (years)     |  | 10    |  | 10    |  | 

The
risk-free rate utilized represents the five-year U.S. Treasury rate which approximates the
risk-free rate for the expected option life at the time of grant. The volatility factor is
calculated based on the twenty-four month-end closing prices of the Companys common
stock preceding the month of stock option grant. The twenty-four month time period was
selected since management believes it is representative of the Companys expected
volatility. The dividend yield is 0% since the Company does not anticipate paying
dividends in the near future. Based on the Companys historical experience, on
January 1, 2006 the Company adopted a stock option expected life of 8.5 years and a 1%
forfeiture rate.

A
summary of option activity as of September 30, 2006, and changes during the nine months
then ended, is presented below:

|                                  |  |           |   |                                |  |                                                  |  |                              | 
|--------------------------------- |  | --------- | - | ------------------------------ |  | ------------------------------------------------ |  | ---------------------------- | 
|Option Activity by Quarter        |  | Shares    |   | Weighted AverageExercise Price |  | Weighted AverageRemainingContractualTerm (Years) |  | Aggregate    Intrinsic Value | 
|                                 
|Outstanding at January 1, 2006    |  | 5,773,280 |   | $0.92                          |  |                                                  |  |                              | 
|Granted                           |  | 390,000   |   | $0.70                          | 
|                                 
|Outstanding at March 31, 2006     |  | 6,163,280 |   | $0.90                          | 
|                                 
|Granted                           |  | 195,000   |   | $0.83                          | 
|                                 
|Outstanding at June 30, 2006      |  | 6,358,280 |  
|                                 
|Granted                           |  |          |  
|Expired                           |  | (500,000  | )
|                                 
|Outstanding at September 30, 2006 |  | 5,858,280 |   | $0.94                          |  | 6.6                                              |  | $1,125,178                   | 
|                                 
|Exercisable at September 30, 2006 |  | 5,464,530 |   | $0.95                          |  | 6.4                                              |  | $1,097,803                   | 

For
the three and nine months ended September 30, 2006, no income tax benefit was recognized
related to stock option activity.

15

---



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

The
weighted-average grant-date fair value of options granted during the three months ended
September 30, 2005 was $0.59 per share. The weighted-average grant-date fair value of
options granted during the nine months ended September 30, 2006 and 2005 were $0.53 and
$0.42 per share, respectively.

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

| |                                         |  |                                      |  |                                     |  | 
| | --------------------------------------- |  | ------------------------------------ |  | ----------------------------------- |  | 
| |                                         |  | Three Months EndedSeptember 30, 2006 |  | Nine Months EndedSeptember 30, 2006 |  | 
|
| | Cost of sales                           |  | $  3,398                             |  | $  11,242                           |  | 
| | Distribution                            |  | 1,330                                |  | 2,049                               |  | 
| | Sales                                   |  | 3,610                                |  | 14,308                              |  | 
| | General and administrative              |  | 27,411                               |  | 100,434                             |  | 
|
| | Total stock option compensation expense |  | $35,749                              |  | $128,033                            |  | 

As
of September 30, 2006, there was $166,919 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.

The
Companys net income (loss) and income (loss) per common share and pro forma net loss
and loss per common share assuming compensation expense had been determined for the three
and nine months ended September 30, 2005 based on the fair value at the grant date for all
awards, using the Black-Scholes option pricing model consistent with the provisions of
SFAS 123 and SFAS 123R, and amortized ratably over the vesting period, instead of the
intrinsic value method under APB 25, are set forth below:

| |                                          |  |                                      |   |                                     |   | 
| | ---------------------------------------- |  | ------------------------------------ | - | ----------------------------------- | - | 
| |                                          |  | Three Months EndedSeptember 30, 2006 |   | Nine Months EndedSeptember 30, 2006 |   | 
|
| | Net income (loss) as reported            |  | $   43,105                           |   | $  (11,763                          | ) | 
| | Pro forma compensation expense           |  | (111,153                             | ) | (583,541                            | ) | 
|
| | Pro forma net loss                       |  | $  (68,048                           | ) | $(595,304                           | ) | 
|
| | Income (loss) per common share - basic   |  |                                     
| | As reported                              |  | $0.00                                |   | $(0.00                              | ) | 
| | Pro forma                                |  | $(0.00                               | ) | $(0.05                              | ) | 
|
| | Income (loss) per common share - diluted | 
| | As reported                              |  | $0.00                                |   | $(0.00                              | ) | 
| | Pro forma                                |  | $(0.00                               | ) | $(0.05                              | ) | 

16

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

Stock
Purchase Warrants

At
September 30, 2006, the Company had warrants outstanding to purchase 7,479,345 shares of
the Companys common stock as outlined below:

| |        |  |                    |  |                |  |                   |  | 
| | ------ |  | ------------------ |  | -------------- |  | ----------------- |  | 
| | Series |  | Number of Warrants |  | Exercise Price |  | Expiration Date   |  | 
|
| | F      |  | 1,309,441          |  | $0.57          |  | January 6, 2007   |  | 
| | 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  |  | 7,479,345          |  |               

In
April, 2006, the Company issued 2,655,098 series H warrants and 754,806 series I warrants
in conjunction with the acquisition of certain net assets of Western Medical (see Note 6
 Common Stock).

Shares
Reserved for Future Issuance

At
September 30, 2006, 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 outstanding                 |  | 5,858,280  | 
| | Common stock warrants outstanding (series F - I) |  | 7,479,345  | 
| | Restricted common stock grants                   |  | 175,000    | 
| |                                                 
| | Total common stock shares reserved               |  | 15,793,032 | 

Restricted
Common Stock

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

On
May 12, 2006, 175,000 shares of restricted common stock were granted to non-employee
members of the Companys board of directors and will vest three years from the date of the grant. The fair
market value at the date of grant, determined by the quoted market price, was $145,250.
The fair market value of the grant is being recognized to compensation expense over the
three year service period. For the three and nine months ended September 30, 2006, $12,105
and $18,158 was expensed, respectively.

A
summary of restricted common stock activity as of September 30, 2006, and the changes
during the three and nine months then ended, is presented below:

| |                                 |  |         |  |                                         |  | 
| | ------------------------------- |  | ------- |  | --------------------------------------- |  | 
| | Restricted Common Stock         |  | Shares  |  | Weighted-Average  Grant-Date Fair Value |  | 
|
| | Nonvested at January 1, 2006    |  | 0       |  | 0                                       |  | 
|
| | Granted                         |  | 175,000 |  | $0.83                                   |  | 
|
| | Nonvested at September 30, 2006 |  | 175,000 |  | $0.83                                   |  | 

At
September 30, 2006, the weighted-average remaining contractual term for the restricted
common stock grant is 2.61 years.

17

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

7.     Comprehensive Income

The
Companys comprehensive income was as follows:

| |                                         |  |                                 |                                |           |  |          |  |           |  
| | --------------------------------------- |  | ------------------------------- | ------------------------------ | --------- |  | -------- |  | --------- | -
| |                                         |  | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
| |                                         |  | 2006                            |                                | 2005      |  | 2006     |  | 2005      |  
|
| | Net income (loss) as reported           |  | $ 380,194                       |                                | $  43,105 |  | $768,704 |  | $(11,763  | )
| | Other comprehensive (loss) income:      | 
| | Foreign currency translation adjustment |  | (7,434                          | )                              | 259,721   |  | 211,950  |  | 192,983   |  
|
| | Comprehensive income                    |  | $ 372,760                       |                                | $302,826  |  | $980,654 |  | $ 181,220 |  

8.     Operating Segments

The Company
consists of three operating segments: wound care, wound closure-fasteners and skin care.
Products in the wound care segment consist of basic and advanced dressings, ointments and
sprays designed to treat wounds. Wound closure-fastener products include wound closure
strips, nasal tube fasteners, a variety of catheter fasteners and net dressings. The skin
care segment consists of bath sponges, antibacterial skin cleansers, hair and body soaps,
lotions and moisturizers designed to enable customers to implement and maintain successful
skin care/ hygiene programs.

Products
in all three operating segments are marketed to long-term care facilities, hospitals,
physicians, clinics, home health care agencies and other healthcare institutions. The
manufacture of basic and advanced wound care products, along with wound closure-fastener
products, are performed both internally and outsourced, while the manufacture of skin care
products is totally outsourced. Internally, the segments are managed at the gross profit
level. The aggregation or allocation of other costs by segment is not practical.

Segment
net sales and gross profit (loss) for the three and nine months ended September 30, 2006
and 2005 were as follows:

|               |  |                                       |  |                         |  |           |  |             |   |                  |  
|-------------- |  | ------------------------------------- |  | ----------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Three Months Ended September 30, 2006 |  |                         |  |          
|              
|               |  | Wound Care                            |  | Wound Closure-Fasteners |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $6,958,654                            |  | $652,167                |  | $265,486  |  |            |   | $ 7,876,307      |  
|              
|Gross profit   |  | 2,582,956                             |  | 311,743                 |  | 22,376    |  |            |   | 2,917,075        |  
|Total expenses |  |                                      |  |                        |  |          |  | $(2,536,881 | ) | (2,536,881       | )
|              
|Net income     |  | $   380,194                           | 

18

---



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

|               |  |                                       |  |                         |  |           |  |             |   |                  |  
|-------------- |  | ------------------------------------- |  | ----------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Three Months Ended September 30, 2005 |  |                         |  |          
|              
|               |  | Wound Care                            |  | Wound Closure-Fasteners |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $4,684,049                            |  | $657,471                |  | $370,937  |  |            |   | $ 5,712,457      |  
|              
|Gross profit   |  | 1,606,267                             |  | 333,916                 |  | 21,890    |  |            |   | 1,962,073        |  
|Total expenses |  |                                      |  |                        |  |          |  | $(1,918,968 | ) | (1,918,968       | )
|              
|Net income     |  | $     43,105                          | 

|               |  |                                      |  |                         |  |           |  |             |   |                  |  
|-------------- |  | ------------------------------------ |  | ----------------------- |  | --------- |  | ----------- | - | ---------------- | -
|               |  | Nine Months Ended September 30, 2006 |  |                         |  |          
|              
|               |  | Wound Care                           |  | Wound Closure-Fasteners |  | Skin Care |  | Other Costs |   | Total    Company |  
|              
|Net sales      |  | $18,302,522                          |  | $1,880,737              |  | $836,643  |  |            |   | $ 21,019,902     |  
|              
|Gross profit   |  | 6,886,849                            |  | 917,797                 |  | 21,992    |  |            |   | 7,826,638        |  
|Total expenses |  |                                     |  |                        |  |          |  | $(7,057,934 | ) | (7,057,934       | )
|              
|Net income     |  | $     768,704                        | 

|                    |  |                                      |   |                         |  |             |   |             |   |                  |  
|------------------- |  | ------------------------------------ | - | ----------------------- |  | ----------- | - | ----------- | - | ---------------- | -
|                    |  | Nine Months Ended September 30, 2005 |   |                         |  |            
|                   
|                    |  | Wound Care                           |   | Wound Closure-Fasteners |  | Skin Care   |   | Other Costs |   | Total    Company |  
|                   
|Net sales           |  | $ 14,435,532                         |   | $1,955,743              |  | $ 1,148,847 |   |            |   | $ 17,540,122     |  
|                   
|Gross profit (loss) |  | 4,749,805                            |   | 996,069                 |  | (72,195     | ) |            |   | 5,673,679        |  
|Total expenses      |  |                                     |   |                        |  |            |   | $(5,685,442 | ) | (5,685,442       | )
|                   
|Net income          |  | $     (11,763                        | )

The
following table presents net sales by geographic region.

| |               |  |                                 |  |                                |  |      |  |      | 
| | ------------- |  | ------------------------------- |  | ------------------------------ |  | ---- |  | ---- | 
| |               |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30, | 
| |               |  | 2006                            |  | 2005                           |  | 2006 |  | 2005 | 
|
| | United States |  | 58%                             |  | 46%                            |  | 53%  |  | 42%  | 
| | Canada        |  | 37%                             |  | 51%                            |  | 42%  |  | 54%  | 
| | Other         |  | 5%                              |  | 3%                             |  | 5%   |  | 4%   | 

United
States net sales for the three and nine months ended September 30, 2006 represent a higher
percentage of total net sales compared with 2005 which is attributable to the April 2006
acquisition of the Western Medical business and the growth of the United States private
label wound care business. Canada net sales for the three and nine months ended September
30, 2005 represent a higher percentage of total net sales compared with 2006 as a result
of the one-time estimated benefit of $1,840,000 related to the sale of inventory on hand
to fill the distribution pipeline in conjunction with the appointment of an exclusive
third party distributor for the Companys Canadian subsidiary in the second quarter
2005.

19

---



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

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

9.     Income Taxes

The
Company recorded a $19,000 provision for income taxes in the third quarter 2006
principally related to estimated federal alternative minimum taxes payable associated with
operating results for the nine months ended September 30, 2006.

The
Company is required to record a valuation allowance when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax asset depends on the Companys ability to generate
sufficient taxable income in the future. The Company has recognized a full valuation
allowance for the amount of net deferred tax asset at September 30, 2006 and December 31,
2005 since there is uncertainty as to the recoverability of the deferred tax asset.

20

---



Index

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

QUARTER ENDED
SEPTEMBER 30, 2006 COMPARED TO QUARTER
ENDED SEPTEMBER 30, 2005.

Results of Operations

Overview

The
2006 and 2005 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-fasteners 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-fastener 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 September 30, 2006 versus 2005 operating
results:

|                           |  |                             |   |               |   |              |   |        | 
|-------------------------- |  | --------------------------- | - | ------------- | - | ------------ | - | ------ | 
|                           |  | Quarter Ended September 30, |  
|                           |  | 2006                        |   | 2005          |   | Variance     |  
|                          
|Gross Sales                |  | $ 9,192,908                 |   | $ 6,825,971   |   | $ 2,366,937  |   | 34.7%  | 
|Sales adjustments          |  | (1,316,601                  | ) | (1,113,514    | ) | (203,087     | ) | 18.2%  | 
|                          
|Net sales                  |  | 7,876,307                   |   | 5,712,457     |   | 2,163,850    |   | 37.9%  | 
|Cost of sales              |  | 4,959,232                   |   | 3,750,384     |   | 1,208,848    |   | 32.2%  | 
|                          
|Gross profit               |  | 2,917,075                   |   | 1,962,073     |   | 955,002      |   | 48.7%  | 
|Gross profit percentage    |  | 37.0                        | % | 34.4          | %
|Operating expenses         |  | 2,389,818                   |   | 1,831,780     |   | 558,038      |   | 30.5%  | 
|Interest expense, net      |  | 106,505                     |   | 75,929        |   | 30,576       |   | 40.3%  | 
|Other expense, net         |  | 21,558                      |   | 11,259        |   | 10,299       |   | 91.5%  | 
|                          
|Total expenses             |  | 2,517,881                   |   | 1,918,968     |   | 598,913      |   | 31.2%  | 
|Income before income taxes |  | 399,194                     |   | 43,105        |   | 356,089      |   | 826.1% | 
|                          
|Provision for income taxes |  | 19,000                      |   |              |   | 19,000       |   |       | 
|                          
|Net income                 |  | $    380,194                |   | $      43,105 |   | $    337,089 |   | 782.0% | 

Gross to Net Sales
Adjustments

Gross
sales are adjusted for trade rebates, 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. 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 September 30, 2006, the trade rebate reserve would be overstated by
approximately $250,000. If the normal rebate cycle were one month greater than estimated
at September 30, 2006, the trade rebate reserve would be understated by approximately
$500,000. To minimize its cash outflow invested in rebates, distributors generally strive
to optimize the rebate credit submission process.

21

---



Index

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 accrual trade rebate 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.

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 have historically been accounted for as incurred.

Gross
to net sales adjustments comprise the following:

| |                        |  |                             |   |             |   | 
| | ---------------------- |  | --------------------------- | - | ----------- | - | 
| |                        |  | Quarter Ended September 30, |   |             |  
| |                        |  | 2006                        |   | 2005        |   | 
|
| | Gross Sales            |  | $ 9,192,908                 |   | $ 6,825,971 |   | 
|
| | Trade rebates          |  | (1,250,287                  | ) | (1,053,717  | ) | 
| | Medicaid rebates       |  | (2,562                      | ) | (8,717      | ) | 
| | Returns and allowances |  | (8,318                      | ) | (11,640     | ) | 
| | Cash discounts         |  | (55,434                     | ) | (39,440     | ) | 
|
| | Total adjustments      |  | (1,316,601                  | ) | (1,113,514  | ) | 
|
| | Net sales              |  | $ 7,876,307                 |   | $ 5,712,457 |   | 

Trade rebates
increased in the third quarter 2006 versus 2005 due to the continuing growth of rebate
intensive U.S. private label sales and the addition of incremental rebates associated with
the Western Medical business acquired in April 2006 partially offset by a decrease in the
level of sales subject to rebate (contract business) in other areas of the
Companys business. A continuing trend towards lower levels of Medicaid reimbursed
sales is responsible for the lower level of Medicaid rebates. Sales returns and allowances
were comparable period-to-period and on balance reflect a normal level of activity. The
increase in cash discounts reflects the growth of sales while discounts as a percentage of
sales remained relatively constant.

Rebate Reserve Roll
Forward

A
quarterly roll forward of the trade rebate accruals at September 30, 2006 and 2005 is
outlined below:

| |                                 |  |                             |   |             |   | 
| | ------------------------------- |  | --------------------------- | - | ----------- | - | 
| |                                 |  | Quarter Ended September 30, |   |             |  
| |                                 |  | 2006                        |   | 2005        |   | 
|
| | Beginning balance - July 1st    |  | $ 2,455,812                 |   | $ 1,398,013 |   | 
| | Rebates paid                    |  | (1,544,160                  | ) | (966,349    | ) | 
| | Rebates accrued                 |  | 1,250,287                   |   | 1,053,717   |   | 
|
| | Ending balance - September 30th |  | $ 2,161,939                 |   | $ 1,485,381 |   | 

The
$293,873 decrease in the third quarter 2006 trade rebate reserve principally reflects
scheduled annual U.S. private label rebate payments of $325,000, lower Canadian rebate
related sales resulting in lower rebates and an improvement in the transition related
timeliness of Western Medical rebate payments due since the acquisition in April 2006
partially offset by an increase in the level of rebate related U.S. private label and
Western Medical sales. 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 $87,368 increase in the third quarter 2005 trade rebate reserve reflects an increase
in the Canada reserve (first recorded in the second quarter 2005 in connection with the
commencement of the exclusive third party distribution agreement) due to higher rebate
related sales levels coupled with higher rebate intensive U.S. private label sales
partially offset by scheduled annual U.S. private label rebate payments.

22

---



Index

Net Sales and Gross Margin

The
following table highlights the September 30, 2006 versus 2005 product line net sales and
gross profit:

|                          |  |                             |  |            |  |             |   |        |  
|------------------------- |  | --------------------------- |  | ---------- |  | ----------- | - | ------ | -
|                          |  | Quarter Ended September 30, | 
|                          |  | 2006                        |  | 2005       |  | Variance    |  
|                         
|Product Line Net Sales   
|                         
|Wound care                |  | $6,958,654                  |  | $4,684,049 |  | $ 2,274,605 |   | 48.6%  |  
|Wound closure-fasteners   |  | 652,167                     |  | 657,471    |  | (5,304      | ) | (0.8%  | )
|Skin care                 |  | 265,486                     |  | 370,937    |  | (105,451    | ) | (28.4% | )
|                         
|Total                     |  | $7,876,307                  |  | $5,712,457 |  | $ 2,163,850 |   | 37.9%  |  
|                         
|Product Line Gross Profit
|                         
|Wound care                |  | $2,582,956                  |  | $1,606,267 |  | $ 976,689   |   | 60.8%  |  
|Wound closure-fasteners   |  | 311,743                     |  | 333,916    |  | (22,173     | ) | (6.6%  | )
|Skin care                 |  | 22,376                      |  | 21,890     |  | 486         |   | 2.2%   |  
|                         
|Total                     |  | $2,917,075                  |  | $1,962,073 |  | $ 955,002   |   | 48.7%  |  

Company
net sales increased $2,163,850, or 37.9%, to $7,876,307 in 2006 from $5,712,457 in 2005.
Canadian net sales increased $8,797, or 0.3%, to $2,905,646 in 2006 from $2,896,849 in
2005. This increase was driven by favorable exchange of $203,089, or 7.0% associated with
a 6.6% strengthening of the Canadian dollar partially offset by lower sales of $194,292,
or 6.7%. The sales decline is principally attributable to inventory adjustments on the
part of the Companys exclusive Canadian distributor and lower private label sales to
the Canadian distributor. In-market sales as measured by sales of the Companys
products reported by the distributor were up slightly. U.S. net sales increased
$2,155,053, or 76.5%, to $4,970,661 in 2006 from $2,815,608 in 2005. The increase was
driven by the addition of incremental Western Medical sales of $1,857,746 coupled with
continued growth of the private label business partially offset by the continued decline
in skin care sales due to competitive pressure. Excluding Western Medical sales, U.S.
sales were up $297,307, or 10.6%.

Company
gross profit increased $955,002, or 48.7% to $2,917,075 in 2006 from $1,962,073 in 2005.
Company gross profit margin percentage increased to 37.0% in 2006 from 34.4% in 2005.
Canadian gross profit increased $190,876, or 20.0%, to $1,143,878 in 2006 from $953,002 in
2005. Canadian gross profit margin increased to 39.4% in 2006 from 32.9% in 2005. The
increase in Canadian 2006 gross profit dollars was driven by improving margin dollars and
percentage on the continuing business, reflecting the combined impact of favorable
exchange, continuing improvement in manufacturing performance, higher unit volume
throughput thru the Toronto plant and the benefit of lower negotiated basic wound care
costs. U.S. gross profit increased $764,126, or 75.7%, to $1,773,197 in 2006 from
$1,009,071 in 2005. Gross profit margins remained relatively flat at 35.7% in 2006 versus
35.8% in 2005. The improvement in U.S. gross margin dollars reflects the combined impact
of higher sales, lower product costs from Canada and third party skin care product costs
associated with outsourcing the line in the third quarter 2005. The slight change in gross
margin percentage reflects the mitigating impact of incremental higher margined Western
Medical sales and the aforementioned product cost savings offset by increasing lower
margined private label sales and lower sales of the Companys higher margined
Dermagran and silver wound care products. Excluding Western Medical gross profit
contribution, U.S. gross profit was down $31,722, or 3.1% and the gross profit margin
percentage would have been 31.4%. The decrease in gross margin excluding Western Medical
reflects an unfavorable sales mix driven by increasing sales of lower margined private
label products.

23

---



Index

Wound
care sales increased $2,274,605, or 48.6%, to $6,958,654 in 2006 from $4,684,049 in 2005.
The increase was driven by a $1,823,358, or 54.0% increase in basic wound care sales and a
$451,246, or 34.6% increase in advanced wound care sales. Incremental Western Medical
sales of $1,857,746 and Canada sales of $8,797 (comprised of favorable exchange of
$203,089 partially offset by erosion of $194,292) and U.S. erosion of $43,185, or 9.0%
were responsible for the net increase in basic wound care sales. The advanced wound care
sales increase was principally driven by continued growth of the Companys private
label sales partially offset by softer demand for the Companys Dermagran and silver
wound care products.

Wound
care gross profit increased $976,689, or 60.8%, to $2,582,956 in 2006 from $1,606,267 in
2005. The gross profit margin percentage increased to 37.1% in 2006 from 34.3% in 2005.
The margin dollar increase and improved gross margin percentage reflects the increase in
sales, inclusion of higher than Company average Western Medical sales and the flow through
of lower product costs as a result of continued improvement in the Toronto manufacturing
operations and the benefit of lower basic wound care and silver product purchase prices.

Wound
closure-fastener sales decreased $5,304, or 0.8%, to $652,167 in 2006 from $657,471 in
2005. The non-recurrence of approximately $11,700 in residual sales of certain catheter
fasteners in 2005 associated with the loss of the Companys exclusive distribution
agreement for the sale of these products in August 2004 partially offset by a modest
increase in demand for the continuing products is responsible for the slight decrease.

Wound
closure-fastener gross profit decreased $22,173, or 6.6%, to $311,743 in 2006 from
$333,916 in 2005. The gross profit margin percentage decreased to 47.8% in 2006 from 50.8%
in 2005. The decrease in margin dollars reflects the lower sales and margin deterioration.
The margin deterioration is due principally to the combined impact of pricing pressure and
higher product costs.

Skin
care sales decreased $105,451, or 28.4%, to $265,486 in 2006 from $370,937 in 2005 due to
continuing competitive pressure. Skin care gross profit improved $486 to $22,376 in 2006
from $21,890 in 2005. The gross margin percentage increased to 8.4% in 2006 from 5.9% in
2005. Elimination of most of the fixed overhead associated with the former skin care
manufacturing facility that was closed in August 2005 and outsourcing production to lower
cost third parties have allowed the business to operate at slightly above break even while
the sales continue to decline.

Operating Expense

The
following table highlights September 30, 2006 versus 2005 operating expenses by type:

|                       |  |                             |  |             |  |           |  |       | 
|---------------------- |  | --------------------------- |  | ----------- |  | --------- |  | ----- | 
|                       |  | Quarter Ended September 30, | 
|                       |  | 2006                        |  | 2005        |  | Variance  | 
|                      
|Distribution           |  | $   470,918                 |  | $   389,807 |  | $  81,111 |  | 20.8% | 
|Marketing              |  | 122,224                     |  | 90,700      |  | 31,524    |  | 34.8% | 
|Sales                  |  | 520,121                     |  | 458,569     |  | 61,552    |  | 13.4% | 
|General administrative |  | 1,276,555                   |  | 892,704     |  | 383,851   |  | 43.0% | 
|                      
|Total                  |  | $2,389,818                  |  | $1,831,780  |  | $558,038  |  | 30.5% | 

Operating
expense increased $558,038, or 30.5%, to $2,389,818 in 2006 from $1,831,780 in 2005
including an increase of $45,393, or 2.5%, attributable to exchange associated with a 6.6%
strengthening of the Canadian dollar on the Canadian operations.

Distribution
expense increased $81,111, or 20.8%, in 2006 versus 2005. Expenses in Canada increased
$65,012 (including $18,762 expense related to exchange) while expenses in the U.S
increased $16,099. Excluding foreign exchange, distribution expense in Canada increased
$46,250, or 17.6% due principally to higher distribution fees associated with higher sales
and rates in 2006 versus 2005. The U.S. increase was attributable to incremental ongoing
personnel and supply costs associated with integrating Western Medical into the U.S.
distribution operation and other one-time Western Medical related transition costs.

Marketing
expense increased $31,524, or 34.8% in 2006 versus 2005. The increase reflects higher
compensation (due to a promotion), and travel and product development expenses in support
of the Companys expanded new product development initiatives.

24

---



Index

Sales
expense increased $61,552, or 13.4%, in 2006 versus 2005. Sales expense in Canada
increased $33,835 (including $6,801 expense related to exchange) while expenses in the
U.S. increased $27,717. Excluding foreign exchange, sales expense in Canada increased
$27,034, or 27.7% due to a higher level of sales support activities to expand market
visibility and improve contract compliance. The U.S. increase was attributable to
incremental consulting expenses of approximately $40,000 to assist in the integration of
the Western Medical business into the Company, incremental ongoing personnel costs
associated with integrating Western Medical into customer service operations and higher
buying group administrative fees partially offset by lower sales representative
compensation and travel costs due to an open position, sales commissions and the
non-recurrence of recruiting expenses incurred in 2005.

General
administrative expense increased $383,851 or 43.0%, in 2006 versus 2005. Expenses in
Canada decreased $20,367 (including $19,831 expense related to exchange) while expenses in
the U.S. increased $404,218. Excluding foreign exchange, general administrative expense in
Canada decreased $40,198, or 14.3%, due to lower compensation (eliminated a position in
the third quarter 2005), employee benefits due to a true-up of the allocation amongst the
various company cost centers, capital taxes due to a true up of the reserve together with
lower audit and information technology expenses. These reductions were partially offset by
incremental bonus, retirement and equity based compensation expenses. The U.S. increase of
$404,218 principally reflects a bonus accrual of $188,000 attributable to improved Company
financial performance, incremental intangible asset amortization expense of $91,000
related to the Western Medical acquisition, equity based compensation expense of
approximately $21,000, one-time Western Medical transition costs of $17,000 together with
higher salary and benefits, bad debt, accounting and consulting expenses, partially offset
by lower information technology and insurance costs.

Interest Expense

Interest
expense increased $30,576, or 40.3%, to $106,505 in 2006 from $75,929 in 2005. Interest
expense in Canada decreased $1,431 (net of $1,040 expense related to exchange) while
interest expense in the U.S. increased $32,007. The decrease in Canada reflects lower term
loan balances in 2006 versus 2005 partially offset by higher interest rates. Canadas
outstanding line of credit balance was reduced to zero by the end of June 2005 through use
of the one-time positive cash flow generated by implementation of the new distribution
agreement. The U.S. increase is due to incremental term loan and promissory note interest
and fees related to the Western Medical acquisition in April 2006. These increases were
partially offset by lower line of credit interest (despite higher interest rates) due to
lower outstanding average balances due to improved U.S. cash flow in 2006.

Other Income/Expense

Other
expense increased $10,299 to $21,558 in 2006 from $11,259 in 2005. Losses on disposal of
equipment and foreign exchange were the primary drivers of the increase.

Income Taxes

The
Company recorded a $19,000 provision for income taxes in the third quarter of 2006
relating to operating results for the nine months ended September 30, 2006. The provision
principally reflects an estimate of federal alternative minimum taxes payable after
utilization of available net operating loss carry forwards. No provision for income taxes
was recorded in the three months ended September 30, 2005 due to year-to-date net
operating losses and available net operating loss carry forwards.

Net Income

The
Company generated net income of $380,194, or $0.02 per share basic and $0.01 per share
fully diluted, in the third quarter 2006 compared to net income $43,105, or $0.00 per
share basic and $0.00 fully diluted, in the third quarter 2005.

25

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Index

NINE MONTHS ENDED
SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2005.

Results of Operations

Overview

The
following table highlights the nine months ended September 30, 2006 versus 2005 operating
results:

|                                  |  |                                 |   |              |   |              |   |        |  
|--------------------------------- |  | ------------------------------- | - | ------------ | - | ------------ | - | ------ | -
|                                  |  | Nine Months Ended September 30, |  
|                                  |  | 2006                            |   | 2005         |   | Variance     |  
|                                 
|Gross Sales                       |  | $ 24,700,417                    |   | $ 20,273,239 |   | $ 4,427,178  |   | 21.8%  |  
|Sales adjustments                 |  | (3,680,515                      | ) | (2,733,117   | ) | (947,398     | ) | 34.7%  |  
|                                 
|Net sales                         |  | 21,019,902                      |   | 17,540,122   |   | 3,479,780    |   | 19.8%  |  
|Cost of sales                     |  | 13,193,264                      |   | 11,866,443   |   | 1,326,821    |   | 11.2%  |  
|                                 
|Gross profit                      |  | 7,826,638                       |   | 5,673,679    |   | 2,152,959    |   | 38.0%  |  
|Gross profit percentage           |  | 37.2                            | % | 32.4         | %
|Operating expenses                |  | 6,766,282                       |   | 5,564,605    |   | 1,201,677    |   | 21.6%  |  
|Interest expense, net             |  | 298,700                         |   | 255,782      |   | 42,918       |   | 16.8%  |  
|Other income, net                 |  | (26,048                         | ) | (134,945     | ) | 108,897      |   | (80.7% | )
|                                 
|Total expenses                    |  | 7,038,934                       |   | 5,685,442    |   | 1,353,492    |   | 23.8%  |  
|Income (loss) before income taxes |  | 787,704                         |   | (11,763      | ) | 799,467      |   |       |  
|                                 
|Provision for income taxes        |  | 19,000                          |   |             |   | 19,000       |   |       |  
|                                 
|Net income (loss)                 |  | $    768,704                    |   | $   (11,763  | ) | $    780,467 |   |       |  

Gross to Net Sales
Adjustments

Gross
to net sales adjustments comprise the following:

| |                        |  |                                 |   |              |   | 
| | ---------------------- |  | ------------------------------- | - | ------------ | - | 
| |                        |  | Nine Months Ended September 30, |   |              |  
| |                        |  | 2006                            |   | 2005         |   | 
|
| | Gross Sales            |  | $ 24,700,417                    |   | $ 20,273,239 |   | 
|
| | Trade rebates          |  | (3,498,220                      | ) | (2,549,451   | ) | 
| | Medicaid rebates       |  | (9,690                          | ) | (22,137      | ) | 
| | Returns and allowances |  | (38,882                         | ) | (50,134      | ) | 
| | Cash discounts         |  | (133,723                        | ) | (111,395     | ) | 
|
| | Total adjustments      |  | (3,680,515                      | ) | (2,733,117   | ) | 
|
| | Net sales              |  | $ 21,019,902                    |   | $ 17,540,122 |   | 

Trade rebates
increased $948,769 in the first nine months 2006 versus 2005 due to the Companys
implementing an exclusive third party distribution agreement in the second quarter 2005
for its Canadian business, the continuing growth of rebate intensive U.S. private label
sales and the addition of incremental rebates associated with the Western Medical business
acquired in April 2006, partially offset by a decrease in the level of sales subject to
rebate (contract business) in other areas of the Companys U.S. business.
Implementing the third party distribution agreement was responsible for $849,767 of the
increase as the majority of the Canadian sales represent contract business subject to
rebate. A continuing trend towards lower levels of Medicaid reimbursed sales is
responsible for the lower level of Medicaid rebates. Sales returns and allowances were
down period to period as 2005 first quarter activity was unusually high due to an increase
in the level of shipping errors associated with upgrading the Companys supply chain
information technology systems. The increase in cash discounts reflects the growth of
sales while discounts as a percentage of sales remained relatively constant.

26

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Index

Rebate Reserve Roll
Forward

A
nine month roll forward of the trade rebate accruals at September 30, 2006 and 2005 is
outlined below:

| |                                 |  |                                 |   |              |   | 
| | ------------------------------- |  | ------------------------------- | - | ------------ | - | 
| |                                 |  | Nine Months Ended September 30, |   |              |  
| |                                 |  | 2006                            |   | 2005         |   | 
|
| | Beginning balance - January 1st |  | $ 1,600,172                     |   | $    253,815 |   | 
| | Rebates paid                    |  | (2,936,453                      | ) | (1,317,885   | ) | 
| | Rebates accrued                 |  | 3,498,220                       |   | 2,549,451    |   | 
|
| | Ending balance - September 30th |  | $ 2,161,939                     |   | $ 1,485,381  |   | 

The
$561,767 increase in the first nine months of 2006 trade rebate reserve reflects a
$483,730 increase to the Canadian reserve due to an adjustment to the reserve to reflect a
change in the underlying assumption used to calculate the rebate amount for certain
products and a modest build up of the exclusive distributors inventory, lower
rebates paid due to continuation of extended payment terms with one large customer and
incremental reserve requirements associated with the Western Medical business acquired in
April 2006. Partially offsetting these increases were scheduled annual U.S. private label
rebate payments of $325,000 in the third quarter, a reduction of $72,300 due to a change
in estimate to a prior period amount due and a decrease in the level of sales subject to
rebate in other areas of the Companys U.S. business. 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 $1,231,566 increase in the first nine
months of 2005 trade rebate reserve reflects a $1,131,813 incremental reserve associated
with implementing the third party distribution agreement in Canada in the second quarter
2005 coupled with the continued growth of the rebate intensive U.S. private label business
and lower rebates paid due to extended payment terms with two large customers, partially
offset by scheduled annual U.S. private label rebate payments.

The
ending balance consists of accrued rebates and third party deductions accrued by and paid
by the Company that are recorded in accrued liabilities. The ending balance at September
30, 2006 and 2005 consist of the following:

| |                                 |  |               |  |            |  | 
| | ------------------------------- |  | ------------- |  | ---------- |  | 
| |                                 |  | September 30, |  |            | 
| |                                 |  | 2006          |  | 2005       |  | 
|
| | Accrued rebates                 |  | $1,999,516    |  | $1,297,960 |  | 
| | Third party deductions recorded |  | 162,423       |  | 187,421    |  | 
| | in accrued liabilities          | 
| | Total                           |  | $2,161,939    |  | $1,485,381 |  | 

27

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Index

Net Sales and Gross Margin

The
following table highlights the September 30, 2006 versus 2005 product line net sales and
gross profit:

|                          |  |                                 |  |               |   |             |   |        |  
|------------------------- |  | ------------------------------- |  | ------------- | - | ----------- | - | ------ | -
|                          |  | Nine Months Ended September 30, | 
|                          |  | 2006                            |  | 2005          |   | Variance    |  
|                         
|Product Line Net Sales   
|                         
|Wound care                |  | $18,302,522                     |  | $ 14,435,532  |   | $ 3,866,990 |   | 26.8%  |  
|Wound closure-fasteners   |  | 1,880,737                       |  | 1,955,743     |   | (75,006     | ) | (3.8%  | )
|Skin care                 |  | 836,643                         |  | 1,148,847     |   | (312,204    | ) | (27.2% | )
|                         
|Total                     |  | $21,019,902                     |  | $ 17,540,122  |   | $ 3,479,780 |   | 19.8%  |  
|                         
|Product Line Gross Profit
|                         
|Wound care                |  | $  6,886,849                    |  | $   4,749,805 |   | $ 2,137,044 |   | 45.0%  |  
|Wound closure-fasteners   |  | 917,797                         |  | 996,069       |   | (78,272     | ) | (7.9%  | )
|Skin care                 |  | 21,992                          |  | (72,195       | ) | 94,187      |   | 130.5% |  
|                         
|Total                     |  | $  7,826,638                    |  | $   5,673,679 |   | $ 2,152,959 |   | 38.0%  |  

Company
net sales increased $3,479,780, or 19.8%, to $21,019,902 in 2006 from $17,540,122 in 2005.
Canadian net sales decreased $566,732, or 6.0%, to $8,900,990 in 2006 from $9,467,722 in
2005. This decrease was driven by the non-recurrence of an estimated $1,840,000 sales
benefit related to the sale of inventory on hand to fill the distribution pipeline in
conjunction with the appointment of an exclusive third party distributor for Canada in the
second quarter 2005, partially offset by growth of $475,563 and favorable exchange of
$797,705 associated with a 7.5% strengthening of the Canadian dollar. U.S. net sales
increased $4,046,512 or 49.9%, to $12,118,912 in 2006 from $8,072,400 in 2005. The
increase was driven by the addition of incremental Western Medical sales of $3,114,321
coupled with continued growth of the private label business, partially offset by the
continued decline in skin care sales due to competitive pressure and softening demand for
basic wound care products. Excluding Western Medical sales, U.S. sales were up $922,191,
or 11.4%.

Company
gross profit increased $2,152,959, or 38.0% to $7,826,638 in 2006 from $5,673,679 in 2005.
Company gross profit margin percentage increased to 37.2% in 2006 from 32.4% in 2005.
Canadian gross profit increased $491,954, or 16.6%, to $3,448,383 in 2006 from $2,956,459
in 2005. The Canadian gross profit margin increased to 38.7% in 2006 from 31.2% in 2005.
The improvement in Canadian 2006 gross profit dollars and margin percentage reflects the
combined impact of sales growth, favorable exchange, continuing improvement in
manufacturing performance, higher unit volume throughput thru the Companys Canadian
manufacturing operation and the benefit of lower negotiated basic wound care costs,
partially offset by the non-recurrence of an estimated $600,000 margin benefit related to
the one-time sale of inventory to fill the new Canadian distributors pipeline in the
second quarter 2005. U.S. gross profit increased $1,661,005, or 61.1%, to $4,378,255 in
2006 from $2,717,250 in 2005. The gross profit margin percentage increased to 36.1% in
2006 from 33.7% in 2005. The improvement in U.S. gross margin dollars and margin
percentage reflects the combined impact of higher sales, favorable product mix and the
benefit of lower wound care product costs from Canada and third party skin care product
costs associated with outsourcing the line in the third quarter 2005. Excluding Western
Medical, gross profit increased $340,569, or 12.5% and the gross profit margin percentage
would have been 34.0%.

Wound
care sales increased $3,866,990, or 26.8%, to $18,302,522 in 2006 from $14,435,532 in
2005. The increase is attributable to an advanced wound care increase of $967,765, or
42.6%. This increase was principally driven by continued growth of the Companys
private label sales. Basic wound care sales increased $2,447,979, or 22.6%. This
performance reflects incremental Western Medical sales of $3,114,321, incremental Canadian
sales of $1,273,268, or 16.7% on its continuing business comprised of favorable growth of
$475,563, or 6.2% and favorable exchange of $797,705, or 10.5%, partially offset by the
non-recurrence of the one-time estimated benefit of $1,840,000 related to implementation
of the exclusive distribution agreement in Canada in the second quarter 2005 and lower
U.S. sales of $99,610. The U.S. sales performance reflects a softening of demand for these
products. Advanced wound care sales increased $1,419,009, or 39.7% to $4,996,648 in 2006
from $3,577,639 in 2005. This increase was driven by continued growth of the U.S. private
label sales.

28

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Index

Wound
care gross profit increased $2,137,044, or 45.0%, to $6,886,849 in 2006 from $4,749,805 in
2005. The gross profit margin percentage increased to 37.6% in 2006 from 32.9% in 2005.
The margin dollar increase and improved gross margin percentage reflects the increase in
sales and the flow through of lower product costs as a result of continued improvement in
the Companys Canadian manufacturing operation and the benefit of lower basic wound
care and silver product purchase prices, partially offset by the non-recurrence of an
estimated $600,000 margin benefit related to the one-time sale of inventory to fill the
new Canadian distributors pipeline in the second quarter 2005.

Wound
closure-fastener sales decreased $75,006, or 3.8%, to $1,880,737 in 2006 from $1,955,741
in 2005. The non-recurrence of approximately $61,000 in residual sales of certain catheter
fasteners in 2005 associated with the loss of the Companys exclusive distribution
agreement for the sale of these products in August 2004 and a slight softening of demand
for the continuing products is responsible for the decrease.

Wound
closure-fastener gross profit decreased $78,272, or 7.9%, to $917,797 in 2006 from
$996,069 in 2005. The gross profit margin percentage decreased to 48.8% in 2006 from 50.9%
in 2005. The decrease in margin dollars reflects the lower sales and margin deterioration.
The gross margin percentage deterioration is due principally to the combined impact of
pricing pressure and higher product costs.

Skin
care sales decreased $312,204, or 27.2%, to $836,643 in 2006 from $1,148,847 in 2005 due
to continuing competitive pressure. Skin care gross profit improved $94,187 to $21,992
in 2006 from a $72,195 gross profit loss in 2005. The main driver for the margin
improvement is the non-recurrence of the one-time manufacturing facility closure costs of
$98,000 recorded in the second quarter 2005. The elimination of most of the fixed overhead
associated with the former skin care manufacturing facility that closed in August 2005 and
outsourcing production to lower cost third parties have allowed the business to operate at
essentially break even while the sales continue to decline.

Operating Expense

The
following table highlights September 30, 2006 versus 2005 operating expenses by type:

|                       |  |                                 |  |            |  |             |  |       | 
|---------------------- |  | ------------------------------- |  | ---------- |  | ----------- |  | ----- | 
|                       |  | Nine Months Ended September 30, | 
|                       |  | 2006                            |  | 2005       |  | Variance    | 
|                      
|Distribution           |  | $1,339,501                      |  | $1,166,839 |  | $   172,662 |  | 14.8% | 
|Marketing              |  | 391,398                         |  | 316,002    |  | 75,396      |  | 23.9% | 
|Sales                  |  | 1,575,693                       |  | 1,390,741  |  | 184,952     |  | 13.3% | 
|General administrative |  | 3,459,690                       |  | 2,691,023  |  | 768,667     |  | 28.6% | 
|                      
|Total                  |  | $6,766,282                      |  | $5,564,605 |  | $1,201,677  |  | 21.6% | 

Operating
expense increased $1,201,677, or 21.6%, to $6,766,282 in 2006 from $5,564,605 in 2005
including an increase of $161,443, or 2.9%, attributable to exchange associated with a
7.5% strengthening of the Canadian dollar on the Canadian operations.

Distribution
expense increased $172,662, or 14.8%, in 2006 versus 2005. Expenses in Canada increased
$160,262 (including $63,583 expense related to exchange) while expenses in the U.S
increased $12,400. Excluding foreign exchange, distribution expense in Canada increased
$96,679, or 10.1% due principally to higher distribution fees associated with higher sales
and rates in 2006 versus 2005. Partially offsetting this increase was the non-recurrence
of transition related costs associated with implementation of the new exclusive third
party distribution agreement in the second quarter 2005. The U.S. increase was
attributable to incremental ongoing personnel and supply costs associated with integrating
Western Medical into the U.S. distribution operation and other one-time Western Medical
related transition costs partially offset by the discontinuation in the third quarter 2005
of compensation related occupancy costs previously charged to distribution in connection
with the closure of the Skin Care manufacturing facility in August 2005.

29

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Index

Marketing
expense increased $75,396, or 23.9%, in 2006 versus 2005. The increase was principally
attributable to higher promotion and product development expense in support of the
Companys growth initiatives. Higher compensation (associated with an employee
promotion) and travel, also contributed.

Sales
expense increased $184,952, or 13.3%, in 2006 versus 2005. Expenses in Canada increased
$48,626 (including $30,427 expense related to exchange) while expenses in the U.S.
increased $136,326. Excluding foreign exchange, sales expense in Canada increased $18,199,
or 4.1% due principally to higher commission and operating expenses to expand sales
support activities to improve market visibility and contract compliance, partially offset
by cost savings initiatives implemented in 2005 and the non-recurrence of transition
related costs associated with implementation of the new exclusive third party distribution
agreement in the second quarter 2005. The U.S. increase was attributable to incremental
consulting expenses of approximately $81,000 to assist in the integration of the Western
Medical business into the Company, higher compensation associated with hiring two new
sales representatives in the third quarter 2005 (one of which subsequently resigned in May
2006 and has not yet been replaced) and incremental ongoing personnel costs associated
with integrating Western Medical into customer service operations, partially offset by
lower sales commissions, sample expense and the non-recurrence of recruiting expenses
incurred in 2005.

General
administrative expense increased $768,667, or 28.6%, in 2006 versus 2005. Expenses in
Canada increased $79,060 (including $67,433 expense related to exchange) while expenses in
the U.S. increased $689,607. Excluding foreign exchange, general administrative expense in
Canada increased $11,627, or 1.4%. The increase in Canada reflects higher compensation,
bonus and retirement benefit costs, higher travel costs principally to China and in
support of new private label business opportunities, employee stock option expense and
higher accounting costs. Partially offsetting these increases were cost savings
initiatives implemented in 2005, the non-recurrence of transition related expenses
associated with implementation of the new exclusive third party distribution agreement in
the second quarter 2005 and lower employee health benefit costs due to a true-up of the
allocation amongst the various company cost centers, capital taxes due to a true-up of the
reserve and bank charges. The U.S. increase of $689,607 principally reflects incremental
intangible asset amortization expense of $200,000 related to the Western Medical
acquisition, a bonus accrual of $188,000 attributable to improved Company financial
performance, equity based compensation expense of $103,000 and one-time Western Medical
transition costs of $54,000 together with higher bad debt $38,000, accounting $37,000,
legal, consulting and investor relations expenses. Partially offsetting these increases
were lower insurance and information technology expenses.

Interest Expense

Interest
expense increased $42,918 or 16.8%, to $298,700 in 2006 from $255,782 in 2005. Interest
expense in Canada decreased $34,534 (net of $6,395 expense related to exchange) while
interest expense in the U.S. increased $77,452. The decrease in Canada reflects lower
outstanding line of credit and term loan balances in 2006 versus 2005 partially offset by
higher interest rates. Canadas outstanding line of credit balance was reduced to
zero by the end of June 2005 through use of the one-time positive cash flow generated by
implementation of the new distribution agreement. The U.S. increase is due to incremental
term loan and promissory note interest and fees related to the Western Medical acquisition
in April 2006. These increases were partially offset by lower line of credit interest
(despite higher interest rates) due to lower outstanding average balances due to improved
U.S. cash flow in 2006.

Other Income/Expense

Other
income decreased $108,897 to $26,048 income in 2006 from $134,945 income in 2005. The main
driver for the decrease was the non-recurrence of a $164,300 gain recorded in the first
quarter 2005 associated with a one-time distribution agreement upset fee, partially offset
by the favorable settlement of a supplier liability of $64,971 in the first quarter 2006.
Higher exchange expense partially offset by higher profit sharing income and other
miscellaneous income in 2006, also contributed.

Income Taxes

The
Company recorded a $19,000 provision for income taxes in the third quarter 2006 relating
to operating results for the nine months ended September 30, 2006. The provision
principally reflects an estimate of federal alternative minimum taxes payable after
utilization of available net operating loss carry forwards. No provision for income taxes
was recorded in the nine months ended September 30, 2005 due to year-to-date net operating
losses and available net operating loss carry forwards.

Net Income (Loss)

The
Company generated net income of $768,704, or $0.04 per share basic and $0.03 per share
fully diluted, in the first nine months of 2006 compared to a net loss of $11,763, or
$0.00 loss per share (basic and diluted), in the first nine months of 2005.

30

---



Index

Liquidity and Capital
Resources

Operational Overview

Net
sales increased 29.3% (24.2% adjusted for foreign exchange and the exclusion of the 2005
one-time sales benefit for appointment of an exclusive distributor for Canada) in the
first nine months 2006 over 2005. This growth was driven by a sales increase in the U.S.
of 50.0%, partially offset by a decrease in Canadian sales of 6.0% (14.4% adjusted for
foreign exchange). Sales growth in the U.S. was driven by the addition of incremental
Western Medical sales of $3,114,321 (since April 18, 2006) and the continued growth of the
private label business. In addition, with the exception of skin care sales, overall U.S.
core product sales have remained relatively stable period to period with strength in some
areas offsetting softness in others. Skin care sales continue to deteriorate in the face
of significant competitive pressure. Excluding Western Medical sales, U.S. sales growth
was 12.4%. Adjusted for the non-recurrence of an estimated $1,840,000 sales benefit
related to the sale of inventory on hand to fill the distribution pipeline in conjunction
with the appointment of an exclusive third party distributor for Canada in the second
quarter 2005, sales in Canada increased 6.2% (16.7% adjusted for foreign exchange). This
performance mirrors recent historical growth rates but is slightly less than expected. The
Company continues to focus on contract compliance, explore opportunities in other market
segments (other than its traditional strength in the acute care segment) and work closely
with its new exclusive distributor to capitalize on sales growth opportunities presented
by this new relationship.

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 is 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 in 2006 stemming from lower
product costs.

Operating
expenses increased 21.6% (18.7% adjusted for foreign exchange) in the first nine months
2006 over 2005. The increase is attributable to incremental Western Medical costs
(intangible asset amortization, planned sales and marketing and one-time integration
expenses), non-cash equity based compensation expense commencing in 2006, planned
increases in Marketing and Sales expenses in support of the Companys growth
initiatives and higher accounting 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.

Excluding
a goodwill impairment charge in the fourth quarter 2005, the Company has reported
profitability in its last six quarters. 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 being able
to continue this trend going forward.

Western Medical Asset
Purchase

On
April 18, 2006, the Company acquired certain assets and assumed the trade payables 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 anticipates transaction expenses of $820,000 related to the purchase. The
purchased assets consist of trade receivables, inventory, equipment and certain
identifiable intangibles. To fund the purchase, the company raised $5,814,999 (net of
$557,237 in commissions and other offering expenses) from the private sale of 2,655,098
units at $2.40 per unit each unit

31

---



Index

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 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 Medicals 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.

Sale of 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 selling price of $1,500,000 to an existing
shareholder. The shareholder paid $500,000 on August 3, 2006 and shall pay the balance due
of $1,000,000, together with interest thereon at the annual rate of 2.5%, not later than
February 13, 2007. The balance due is secured by a promissory note issued to the Company
by the shareholder. At September 30, 2006, the $1,000,000 note receivable was recorded as
a reduction to shareholders equity on the balance sheet.

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. Upon receipt, the balance due of $1,000,000 will be used for general working
capital, debt service or strategic initiative support.

Cash Flow and Working
Capital

At
September 30, 2006 and December 31, 2005, the Company had cash and cash equivalents on
hand of $1,088,778 and $1,105,330, respectively. The $16,552 decrease reflects net cash
provided by operating activities of $1,512,628, net cash used in investing activities of
$7,504,403, net cash provided in financing activities of $5,917,650 and cash provided as a
result of exchange rate changes of $57,573. The September 2006 cash balance reflects
overall improved cash flow due to improving operations and the addition of the Western
Medical business, which was successfully absorbed into the Company while adding only a
modest amount of incremental overhead expense. This point is clearer given that the
December 2005 cash balance was higher than normal due to the timing of receipt of a large
Canadian receivable payment at year-end.

Net
cash provided in operating activities of $1,512,628 stems from $2,136,455 cash provided
from operations (net income plus non cash items) partially offset by $623,827 cash used
from the net change in operating assets and liabilities (excluding estimated Western
Medical operating assets and liabilities acquired as of the date of acquisition). Higher
receivables and payables, partially offset by an decrease in inventory were the main
drivers behind the net change in ongoing operating assets and liabilities. The increase in
receivables principally reflects the growing private label and Western Medical (post
acquisition) sales. The increase in accounts payable principally reflects an increase in
the level of inventory purchase related payables being carried to support the ongoing
Western Medical business (post acquisition). The decrease in inventory reflects the post
acquisition reduction of Western Medical inventory purchased as the inventory was
integrated into the Companys supply chain along with planned reductions in certain
products to better balance inventory on hand with demand and timing. The quantity of
inventory on hand for some products are temporarily lower than normal due to unexpected
increases in sales and/or production delays caused by the equipment and facility
improvement activities underway at the Companys manufacturing operation in Canada.

32

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Index

Net
cash used in investing activities of $7,504,403 reflects funds used for the acquisition of
Western Medical of $6,000,000 together with deferred business acquisition related expenses
of $758,866. In addition, $755,849 was expended principally on purchases of equipment at
the Companys manufacturing operation in Canada to expand manufacturing capability in
response to an increase in private label business and to bring the manufacture of the
Companys wound closure-fastener line of products in-house. Both of these initiatives
are anticipated to generate an above average long term return on investment.

Net
cash provided in financing activities of $5,917,650 reflects cash received of $6,297,801,
net of offering expenses of $574,435 from the private sale of common stock together with
term loan proceeds of $1,000,000 from the Companys U.S. lender, partially offset by
Western Medical asset purchase related deferred financing costs of $48,722 together with
the use of available funds to pay down the Companys outstanding line of credit
balance by $608,809 and make long-term debt repayments of $722,620.

Working
capital increased $1,478,507, or 44.1%, at September 30, 2006 to $4,833,300 from
$3,354,793 at December 31, 2005. The increase is principally attributable to the net
working capital acquired as part of the Western Medical asset purchase. Improving
operating performance also contributed. Working capital of this magnitude is considered
sufficient to support ongoing operations.

Financing Arrangements

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 September 30, 2006 were $3,328,000. Advances
outstanding against the line were $471,752 at September 30, 2006, leaving an additional
$2,856,248 available for borrowing.

In
November 2005, the Company renewed its annual revolving credit facility agreement with its
Canadian lender for a maximum principal amount of $716,000 ($800,000 Canadian). Maximum
potential advances under the agreement at September 30, 2006 were $262,000. Advances
outstanding against the agreement were zero at September 30, 2006, leaving $262,000
available for borrowing.

In
addition, the Canadian lender has granted Derma Sciences Canada Inc. a $447,000 ($500,000
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. As of September 30, 2006,
outstanding advances against the line were zero.

Prospective Assessment

The
Companys objective is to continue to grow sales and gross profit in 2006. Beginning
in 2005, the Company expanded its product development efforts. As a result of these
efforts, the Company expects to launch one new product before year-end and additional new
product launches are anticipated 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 growing as the existing business continues to grow 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 represents an opportunity for
sales growth in the near future. In addition, the Company recently 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-fastener line in-house during 2006 at a savings versus
existing third party sourced product costs is on schedule. The Company also anticipates
realizing savings when it begins sterilizing its China sourced products in China by the
end of 2006. Subject to commodity driven cotton prices and fluctuations in foreign
exchange, which are outside of the Companys control, the Company anticipates
continuing to build on its successful relationships in China to keep its basic wound care
costs competitive.

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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 is presently is in the midst of a two to three year program to upgrade its
capabilities. In addition, as a small business 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 expects to
incur significant one-time costs to comply beginning in the fourth quarter 2006 through
the first quarter 2008, 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.

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, available lines of credit and
receipt of payment for the $1,000,000 note receivable related to the August 2006 sale of
stock 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 and Pacific Stock
Exchanges 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, 2006:

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

As
of September 30, 2006, 15,793,032 shares of the Companys common stock were issuable
upon the conversion or exercise of outstanding convertible preferred stock, warrants and
options and the vesting of restricted shares (derivative securities). The
shares of common stock issuable upon conversion or exercise of derivative securities and
the vesting of restricted shares are substantial compared to the 24,906,160 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 conversion, exercise and vesting of all dilutive derivative
securities. Earnings per share of common stock would be substantially diluted by the
existence of these derivative securities regardless of whether they are converted or
exercised. 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 earned net income of $768,704 (unaudited) in the first nine months of 2006,
$22,241 in 2003, $61,368 in 2002 and $192,398 in 2001 and incurred losses of $909,104 in
2005, $2,338,693 in 2004, $2,581,337 in 2000 and $2,998,919 in 1999. At September 30,
2006, the Company had an accumulated deficit of $13,126,430 (unaudited). Although the
Company achieved profitability in the first nine months of 2006, in 2003, 2002 and 2001,
the Company cannot offer any assurance that it will be able to generate sustained or
significant earnings.

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Index

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 2005 and the first ten months of 2006 are set forth in
the table below:

| |                                            |       |       | 
| | ------------------------------------------ | ----- | ----- | 
| | Derma SciencesTrading 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 | $0.97 | 
| | (*) January 1 through October 31.          |       |       | 

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

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

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.

If members of the Companys
management and their affiliates were to exercise all warrants and options held by them,
and if substantially all of the shares of restricted stock reserved for issuance to
members of management were to be issued and vest, members of management and their
affiliates could acquire a majority of the voting stock of the Company.

The
executive officers and directors of the Company, together with institutions with which
they are affiliated, own substantial amounts of the Companys common stock, together
with outstanding options and warrants to purchase the Companys common stock. In
addition, the Company has adopted, and its shareholders have approved, a restricted stock
plan pursuant to which the Companys directors and executive officers may be awarded
up to 2,500,000 shares of restricted stock. Depending upon the warrants and options
exercised by outside investors, if directors and affiliates were to exercise their options
and warrants, and if restricted stock is awarded to the Companys directors and
executive officers and such awards vest, members of management and their affiliates could
obtain a majority of the Companys voting stock. As a result, these officers,
directors and affiliates of the Company would be in a position to significantly influence
the strategic direction of the Company, the composition of its board of directors and the
outcome of fundamental transactions requiring shareholder approval.

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Index

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.

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. 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. If the
assumptions used to calculate these rebates 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
make adjustments as necessary.

Goodwill

At
September 30, 2006, the Company had $3,800,072 of goodwill. The goodwill is comprised of
$3,600,072 included in the wound care segment representing a preliminary estimate relating
to the acquisition of Western Medical in April 2006. The remaining $200,000 balance
relates to the 1998 Sunshine acquisition and is included within the skin care segment. 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.

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Index

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 $35,749 and $128,033 in the three and nine months ended September 30,
2006, respectively, under SFAS 123R and $1,000 compensation under APB 25 in the nine
months ended September 30, 2005. Assuming compensation expense had been determined based
on the fair value at the grant date for all awards to employees, using the Black-Scholes
option pricing model consistent with the provisions of SFAS 123 and SFAS 123R, and
amortized ratably over the vesting period, instead of the intrinsic value method under APB
25, the Company would have recorded compensation expense of $111,153 and $583,541 for the
three and nine months ended September 30, 2005, respectively.

Recent Accounting
Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
is effective for calendar year companies on January 1, 2008. The Statement defines fair
value, establishes a framework for measuring fair value in accordance with Generally
Accepted Accounting Principles, and expands disclosures about fair value measurements. The
Statement codifies the definition of fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing the asset or
liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The Company does not expect the adoption of SFAS No. 157 to
have a material effect on its financial condition or results of operations.

In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N (SAB
108), Financial Statements  Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements,
which is effective for calendar year companies as of December 31, 2006. SAB 108 provides
guidance on how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes of determining
whether the financial statements are materially misstated. Under this guidance, companies
should take into account both the effect of a misstatement on the current year balance
sheet as well as the impact upon the current year income statement in assessing the
materiality of a current year misstatement. Once a current year misstatement has been
quantified, the guidance in SAB Topic 1M, Financial Statements 
Materiality, (SAB 99) should be applied to determine whether the
misstatement is material. The Company will adopt SAB 108 as of December 31, 2006. The
Company does not expect the adoption of SAB 108 to have a material effect on its financial
condition or results of operations.

In
July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: an Interpretation of FASB Statement No. 109 (FIN 48). FIN
48 clarifies the accounting for uncertainty involved in the recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires that the
Company recognize in the financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are effective as of the beginning of the
Companys 2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company does not
expect the adoption of FIN 48 to have a material effect on its financial condition or
results of operations.

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Index

In
May 2005, the FASB issued SFAS Statement 154, Accounting Changes and Error
Corrections  a Replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154). SFAS 154 changes the requirements of the
accounting for and reporting of a change in accounting principle. The provisions of SFAS
154 require, unless impracticable, retrospective application to prior periods
financial statements of (1) all voluntary changes in accounting principles and
(2) changes required by a new accounting pronouncement, if a specific transition is
not provided. SFAS 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for as a change in
accounting estimate, which requires prospective application of the new method. SFAS 154 is
effective for all accounting changes made in fiscal years beginning after
December 15, 2005. The Company adopted SFAS 154 during the first quarter of 2006 and
the adoption did not have a material effect on its financial condition or results of
operations.

Management
is not aware of any recently issued accounting pronouncement that became effective during
the nine months ended September 30, 2006 or that will become effective in a subsequent
period that has had or is anticipated to have a material impact on the Companys
consolidated financial statements.

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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 September 30, 2006. Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were 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.

During
the three months ended September 30, 2006, 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, 2006, 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

|                         |                                                                                              
|------------------------ | ---------------------------------------------------------------------------------------------
|                         | DERMA SCIENCES, INC.                                                                         
|                         |                                                                                              
|                         |                                                                                              
|Dated: November 13, 2006 | By:/s/ John E.
     Yetter
         John E. Yetter, CPA
         Chief Financial
     Officer

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Index

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