8-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 8-K/A


CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported):  November 9, 2007



Derma Sciences, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania	1-31070	23-2328753
(State or other jurisdiction	(Commission	(IRS employer
of incorporation)	File Number)	identification number)

214 Carnegie Center, Suite 300
Princeton, NJ 08540
(609) 514-4744
(Address including zip code and telephone
number, of principal executive offices)

        Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01. Completion of Acquisition or Disposition of Assets

        Derma Sciences, Inc. (referred to herein as the “Registrant”), amends its Current Report on Form 8-K filed November 9, 2007 and amended on January 14, 2008 concerning the acquisition by the Registrant of substantially all of the assets and the business of F.A. Products, L.P. The purpose of the amendment is the filing of financial statements and exhibits required by Item 9.01 of Form 8-K and Item 310(c) of Regulation S-B.

Item 9.01. Financial Statements and Exhibits

(a)  Financial Statements of Business Acquired.

        The audited balance sheets as of September 29, 2007 and September 30, 2006 and statements of income, cash flows and changes in stockholders’ equity for the years ended September 29, 2007 and September 30, 2006 of F.A. Products, L.P. are filed herewith as Exhibit 99.1.

(b)  Pro Forma Financial Information.

        The unaudited pro forma condensed consolidated balance sheet at September 30, 2007 and the pro forma condensed consolidated statements of income for the nine months ended September 30, 2007 and the year ended December 31, 2006 of the Registrant and F.A. Products, L.P. are filed herewith as Exhibit 99.2.

(d)  Exhibits

23.1 Consent of Vitale, Caturano & Company, Ltd.

99.1 Audited balance sheets as of September 29, 2007 and September 30, 2006 and statements of income, changes in stockholders’ equity and cash flows for the years ended September 29, 2007 and September 30, 2006 of F.A. Products, L.P.

99.2 Unaudited pro forma condensed consolidated balance sheet at September 30, 2007 and the pro forma condensed consolidated statements of income for the nine months ended September 30, 2007 and the year ended December 31, 2006 of the Registrant and F.A. Products, L.P.

2

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

	DERMA SCIENCES, INC.
	By:	/s/ John E. Yetter
		John E. Yetter, CPA Vice President and Chief Financial Officer
Date: January 24, 2008

3

EXHIBIT INDEX

23.1 Consent of Vitale, Caturano & Company, Ltd.

99.1 Audited balance sheets as of September 29, 2007 and September 30, 2006 and statements of income, changes in stockholders’ equity and cash flows for the years ended September 29, 2007 and September 30, 2006 of F.A. Products, L.P.

99.2 Unaudited pro forma condensed consolidated balance sheet at September 30, 2007 and the pro forma condensed consolidated statements of income for the nine months ended September 30, 2007 and the year ended December 31, 2006 of the Registrant and F.A. Products, L.P.

EX-23

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

As independent public accountants, we hereby consent to the incorporation of our report on F.A. Products, L.P. dated January 22, 2008 included in this Form 8-K/A of Derma Sciences, Inc. into Derma Sciences, Inc.‘s previously filed registration statements on Form S-3 Nos. 333-123940, 333-135038, 333-138303 and 333-128332 and Form S-8 File No. 333-127527.

s/  Vitale, Caturano & Company, Ltd.

VITALE, CATURANO & COMPANY, Ltd.

Boston, Massachusetts
January 22, 2008

EX-99

Exhibit 99.1

F.A. PRODUCTS, L.P.

FINANCIAL STATEMENTS
Years Ended September 29, 2007 and September 30, 2006

C O N T E N T S

		Page
Independent Auditor's Report		1
Financial Statements:
	Balance Sheets	2
	Statements of Operations	3
	Statements of Changes in Net Parent Company Investment	4
	Statements of Cash Flows	5
	Notes to Financial Statements	6-12

INDEPENDENT AUDITOR’S REPORT

To F.A. Products, L.P.

We have audited the accompanying balance sheets of F.A. Products, L.P. (a Delaware limited partnership), a wholly owned subsidiary of NutraMax Products, Inc., as of September 29, 2007 and September 30, 2006, and the related statements of operations, changes in net parent company investment and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of F.A. Products, L.P. as of September 29, 2007 and September 30, 2006 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

s/  VITALE, CATURANO & COMPANY, LTD.

VITALE, CATURANO & COMPANY, LTD.

January 22, 2008
Boston, Massachusetts

Page 2

F.A. PRODUCTS, L.P.
Balance Sheets
September 29, 2007 and September 30, 2006
(in thousands)

	2007	2006
ASSETS
Current assets:
Cash	$         1	$         2
Accounts receivable, less allowance for doubtful accounts
of $178 and $123 in 2007 and 2006, respectively	2,158	2,063
Inventories	4,025	3,956
Prepaid expenses and other current assets	158	597
Total current assets	6,342	6,618
Property, plant and equipment, net	681	708
Other assets	132	133
	$  7,155	$  7,459
LIABILITIES AND NET PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable	$  1,817	$  1,404
Accrued expenses	588	749
Deferred revenue	345	367
Total current liabilities	2,750	2,520
Total liabilities	2,750	2,520
Commitments and contingencies (Note 5)
Net parent company investment	4,405	4,939
	$  7,155	$  7,459

The accompanying notes are an integral part of these financial statements.

Page 3

F.A. PRODUCTS, L.P.
Statements of Operations
Years Ended September 29, 2007 and September 30, 2006
(in thousands)

	2007		2006
Net sales	$  16,688		$  20,022
Cost of sales	15,456		16,740
Gross profit	1,232		3,282
Selling, general and administrative expenses	2,065		2,437
Income (loss) from operations	(833	)	845
Other expenses	47		-
Net income (loss)	$      (880	)	$       845

The accompanying notes are an integral part of these financial statements.

Page 4

F.A. PRODUCTS, L.P.
Statements of Changes in Net Parent Company Investment
Years Ended September 29, 2007 and September 30, 2006
(in thousands)

	Net Parent Company Investment
Net parent company investment, October 1, 2005	$    7,932
Net parent company distributions	(3,838	)
Net income	845
Net parent company investment September 30, 2006	4,939
Net parent company contributions	346
Net loss	(880	)
Net parent company investment, September 29, 2007	$    4,405

The accompanying notes are an integral part of these financial statements.

Page 5

F.A. PRODUCTS, L.P.
Statements of Cash Flows
Years Ended September 29, 2007 and September 30, 2006
(in thousands)

	2007		2006
Cash flows from operating activities:
Reconciliation of net loss to net cash
used in operating activities:
Net income (loss)	$   (880	)	$    845
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation	114		128
Gain on sale of property and equipment	-		(16	)
Provision for doubtful accounts	25		111
Changes in assets and liabilities:
Asset (increase) decrease:
Accounts receivable	(120	)	990
Inventories	(69	)	2,254
Prepaid expenses and current other assets	439		20
Other long-term assets	1		(101	)
Liability increase (decrease):
Accounts payable	413		157
Accrued expenses	(162	)	(51	)
Deferred revenue	(22	)	(469	)
Net cash provided by (used in) operating activities	(261	)	3,868
Cash flows from investing activities:
Purchase of property and equipment	(86	)	(46	)
Proceeds from sale of equipment	-		16
Net cash used in investing activities	(86	)	(30	)
Cash flows from financing activities:
Net contributions from parent company	346		-
Net distributions to parent company	-		(3,838	)
Net cash provided by (used in) financing activities	346		(3,838	)
Net decrease in cash	(1	)	-
Cash, beginning of year	2		2
Cash, end of year	$        1		$        2

The accompanying notes are an integral part of these financial statements.

Page 6

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

1. THE COMPANY

F.A. Products, L.P. (the Company) is a limited partnership formed under Delaware law. The Company is a manufacturer and marketer of private-label first aid products located in Houston, Texas. The Company is a wholly owned subsidiary of NutraMax Products, Inc. (NutraMax), a privately owned Delaware Corporation. Other entities wholly owned by NutraMax own all of the Company’s general and limited partnership units.

On November 8, 2007, NutraMax entered into an Agreement pursuant to which Derma Sciences, Inc., a publicly traded New Jersey corporation, acquired substantially all of the Company’s assets, and assumed certain liabilities and post closing obligations under assigned contracts.

The accompanying financial statements reflect the allocation to the Company of NutraMax’s common expenditures. Such allocations have been made in accordance with SEC Staff Accounting Bulletin (SAB) No. 55, Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.

The accompanying financials statements reflect substantially all of the Company’s costs of doing business, including those incurred by NutraMax on the Company’s behalf. Costs that are clearly identifiable as being applicable to the Company’s business have been allocated to the Company. The most significant costs included in this category are certain corporate selling, general, and administrative expenses, such as salaries, sales commissions and professional fees. Costs of centralized operations that serve all NutraMax operations have been allocated, where such allocations would be material, using relevant allocation measures, such as estimated time worked for salary and benefits of certain centralized personnel. Corporate costs that clearly relate to businesses or other subsidiaries that were retained by NutraMax or that do not provide any significant direct or indirect benefit to the Company have not been allocated to the Company. As discussed in Note 2, the Company accounts for income taxes using the separate return method, pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The Company does not have any indebtedness with NutraMax or other affiliated entities, and NutraMax does not allocate to the Company interest expense associated with general corporate borrowing. The Company believes that the allocation methods described herein are reasonable and fairly reflect its financial position and results of operations.

Parent Company investment consists of the nominal original capital investment by NutraMax (or related entities) and the subsequent net cash flows to/from NutraMax and the Company.

NutraMax facilitates all cash transactions associated with the Company’s business. The Company and NutraMax do not contemplate settlement of the resulting intercompany balances, therefore they are considered capital transactions. The receipt of amounts due or payment of expenses by NutraMax on behalf of the Company result in a parent company contribution or distribution, as applicable. The net contribution or distribution is recorded as an increase or decrease, respectively, in net parent company investment in the statement of changes in parent company investment.

Page 7

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The Company reports on a 52-53 week fiscal year ending on the Saturday closest to the last day in September. The Company’s fiscal years ending September 29, 2007 and September 30, 2006 were both 52 week fiscal years.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off against the allowance when identified. At September 29, 2007 and September 30, 2006 the allowance for doubtful accounts was $178 and $123, respectively.

Inventories

Raw materials, work-in-process and finished goods inventories are stated at the lower of cost (first-in, first-out method) or market. Raw materials inventory consists of items used in the manufacturing process. Work-in-process inventory represents materials released into production and labor and overhead applied on a job-order cost basis. Finished goods inventory includes goods awaiting shipment to fulfill open sales orders.

The Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage. The Company records, as a charge to cost of sales, any amounts required to reduce the basis of the inventory to net realizable value.

Property, Plant and Equipment

Property and equipment are recorded at cost. Additions and improvements are capitalized, and ordinary repairs and maintenance are charged to expense as incurred.

Page 8

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...continued

Property, Plant and Equipment...continued

The Company provides for depreciation on property and equipment on the straight-line basis over their estimated useful lives, as follows:

Asset Classification	Useful Life
Leasehold improvements	Life of lease
Machinery, equipment, molds, tools
and furniture and fixtures	2 - 7 years
Packaging development costs	4 years

Long-Lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the asset’s carrying amount over the fair value of the asset, while long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. As of September 29, 2007 and September 30, 2006, the Company does not believe that any impairment of its long-lived assets has occurred.

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Product sales are recorded at the time of shipment, or upon delivery, depending on the terms of the order, provided that persuasive evidence of an arrangement exists, the seller’s price to the buyer is fixed or determinable and collectibility is reasonably assured. In accordance with EITF No. 01-09 Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), sales are recorded net of discounts, rebates and other related customer consideration on the accompanying statements of operations. Also, pursuant to SFAS No. 48 Revenue Recognition When Rights of Return Exists, revenue is presented net of expected returns.

Deferred revenue on the accompanying consolidated balance sheets represent goods in transit that have been billed, but for which title has not yet passed. Deferred revenue as of September 29, 2007 and September 30, 2007 amounted to $345 and $367, respectively.

Shipping and Handling Costs

In accordance with EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs, the Company records any amounts billed to a customer in a sales transaction related to shipping and handling as revenue, with the related costs reflected as selling, general, and administrative expenses in the accompanying statements of operations.

Page 9

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...continued

Income Taxes

The Company files information returns with United States federal and state agencies. As a partnership, tax basis income and losses are passed through to the individual partners (NutraMax) and, accordingly, there is no provision for income taxes for the Company. The tax-basis income and losses may differ from the income and losses in the accompanying statements of operations, which is prepared in accordance with generally accepted accounting principles.

Fair Value of Financial Instruments

Financial instruments held or used by the Company consist of cash, accounts receivable, and accounts payable. Given the nature of the items considered financial instruments, management believes that their carrying values approximate fair value for all financial instruments at September 29, 2007 and September 30, 2006.

Concentration of Credit Risk and Significant Customers

Financial instruments that subject the Company to credit risk concentrations consist of accounts receivable. The Company has not experienced significant losses related to individual customers or groups of customers in any particular industry or geographic area. For the years ended September 29, 2007 and September 30, 2006, no one customer accounted for over 10% of sales. As of September 30, 2006, there was one customer that individually accounted for 13% of accounts receivable. As of September 29, 2007, no one customer accounted for over 10% of accounts receivable.

Stock-Based Compensation

NutraMax allocates to the Company compensation associated with share-based payments, generally options to purchase NutraMax common stock. For the years ended September 29, 2007 and September 30, 2006, such amounts were immaterial.

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company adopted this statement as of October 1, 2006 and the impact was not significant.

Page 10

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...continued

Recent Accounting Pronouncements...continued

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes, and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 as of October 1, 2006 and the impact was not significant.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Interpretation No. 48 (” FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for nonpublic companies for fiscal years beginning after December 15, 2007. Management does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value, provides a framework for measuring fair value under U.S. generally accepted accounting principles and expands disclosure requirements about fair value measurements. SFAS No. 157 is effective for financial statements issued in fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value on a recurring basis. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Standards No. 159 (“FASB 159”), The Fair Value Option for Financial Assets and Financial Liabilities -- Including an Amendment of FASB Statement No. 115. This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this standard will have a material effect on the Company’s financial position, results of operations or cash flows.

Page 11

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

3. INVENTORIES

At September 29, 2007 and September 30, 2006, inventories consisted of the following:

	2007	2006
Raw materials	$     766	$  1,088
Work-in-process	131	934
Finished goods	3,128	1,934
	$  4,025	$  3,956

4. PROPERTY, PLANT AND EQUIPMENT

As of September 29, 2007 and September 30, 2006, property, plant and equipment consisted of the following:

	2007	2006
Leasehold improvements	$   764	$   764
Machinery, equipment, molds, tools   and furniture and fixtures	2,988	2,988
Package development costs	91	39
	3,843	3,791
Less - accumulated depreciation	3,162	3,083
	$   681	$   708

Depreciation expense for the years ended September 29, 2007 and September 30, 2006 was $114 and $128, respectively.

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its Houston, Texas facility under a noncancelable operating lease. Rent expense amounted to $957 and $953 for the years ended September 29, 2007 and September 30, 2006, respectively.

Page 12

F.A. PRODUCTS, L.P.
Notes to Financial Statements
Years Ended September 29, 2007 and September 30, 2006
(in thousands, except share amounts)

5. COMMITMENTS AND CONTINGENCIES...continued

Operating Leases...continued

        Future minimum lease payments under noncancelable operating leases for the fiscal years ending are as follows:

2008	$       961
2009	965
2010	969
2011	973
Thereafter	8,973
	$    12,841

Contingencies

From time to time, the Company has been named as a defendant in legal proceedings that have arisen in the normal course of business. Although the amount of damages that could result from any litigation cannot be predicted, in the opinion of management, the Company’s potential liability on all known claims would not have a material adverse effect on its financial position.

6. EMPLOYEE BENEFIT PLANS

The Company’s employees are participants in the NutraMax 401(k) savings plan (the 401(k) Plan) covering substantially all employees. The 401(k) Plan is subject to certain minimum age and length of employment requirements. Under the 401(k) Plan, the Company matches 50% of each participant’s eligible contributions for the plan year, subject to certain limitations. In addition, the Company has a profit sharing plan, funded by discretionary Company contributions. The 401(k) Plan expense charged to operations was approximately $25 and $64 for the years ended September 29, 2007 and September 30, 2006, respectively. NutraMax did not make a contribution to the profit sharing plan in fiscal 2007 or 2006.

7. SUBSEQUENT EVENTS

In November of 2007, NutraMax sold substantially all of the Company’s assets to Derma Sciences, Inc (Derma), a publicly-traded corporation. Derma also assumed certain liabilities and post closing obligations under assigned contracts. NutraMax received proceeds of approximately $10,000 on the date of the sale, with an additional $3,000 of contingent consideration payable if and when certain performance targets are met by the Company.

EX-99

Exhibit 99.2

Derma Sciences, Inc.

Unaudited Pro Forma Condensed Consolidated Financial Statements
for the Nine Months Ended September 30, 2007 and Year Ended December 31, 2006

Index to Condensed Financial Statements

	PAGE
Basis of Presentation	2
Condensed Balance Sheet as of September 30, 2007 (Unaudited)	3
Condensed Statement of Operations for the Nine Months ended       September 30, 2007 (Unaudited)	4
Condensed Statement of Operations for the Year ended       December 31, 2006 (Unaudited)	5
Notes to Condensed Financial Statements (Unaudited)	6

Basis of Presentation

        The accompanying Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2007 and Pro Forma Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and the year ended December 31, 2006, are based on the audited and unaudited historical financial statements of Derma Sciences, Inc. (the “Company”) and F.A. Products, L.P. (“FAP”). The acquisition of substantially all of the assets of FAP by the Company consummated on November 8, 2007 will be accounted for using the purchase method of accounting as of and from that date. The Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2007 was prepared assuming the FAP acquisition was completed on September 30, 2007. The Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2007 was prepared assuming the FAP acquisition was completed on January 1, 2007. The Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2006 was prepared assuming the FAP acquisition was completed on January 1, 2006.

        The Unaudited Pro Forma financial statements are presented for informational purposes only. The Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations do not purport to represent what the Company’s actual financial position or results of operations would have been had the acquisition of FAP occurred as of such dates, or to project the Company’s financial position or results of operations for any subsequent period or date, nor does it give effect to any matters other than those described in the notes hereto. In addition, the allocation of the purchase price by the Company to the assets and liabilities of FAP it acquired is preliminary. The final allocation which will be made on the basis of the estimated fair values of such assets and liabilities as of November 8, 2007 may differ from the amounts reflected herein. The Unaudited Pro Forma Condensed Consolidated Balance Sheet and Unaudited Pro Forma Statements of Operations should be read in conjunction with the Company’s historical financial statements contained in its Annual Report on Form 10-KSB for the year ended December 31, 2006 and Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007 previously filed with the Securities and Exchange Commission and the historical audited and unaudited financial statements of FAP contained herein.

2

DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
September 30, 2007

ASSETS		Derma Sciences			FAP		Seller Excludables (1)			Transaction Funding (2)			Allocation of Purchase Price (3)			Total Pro Forma Adjustments			Consolidated Pro Forma
Current Assets
Cash	$	674,871		$	1,000	$	(1,000	)	$	(674,871	)		-		$	(675,871	)		-
Accounts receivable, net		2,111,042			2,158,000		-			-			-			-		$	4,269,042
Inventories		6,386,112			4,025,000		-			-			-			-			10,411,112
Prepaids and other current assets		311,495			158,000		(158,000	)		-			-			(158,000	)		311,495
Total current assets		9,483,520			6,342,000		(159,000	)		(674,871	)		-			(833,871	)		14,991,649
Equipment and improvements		4,742,648			681,000		(681,000	)		-		$	300,000			(381,000	)		5,042,648
Goodwill		2,441,542			-		-			-			6,254,000			6,254,000			8,695,542
Other intangible assets, net		2,787,577			-		-			-			3,000,000			3,000,000			5,787,577
Investment in FAP		-			-		-			13,000,000			(13,000,000	)		-			-
Other assets, net		322,056			132,000		(132,000	)		1,410,000			(920,000	)		358,000			812,056
Total assets	$	19,777,343		$	7,155,000	$	(972,000	)	$	13,735,129		$	(4,366,000	)	$	8,397,129		$	35,329,472
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit borrowings	$	11,607			-		-		$	2,195,135			-		$	2,195,135		$	2,206,742
Current maturities LTD		86,616			-		-			1,200,000			-			1,200,000			1,286,616
Accounts payable		1,305,545			1,817,000		-			-			-			-			3,122,545
Accrued expenses and other current liabilities		1,179,786			588,000		(588,000	)		-			-			(588,000	)		1,179,786
Deferred Revenue		-			345,000		(345,000	)		-			-			(345,000	)		-
Total current liabilities		2,583,554			2,750,000		(933,000	)		3,395,135			-			2,462,135			7,795,689
Long term debt, less current portion		615,001			-		-			4,800,000			-			4,800,000			5,415,001
Other long term liabilities		448,995			-		-			-			-			-			448,995
Total liabilities		3,647,550			2,750,000		(933,000	)		8,195,135			-			7,262,135			13,659,685
Preferred stock		22,804			-		-			-			-			-			22,804
Common stock		252,583			-		-			85,714			-			85,714			338,297
FAP parent investment		-			4,405,000		(4,405,000	)		-			-			(4,405,000	)		-
Net assets contributed by Seller		-			-		4,366,000			-			(4,366,000	)		-			-
APIC		27,671,491			-		-			5,454,280			-			5,454,280			33,125,771
Acc. Other comprehensive income		1,838,858			-		-			-			-			-			1,838,858
Accumulated deficit		(13,655,943	)		-		-			-			-			-			(13,655,943	)
Total shareholders' equity		16,129,793			4,405,000		(39,000	)		5,539,994			(4,366,000	)		1,134,994			21,669,787
Total liabilities and shareholders' equity	$	19,777,343		$	7,155,000	$	(972,000	)	$	13,735,129		$	(4,366,000	)	$	8,397,129		$	35,329,472

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

3

DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Nine Months Ended September 30, 2007

		Derma Sciences			FAP			Pro Forma Adjustments			Consolidated Pro Forma
Net sales	$	23,483,457		$	12,342,000			-		$	35,825,457
Cost of sales		15,299,228			11,651,000			-			26,950,228
Gross Profit		8,184,229			691,000			-			8,875,229
Operating expenses		8,042,109			1,528,000		$	450,000	(4)		10,020,109
Interest expense, net		143,387			-			750,000	(5)		893,387
Other expense, net		42,230			47,000			250,000	(6)		339,230
Total expenses		8,227,726			1,575,000			1,450,000			11,252,726
Loss before provision for taxes		(43,497	)		(884,000	)		(1,450,000	)		(2,377,497	)
Provision for taxes		195,165			-			-			195,165
Net loss	$	(238,662	)	$	(884,000	)	$	(1,450,000	)	$	(2,572,662	)
Loss per share - basic and fully diluted		$(0.01	)		-			-			$(0.08	)
Shares used in computing loss per
common share - basic and fully diluted		25,254,465			-			-			33,825,885

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

4

DERMA SCIENCES, INC.

Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 2006

		Derma Sciences			FAP		Pro Forma Adjustments			Consolidated Pro Forma
Net sales	$	27,887,391		$	19,191,000		-		$	47,078,391
Cost of sales		18,235,003			16,252,000		-			34,487,003
Gross Profit		9,652,388			2,939,000		-			12,591,388
Operating expenses		8,339,227			2,376,000	$	600,000	(4)		11,315,227
Goodwill impairment loss		200,000			-		-			200,000
Interest expense, net		374,079			-		920,000	(5)		1,294,079
Other (income)/expense, net		(47,998	)		-		250,000	(6)		202,002
Total expenses		8,865,308			2,376,000		1,770,000			13,011,308
Income (loss) before provision for taxes		787,080			563,000		(1,770,000	)		(419,920	)
Provision for taxes		118,341			-		-			118,341
Net income (loss)	$	668,739		$	563,000	$	(1,770,000	)	$	(538,261	)
Income (loss) per share - basic and fully	$	0.03			-		-		$	(0.02	)
diluted
Shares used in computing income (loss)    per common share - basic		20,591,085			-		-			29,162,505
Shares used in computing income (loss)    per common share - fully diluted		24,409,760			-		-			29,162,505

See accompanying notes to unaudited pro forma condensed consolidated financial statements.

5

DERMA SCIENCES, INC.

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

1. Preliminary Allocation of Purchase Price

        On November 8, 2007, the Company acquired certain assets and assumed the trade payables of the F.A. Products, L.P. (“FAP”) for $13,000,000 cash and a $500,000 potential earn out bonus. The cash purchase price consisted of $10,250,000 paid to FAP, $2,000,000 deposited in a supply agreement escrow account and $750,000 deposited in an indemnification escrow account. The supply agreement escrow funds are payable to FAP quarterly, in the amount of $500,000 plus interest at 6% from the closing date, upon achievement of certain agreed-upon third party supplier product cost and delivery performance objectives. The indemnification escrow funds are being held for one year from the date of closing against any intervening adjustments to the purchase price. If certain agreed-upon third party supplier product cost and delivery performance objectives are met during the twelve month post closing period, the Company will pay to FAP an additional $500,000 classified as an addition to the purchase price. The Company anticipates capitalized transaction and deferred financing costs totaling $1,410,000 and direct expenses of $450,000 ($200,000 recorded as interest expense) related to the purchase.

        In connection with the purchase, the Company raised $5,539,994 (net of $460,000 in commission and other offering expenses) from the private sale to two institutional investors of 8,571,420 shares of the Company’s common stock at the price of $0.70 per share, together with 2,142,855 five-year warrants to purchase one share of common stock at the price of $0.77. Further, the Company entered into a new five-year credit and security agreement (the “Agreement”) comprised of an $8,000,000 revolver and a $6,000,000 term loan. The Company applied the entirety of the $6,000,000 term loan and $2,200,000 of the revolver in satisfaction of the Company’s obligations under the purchase agreement, payment of its obligations to its former lender and payment of transaction, credit facility and equity syndication closing costs.

        The acquisition will be accounted for under the purchase method. A preliminary allocation of the purchase price assuming the acquisition had been consummated as of September 30, 2007 is outlined below:

Purchase Price:
Cash paid	$	10,250,000
Cash held in escrow		2,750,000
Transaction costs		920,000
Total	$	13,920,000
Allocation of Purchase Price:
Trade receivables	$	2,158,000
Inventory		4,025,000
Equipment		300,000
Identifiable intangibles		3,000,000
Goodwill		6,254,000
Accounts payable		(1,817,000	)
Total	$	13,920,000

        The Company is currently assessing the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed. With the exception of inventory, it is expected that the current assets and liabilities assumed will approximate their historical carrying values as of the date of the acquisition. A valuation study is presently being conducted to establish the fair market value as of November 8, 2007 of the inventory, equipment and the identifiable intangibles acquired.

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2. Explanation of Pro Forma Adjustments

(1) To exclude FAP assets, liabilities and equity included in the FAP balance sheet at September 30, 2007 that have been retained by the former owners and are not included in the assets acquired and liabilities assumed by the Company.

(2) To record the acquisition of FAP as of September 30, 2007 by the Company in accordance with the financial terms outlined in footnote 1 above.

(3) To preliminarily allocate the purchase price to the assets acquired and liabilities assumed at their estimate fair market values as of September 30, 2007 and the excess to goodwill.

(4) To adjust operating expense based on the amortization of estimated amortizable intangibles acquired over an estimated life of five years.

(5) To adjust interest expense based on actual indebtedness incurred together with the amortization of estimated deferred financing costs associated with the acquisition and a one-time $200,000 line of credit termination fee.

(6) To adjust other expense for estimated relocation and stay-bonus costs associated with the acquisition.

3. Cost of Sales Reduction Initiative

        As of the acquisition date, FAP was in the process of transferring the manufacture of certain of its products to lower cost offshore third party suppliers and closing its U.S. manufacturing operation. The Company will pursue this initiative and expects thereby to generate significant product cost savings.

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