UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A No. 2

(Mark One)
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarter ended June 30, 2006
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from ______________ to ____________
	Commission file number 0-27368

ORTEC INTERNATIONAL, INC.

(Exact name of small business issuer as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3068704

(I.R.S. Employer Identification No.)

3960 Broadway

New York, New York 10032

(Address of principal executive offices)

(212) 740-6999

(Issuer’s telephone number)

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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  o

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o  No  x

The number of shares outstanding of the issuer’s common stock is 8,963,870 (as of March 31, 2007)

ORTEC INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB/A
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED JUNE 30, 2006

ITEMS IN FORM 10-QSB /A No. 2

EXPLANATORY NOTE:

This Amendment No. 2 on Form 10-QSB/A (“Form 10-QSB/A”) is being filed to restate certain amounts (see “Restatement” within Note 1 for discussion of significant changes to Ortec International, Inc’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2006, initially filed with the Securities and Exchange Commission (‘SEC”) on August 14, 2006 (the “Original Filing”), and amended on September 29, 2006 (Amendment No. 1).

During the fourth quarter of 2006, we received a comment letter from the SEC’s Division of Corporation Finance (“Staff”) relating to a routine review of our Form 10-KSB for the year ended December 31, 2005 and Form 10-QSB/A for the quarter ended June 30, 2006. In the course of responding to the Staff’s comments, we reviewed the accounting treatment for the various transactions. We determined that certain transactions, specifically our accounting for the Series C preferred stock exchange in the first quarter of 2005 and our accounting for the reduction in Series E warrant prices to $0.001 in relation to the issuance of promissory notes in the second quarter of 2005 were recorded incorrectly. Additionally, in the first quarter of 2007, we discovered while preparing for the December 31, 2006 audit, that although we had properly disclosed the issuance of a warrant to our investment bankers in connection with our Hapto acquisition in the second quarter of 2006 in our Form 10-QSB filing, we had inadvertently failed to record the related non-cash charge for the warrant issuance. As a result of the SEC’s review and our internal findings, on December 26, 2006 and on April 17, 2007, after discussion with our independent registered accounting firm, BDO Seidman, LLP (“BDO”), and consultation with our Audit Committee, we concluded that we should restate our financial statements for the quarterly periods ended March, June, and September, 2005, June and September 2006, and the fiscal year ended December 31, 2005 to reflect these changes. Also, see Part I, Item 3 for the affect on our evaluation of disclosure controls and procedures.

Except as otherwise expressly stated by reference to a specific later date, the disclosure in this Form 10-QSB/A has not been updated to reflect events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. Accordingly, except as otherwise expressly stated, this Form 10-QSB/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

In addition, pursuant to the rules of the SEC, Item 7 of Part III of the Original Filing has been amended to include currently dated certifications from our Chief Executive Officer and our Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and our Chief Financial Officer, are attached to this Form 10-QSB/A No. 2 as exhibits 31.1 and 32.1, respectively.

The items amended are as follows:

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2.	Management’s Plan of Operation	24
Item 3.	Controls and Procedures	30
Part II	OTHER INFORMATION
Item 6.	Exhibits	32
	SIGNATURES	33

2

Part I, Item 1. FINANCIAL STATEMENTS

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2006
	(Unaudited) (restated)
ASSETS
Current assets:
Cash and cash equivalents	$	1,617,422
Prepaid and other current assets		242,146
Total current assets		1,859,568
Property and equipment, net		205,254
Patent application costs, net		517,500
Deposits and other assets		258,810
Total assets	$	2,841,132
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	2,812,817
Insurance premium financing payable		99,139
Current maturities of loan payable		42,475
Capital lease obligation - current		11,776
Warrant liability		12,696,187
Obligation under revenue interest assignment		33,676,000
Total current liabilities		49,338,394
Promissory notes – noncurrent		28,633
Capital lease obligation - noncurrent		4,676
Total liabilities		49,371,703
COMMITMENTS AND CONTINGENCIES
Temporary equity-common stock, $.001 par value, 294,693 shares issued and outstanding		1,119,834
Shareholders’ deficit:
Preferred stock, $.001 par value; authorized, 1,000,000 shares:
Series D, stated value $10,000 per share; authorized 10,000 shares; 5,948.6148 shares issued and outstanding; liquidation preference $59,486,148		15,090,903
Series E, stated value $1,000 per share; authorized 8,000 shares; 6,477.333 shares issued and outstanding; liquidation preference $6,477,333		79,893
Common stock, $.001 par value; authorized 200,000,000 shares; 6,071,403 issued and 6,071,269 outstanding (including 294,693 shares subject to registration rights classified as temporary equity)		5,776
Additional paid-in capital		114,440,908
Deficit accumulated during the development stage		(176,648,279	)
Treasury stock, 134 shares at cost		(177,645	)
Deferred compensation		(441,961	)
Total shareholders’ deficit		(47,650,405	)
Total liabilities and shareholders’ deficit	$	2,841,132

See accompanying notes to condensed unaudited financial statements.

3

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

													Cumulative From March 12, 1991 (inception) to June 30, 2006
	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
	(restated)			(restated)			(restated)			(restated)			(restated)
Product revenue	$	—		$	—		$	—		$	—		$	265,665
Expenses
Product and laboratory costs		1,181,351			718,190			2,506,860			1,940,234			33,294,008
Personnel		1,085,850			1,019,686			2,010,669			2,157,714			43,092,224
General and administrative		296,125			563,229			688,104			1,081,523			21,592,561
Rent		182,580			117,422			365,160			234,844			4,811,467
Consulting		—			—			—			—			5,702,651
Interest and other expense		2,227,826			1,858,755			4,209,696			3,408,919			33,520,741
Interest and other income		(18,787	)		25,461			(31,650	)		53,591			(2,585,868	)
Purchased in-process research and development costs		11005,215			—			11,005,215			—			11,005,215
Change in fair value of warrants		(5,082,969	)		—			(5,082,969	)		—			(5,082,969	)
Loss on settlement of promissory notes		—			—			—			10,328,199			13,081,453
Lease termination costs		—			—			—			—			1,119,166
Loss on extinguishments of debt and Series A preferred shares		—			—			—			—			1,004,027
		10,877,191			4,302,743			15,671,085			19,205,024			160,554,676
Net loss		(10,877,191	)		(4,302,743	)		(15,671,085	)		(19,205,024	)		(160,289,011	)
Preferred stock dividends		79,887			—			79,887			(17,891	)		3,091,461
Preferred stock and warrants deemed dividends and discounts		258,112			67,217			258,112			6,420,665			13,267,807
Net loss applicable to common shareholders	$	(11,215,190	)	$	(4,369,960	)	$	(16,009,084	)	$	(25,607,798	)	$	(176,648,279	)
Net loss per share
Basic and diluted	$	(1.72	)	$	(2.15	)	$	(2.95	)	$	(13.87	)
Weighted average shares outstanding
Basic and diluted		6,510,623			2,034,514			5,422,094			1,846,648

See accompanying notes to condensed unaudited financial statements.

4

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

	Common Stock			Preferred Stock
	Shares	Amount		Series B	Series C	Series D	Series E
March 12, 1991 (inception) to December 31, 1991   Founders	10,358	$	10	—	—	—	—
First private placement ($45.00 per share)	1,450		2	—	—	—	—
The Director ($172.50 and $795.00 per share)	994		1	—	—	—	—
Second private placement ($1413.75 per share)	354		—	—	—	—	—
Share issuance expense	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1991	13,156		13	—	—	—	—
Second private placement ($1,413.75 per share)	176		—	—	—	—	—
Second private placement ($1,413.75 per share)	152		—	—	—	—	—
Stock purchase agreement with the Director ($1,413.75 per share)	212		—	—	—	—	—
Share issuance expense	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1992	13,696		13	—	—	—	—
Third private placement ($1,500.00 per share)	731		1	—	—	—	—
Third private placement ($1,500.00 per share)	150		—	—	—	—	—
Stock purchase agreement with Home Insurance Company ($1,350.00 per share)	741		1	—	—	—	—
Stock purchase agreement with the Director ($1,413.75 per share)	142		—	—	—	—	—
Shares issued in exchange for commission	4		—	—	—	—	—
Share issuance expenses	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1993	15,464		15	—	—	—	—
Fourth private placement ($1,500.00 per share)	263		—	—	—	—	—
Stock purchase agreement with Home Insurance Company ($1,500.00 per share)	333		1	—	—	—	—
Share issuance expense	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1994	16,060		16
Rent forgiveness	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1995	16,060		16	—	—	—	—
Initial public offering	8,000		8	—	—	—	—
Exercise of warrants	226		—	—	—	—	—
Fifth private placement ($973.50 per share)	6,394		6	—	—	—	—
Share issuance expenses	—		—	—	—	—	—
Stock options issued for services	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1996	30,680		30	—	—	—	—
Exercise of warrants	7,726		8	—	—	—	—
Share issuance expenses	—		—	—	—	—	—
Stock options and warrants issued for services	—		—	—	—	—	—
Net loss	—		—	—	—	—	—
Balance at December 31, 1997 (carried forward)	38,406		38	—	—	—	—

	Additional paid-in capital			Deficit accumulated during the development stage		Treasury stock	Deferred compensation	Total shareholders’ equity (deficit)
March 12, 1991 (inception) to December 31, 1991   Founders	$	860		—		—	—	$	870
First private placement ($45.00 per share)		64,998		—		—	—		65,000
The Director ($172.50 and $795.00 per share)		249,999		—		—	—		250,000
Second private placement ($1413.75 per share)		500,000		—		—	—		500,000
Share issuance expense		(21,118	)	—		—	—		(21,118	)
Net loss		—		(281,644	)	—	—		(281,644	)
Balance at December 31, 1991		794,739		(281,644	)	—	—		513,108
Second private placement ($1,413.75 per share)		250,006		—		—	—		250,006
Second private placement ($1,413.75 per share)		215,467		—		—	—		215,467
Stock purchase agreement with the Director ($1,413.75 per share)		299,998		—		—	—		299,998
Share issuance expense		(35,477	)	—		—	—		(35,477	)
Net loss		—		(785,941	)	—	—		(785,941	)
Balance at December 31, 1992		1,524,733		(1,067,585	)	—	—		457,161
Third private placement ($1,500.00 per share)		1,096,499		—		—	—		1,096,500
Third private placement ($1,500.00 per share)		225,000		—		—	—		225,000
Stock purchase agreement with Home Insurance Company ($1,350.00 per share)		999,998		—		—	—		999,999
Stock purchase agreement with the Director ($1,413.75 per share)		200,000		—		—	—		200,000
Shares issued in exchange for commission		6,000		—		—	—		6,000
Share issuance expenses		(230,207	)	—		—	—		(230,207	)
Net loss		—		(1,445,624	)	—	—		(1,445,624	)
Balance at December 31, 1993		3,822,023		(2,513,209	)	—	—		1,308,829
Fourth private placement ($1,500.00 per share)		397,712		—		—	—		397,712
Stock purchase agreement with Home Insurance Company ($1,500.00 per share)		499,999		—		—	—		500,000
Share issuance expense		(8,697	)	—		—	—		(8,697	)
Net loss		—		(1,675,087	)	—	—		(1,675,087	)
Balance at December 31, 1994		4,711,037		(4,188,296	)	—	—		522,757
Rent forgiveness		40,740		—		—	—		40,740
Net loss		—		(1,022,723	)	—	—		(1,022,723	)
Balance at December 31, 1995		4,751,777		(5,211,019	)	—	—		(459,226	)
Initial public offering		5,999,992		—		—	—		6,000,000
Exercise of warrants		33,885		—		—	—		33,885
Fifth private placement ($973.50 per share)		6,220,791		—		—	—		6,220,797
Share issuance expenses		(1,580,690	)	—		—	—		(1,580,690	)
Stock options issued for services		152,000		—		—	—		152,000
Net loss		—		(2,649,768	)	—	—		(2,649,768	)
Balance at December 31, 1996		15,577,755		(7,860,787	)	—	—		7,716,998
Exercise of warrants		10,822,783		—		—	—		10,822,791
Share issuance expenses		(657,508	)	—		—	—		(657,508	)
Stock options and warrants issued for services		660,000		—		—	—		660,000
Net loss		—		(4,825,663	)	—	—		(4,825,663	)
Balance at December 31, 1997 (carried forward)		26,403,030		(12,686,450	)	—	—		13,716,618

5

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

	Common Stock			Preferred Stock
	Shares	Amount		Series B		Series C	Series D	Series E
Balance at December 31, 1997 (brought forward)	38,406		38	—		—	—	—
Exercise of warrants	1,477		2	—		—	—	—
Stock options and warrants issued for services	—		—	—		—	—	—
Sixth private placement	1,333		1	—		—	—	—
Sixth private placement – warrants issued	—		—	—		—	—	—
Share issuance expenses	—		—	—		—	—	—
Purchase of 44 shares of treasury stock (at cost)	—		—	—		—	—	—
Net loss	—		—	—		—	—	—
Balance at December 31, 1998	41,216		41	—		—	—	—
Exercise of warrants	94		—	—		—	—	—
Stock options and warrants issued for services	—		—	—		—	—	—
Seventh private placement ($1,312.50 per share)	2,594		3	—		—	—	—
Seventh private placement – investor warrants	—		—	—		—	—	—
Seventh private placement – placement agent warrants	—		—	—		—	—	—
Eighth private placement ($825.00 per share)	10,909		11	—		—	—	—
Share issuance expenses	—		—	—		—	—	—
Purchase of 61 shares of treasury stock (at cost)	—		—	—		—	—	—
Net loss	—		—	—		—	—	—
Balance at December 31, 1999	54,813		55	—		—	—	—
Exercise of options and warrants	1,170		1	—		—	—	—
Stock options and warrants issued for services	—		—	—		—	—	—
Ninth private placement ($2,250.00 per share)	444		—	—		—	—	—
Ninth private placement – placement agent warrants	—		—	—		—	—	—
Tenth private placement ($1,012..50 per share)	8,318		8	—		—	—	—
Share issuance expenses	—		—	—		—	—	—
Purchase of 29 shares of treasury stock (at cost)	—		—	—		—	—	—
Net loss	—		—	—		—	—	—
Balance at December 31, 2000	64,745		64	—		—	—	—
Stock options issued for services	—		—	—		—	—	—
Net loss	—		—	—		—	—	—
Balance at December 31, 2001	64,745		64	—		—	—	—
Exercise of options and warrants	2,381		2	—		—	—	—
Stock options and warrants issued for services	—		—	—		—	—	—
Warrants issued with convertible debentures	—		—	—		—	—	—
Warrants issued with convertible redeemable preferred stock	—		—	—		—	—	—
Convertible debenture conversion benefit	—		—	—		—	—	—
Redeemable convertible preferred stock conversion benefit	—		—	—		—	—	—
Issuance of series B preferred stock (938 shares) ($10,000 per share)	—		—	9,382,742		—	—	—
Warrants issued and exercised with preferred stock	62,552		63	(3,479,043	)	—	—	—
Shares issuance costs – preferred stock	—		—	(866,612	)	—	—	—
Preferred stock dividends	25,021		25	—		—	—	—
Net loss	—		—	—		—	—	—
Balance at December 31, 2002 (carried forward)	154,699		154	5,037,087		—	—	—

	Additional paid-in capital			Deficit accumulated during the development stage		Treasury stock		Deferred compensation	Total shareholders’ equity (deficit)
Balance at December 31, 1997 (brought forward)		26,403,030		(12,686,450	)	—		—		13,716,618
Exercise of warrants		1,281,955		—		—		—		1,281,957
Stock options and warrants issued for services		1,920,111		—		—		—		1,920,111
Sixth private placement		1,788,697		—		—		—		1,788,698
Sixth private placement – warrants issued		211,302		—		—		—		211,302
Share issuance expenses		(48,000	)	—		—		—		(48,000	)
Purchase of 44 shares of treasury stock (at cost)		—		—		(67,272	)	—		(67,272	)
Net loss		—		(8,412,655	)	—		—		(8,412,655	)
Balance at December 31, 1998		31,557,095		(21,099,105	)	(67,272	)	—		10,390,759
Exercise of warrants		14,103		—		—		—		14,103
Stock options and warrants issued for services		64,715		—		—		—		64,715
Seventh private placement ($1,312.50 per share)		3,168,782		—		—		—		3,168,785
Seventh private placement – investor warrants		236,291		—		—		—		236,291
Seventh private placement – placement agent warrants		232,000		—		—		—		232,000
Eighth private placement ($825.00 per share)		8,999,991		—		—		—		9,000,002
Share issuance expenses		(619,908	)	—		—		—		(619,908	)
Purchase of 61 shares of treasury stock (at cost)		—		—		(75,518	)	—		(75,518	)
Net loss		—		(10,040,509	)	—		—		(10,040,509	)
Balance at December 31, 1999		43,653,069		(31,139,614	)	(142,790	)	—		12,370,720
Exercise of options and warrants		327,281		—		—		—		327,282
Stock options and warrants issued for services		56,265		—		—		—		56,265
Ninth private placement ($2,250.00 per share)		1,000,005		—		—		—		1,000,005
Ninth private placement – placement agent warrants		23,000		—		—		—		23,000
Tenth private placement ($1,012.50 per share)		8,421,063		—		—		—		8,421,071
Share issuance expenses		(641,500	)	—		—		—		(641,500	)
Purchase of 29 shares of treasury stock (at cost)		—		—		(34,855	)	—		(34,855	)
Net loss		—		(12,129,663	)	—		—		(12,129,663	)
Balance at December 31, 2000		52,839,183		(43,269,277	)	(177,645	)	—		9,392,325
Stock options issued for services		188,080		—		—		—		188,080
Net loss		—		(15,885,377	)	—		—		(15,885,377	)
Balance at December 31, 2001		53,027,263		(59,154,654	)	(177,645	)	—		(6,304,972	)
Exercise of options and warrants		355		—		—		—		357
Stock options and warrants issued for services		113,060		—		—		—		113,060
Warrants issued with convertible debentures		440,523		—		—		—		440,523
Warrants issued with convertible redeemable preferred stock		559,289		—		—		—		559,289
Convertible debenture conversion benefit		1,042,663		—		—		—		1,042,663
Redeemable convertible preferred stock conversion benefit		1,097,886		—		—		—		1,097,886
Issuance of series B preferred stock (938 shares) ($10,000 per share)		—		—		—		—		9,382,742
Warrants issued and exercised with preferred stock		3,486,318		—		—		—		7,338
Shares issuance costs – preferred stock		304,615		—		—		—		(561,997	)
Preferred stock dividends		1,125,909		(1,125,934	)	—		—		—
Net loss		—		(21,578,021	)	—		—		(21,578,021	)
Balance at December 31, 2002 (carried forward)		61,197,881		(81,858,609	)	(177,645	)	—		(15,801,132	)

6

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

	Common Stock			Preferred Stock
	Shares	Amount		Series B		Series C		Series D	Series E
Balance at December 31, 2002 (brought forward)	154,699		154	5,037,087		—		—	—
Exercise of options and warrants	26,583		27	—		—		—	—
Issuance of preferred stock: series B (200 shares), series C (948 shares)	—		—	2,000,000		5,690,000		—	—
Warrants issued with preferred stock	—		—	(490,567	)	(1,225,632	)	—	—
Warrants issued for services	—		—	—		—		—	—
Share issuance costs – preferred stock	—		—	(393,488	)	(797,327	)	—	—
Conversion of series B preferred stock (605 shares) into common stock	161,437		162	(3,253,571	)	—		—	—
Conversion of series B preferred stock into series D preferred stock (483 shares)	—		—	(2,628,602	)	—		2,628,602	—
Preferred stock deemed dividends and discounts	—		—	—		—		—	—
Preferred stock dividends	6,154		6	—		—		—	—
Common stock dividend to be distributed on series C preferred stock	—		—	—		—		—	—
Common stock to be issued in connection with promissory notes	—		—	—		—		—	—
Adjustment for one for ten reverse stock split	5		—	—		—		—	—
Net loss	—		—	—		—		—	—
Balance at December 31, 2003	348,878		349	270,859		3,667,041		2,628,602	—
Common stock issued in connection with previously issued notes	10,467		11	—		—		—	—
Common stock issued in connection with promissory notes	22,122		22	—		—		—	—
Common stock (18,468) and 34.31 shares of series D preferred to be issued in connection with agreements which extended due date of promissory notes	—		—	—		—		—	—
Common stock issued in connection with exercise of warrants	2,164		2	—		—		—	—
Conversion of 35.62 shares of series C preferred stock into common stock	7,125		7	—		(137,752	)	—	—
Payment of dividends on 35.62 shares of series C preferred stock in common stock	916		1	—		—		—	—
Common stock and series D preferred (233.83 shares) issued in connection with special warrant offer	33,132		33	—		—		939,050	—
Common stock dividend to be distributed on series B and series C preferred stock	—		—	—		—		—	—
Option issued to director for services	—		—	—		—		—	—
Warrant issued for services	—		—	—		—		—	—
Warrant issued in connection with lease	—		—	—		—		—	—
Share issuance expenses	—		—	—		—		—	—
Special warrant offer deemed dividends	—		—	—		—		—	—
Net loss	—		—	—		—		—	—
Balance at December 31, 2004 (carried forward)	424,804		425	270,859		3,529,289		3,567,652	—

	Additional paid-in capital			Deficit accumulated during the development stage		Treasury stock		Deferred compensation	Total shareholders’ equity (deficit)
Balance at December 31, 2002 (brought forward)		61,197,881		(81,858,609	)	(177,645	)	—		(15,801,132	)
Exercise of options and warrants		12,939		—		—		—		12,966
Issuance of preferred stock: series B (200 shares), series C (948 shares)		—		—		—		—		7,690,000
Warrants issued with preferred stock		1,716,199		—		—		—		—
Warrants issued for services		87,000		—		—		—		87,000
Share issuance costs – preferred stock		359,078		—		—		—		(831,737	)
Conversion of series B preferred stock (605 shares) into common stock		3,253,409		—		—		—		—
Conversion of series B preferred stock into series D preferred stock (483 shares)		—		—		—		—		—
Preferred stock deemed dividends and discounts		4,269,000		(4,269,000	)	—		—		—
Preferred stock dividends		923,071		(923,077	)	—		—		—
Common stock dividend to be distributed on series C preferred stock		336,550		(336,550	)	—		—		—
Common stock to be issued in connection with promissory notes		287,000		—		—		—		287,000
Adjustment for one for ten reverse stock split		—		—		—		—		—
Net loss		—		(15,920,504	)	—		—		(15,920,504	)
Balance at December 31, 2003		72,442,127		(103,307,740	)	(177,645	)	—		(24,476,407	)
Common stock issued in connection with previously issued notes		(11	)	—		—		—		—
Common stock issued in connection with promissory notes		746,180		—		—		—		746,202
Common stock (18,468) and 34.31 shares of series D preferred to be issued in connection with agreements which extended due date of promissory notes		828,540		—		—		—		828,540
Common stock issued in connection with exercise of warrants		323		—		—		—		325
Conversion of 35.62 shares of series C preferred stock into common stock		137,745		—		—		—		—
Payment of dividends on 35.62 shares of series C preferred stock in common stock		30,098		(30,099	)	—		—		—
Common stock and series D preferred (233.83 shares) issued in connection with special warrant offer		498,936		—		—		—		1,438,019
Common stock dividend to be distributed on series B and series C preferred stock		613,805		(613,805	)	—		—		—
Option issued to director for services		398,574		—		—		—		398,574
Warrant issued for services		94,393		—		—		—		94,393
Warrant issued in connection with lease		18,500		—		—		—		18,500
Share issuance expenses		(26,600	)	—		—		—		(26,600	)
Special warrant offer deemed dividends		1,123,000		(1,123,000	)	—		—		—
Net loss		—		(15,377,900	)	—		—		(15,377,900	)
Balance at December 31, 2004 (carried forward)		76,905,610		(120,452,544	)	(177,645	)	—		(36,356,354	)

7

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

	Common Stock			Preferred Stock
	Shares		Amount	Series B			Series C			Series D		Series E
Balance at December 31, 2004 (brought forward)		424,804	425		270,859			3,529,289			3,567,652		—
Common stock and series D preferred (34.31 shares) issued in connection with agreements which extended due date of promissory notes		18,468	18		—			—			274,500		—
January 2005 Private Placement: Common stock issued in connection with private placement		432,264	432		—			—			—		—
Common stock and series D preferred (1,720.16 shares) issued for promissory note conversion		530,208	530		—			—			5,733,853		—
Common stock and series D preferred (1,086.21 shares) issued in connection with Series C preferred exchange - restated		218,912	219		—			(3,529,289	)		3,620,702		—
Common stock issued for exercise of additional investment right from private placement		10,217	10		—			—			—		—
Common stock issued in connection with February 2005 private placement		8,000	8		—			—			—		—
Common stock issued in connection with exchange for series B preferred stock		14,710	15		(270,859	)		—			—		—
Common stock issued to officers		109,667	110		—			—			—		—
Common stock issued upon exercise of warrants		243,901	244		—			—			—		—
October 2005 Private Placement:
Common stock issued		972,718	973		—			—			—		—
Common stock and Series D preferred (2,714.62 shares) and warrants issued for promissory notes		423,128	423		—			—			2,714,624		—
Return of excess preferred stock dividend		—	—		—			—			—		—
Modifications of Series E warrant prices		—	—		—			—			—		—
Warrant issued for services		—	—		—			—			—		—
Share issuance expenses		—	—		—			—			—		—
Net loss		—	—		—			—			—		—
Balance at December 31, 2005 - restated (carried forward)		3,406,997	3,407		—			—			15,911,331		—

	Additional paid-in capital			Deficit accumulated during the development stage			Treasury stock			Deferred compensation			Total shareholders’ equity (deficit)
Balance at December 31, 2004 (brought forward)		76,905,610			(120,452,544	)		(177,645	)		—			(36,356,354	)
Common stock and series D preferred (34.31 shares) issued in connection with agreements which extended due date of promissory notes		(274,518	)		—			—			—			—
January 2005 Private Placement: Common stock issued in connection with private placement		4,775,668			—			—			—			4,776,100
Common stock and series D preferred (1,720.16 shares) issued for promissory note conversion		14,895,029			—			—			—			20,629,412
Common stock and series D preferred (1,086.21 shares) issued in connection with Series C preferred exchange - restated		6,261,816			(6,353,448	)		—			—			—
Common stock issued for exercise of additional investment right from private placement		114,937			—			—			—			114,947
Common stock issued in connection with February 2005 private placement		86,265			—			—			—			86,273
Common stock issued in connection with exchange for series B preferred stock		270,844			—			—			—			—
Common stock issued to officers		751,474			—			—			(462,445	)		289,139
Common stock issued upon exercise of warrants		3,415			—			—			—			3,659
October 2005 Private Placement:
Common stock issued		3,172,643			—			—			—			3,173,616
Common stock and Series D preferred (2,714.62 shares) and warrants issued for promissory notes		3,622,670			—			—			—			6,337,717
Return of excess preferred stock dividend		(17,891	)		17,891			—			—			—
Modifications of Series E warrant prices		3,490,140			(1,264,247	)		—			—			2,225,893
Warrant issued for services		7,189			—			—			—			7,189
Share issuance expenses		(14,234	)		—			—			—			(14,234	)
Net loss		—			(32,586,847	)		—			—			(32,586,847	)
Balance at December 31, 2005 - restated (carried forward)		114,051,057			(160,639,195	)		(177,645	)		(462,445	)		(31,313,490	)

8

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

	Common Stock				Preferred Stock
	Shares		Amount		Series B	Series C	Series D			Series E
Balance at December 31, 2005 - restated (brought forward)		3,406,997		3,407	—	—		15,911,331			—
Exercise of Series E warrants		139,207		139	—	—		—			—
Warrant issued for vendor settlement		—		—	—	—		—			—
Warrant issued with promissory notes		—		—	—	—		—			—
Common stock and warrants issued for
Production suite charges		294,693		—	—	—		—			—
Placement agent fees		113,147		113	—	—		—			—
Hapto acquisition - restated		2,031,119		2,031	—	—		—			—
Common stock issued upon conversion of 323.4008 shares of Series D preferred stock		86,240		86	—	—		(820,428	)		—
April 2006 private placement
Issuance of 6,176 shares of Series E preferred stock		—		—	—	—		—			6
Bridge loan converted into 301.333 shares of Series E preferred stock		—		—	—	—		—			—
Fair value of warrants reclassified as liabilities		—		—	—	—		—			—
Modifications of Series E and F warrant prices		—		—	—	—		—			—
Dividends on Series E preferred stock		—		—	—	—		—			79,887
Share-based compensation		—		—	—	—		—			—
Share issuance expenses		—		—	—	—		—			—
Amortization of deferred compensation		—		—	—	—		—			—
Net loss - restated		—		—	—	—		—			—
Balance at June 30, 2006 - restated		6,071,403	$	5,776	—	—	$	15,090,903		$	79,893

	Additional paid-in capital			Deficit accumulated during the development stage			Treasury stock			Deferred compensation			Total shareholders’ equity (deficit)
Balance at December 31, 2005 - restated (brought forward)		114,051,057			(160,639,195	)		(177,645	)		(462,445	)		(31,313,490	)
Exercise of Series E warrants		58			—			—			—			197
Warrant issued for vendor settlement		54,982			—			—			—			54,982
Warrant issued with promissory notes		7,262			—			—			—			7,262
Common stock and warrants issued for
Production suite charges		67,505			—			—			—			67,505
Placement agent fees		424,187			—			—			—			424,300
Hapto acquisition - restated		10,692,540			—			—			—			10,6944,571
Common stock issued upon conversion of 323.4008 shares of Series D preferred stock		820,342			—			—			—			—
April 2006 private placement
Issuance of 6,176 shares of Series E preferred stock		—			—			—			—			6
Bridge loan converted into 301.333 shares of Series E preferred stock		—			—			—			—			—
Fair value of warrants reclassified as liabilities		(11,951,000	)		—			—			—			(11,951,000	)
Modifications of Series E and F warrant prices		258,112			(258,112	)		—			—			—
Dividends on Series E preferred stock		—			(79,887	)		—			—			—
Share-based compensation		20,292			—			—			—			20,292
Share issuance expenses		(4,429	)		—			—			—			(4,429	)
Amortization of deferred compensation		—			—			—			20,484			20,484
Net loss - restated		—			(15,671,085	)		—			—			(15,671,085	)
Balance at June 30, 2006 - restated	$	114,440,908		$	(176,648,279	)	$	(177,645	)	$	(441,961	)	$	(47,650,405	)

See accompanying notes to condensed unaudited financial statements.

9

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

							Cumulative from March 12, 1991 (inception to) June 30, 2006
	Six months ended June 30,
	2006			2005
	(restated)			(restated)			(restated)
Cash flows from operating activities
Net loss	$	(15,071,085	)	$	(19,205,024	)	$	(160,289,011	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		106,562			174,616			5,673,409
Allowance for doubtful accounts		—			—			5,374
Unrealized loss on marketable securities		—			—			11,404
Realized loss on marketable securities		—			—			5,250
Gain on sale of property and equipment		—			—			(58,642	)
Loss on settlement of promissory note		—			10,328,199			13,081,453
Cost to terminate lease on New Jersey facility		—			—			836,032
Amortization of deferred compensation		20,484			136,720			309,623
Non-cash stock compensation		—			—			3,335,231
Non-cash interest		63,113			183,876			4,258,772
Non-cash imputed interest		4,107,000			3,167,890			27,029,150
Non-cash production suite charges		1,187,339			—			1,422,839
Share-based compensation		20,292			—			20,292
Gain on loan adjustment		—			—			(236,000	)
Gain on vendor settlement		(11,710	)		—			(11,710	)
Loss on extinguishment of debt and series A preferred stock		—			—			1,004,027
Purchase of marketable securities		—			—			(19,075,122	)
Sales of marketable securities		—			—			19,130,920
Purchased in-process research and development		11,005,215			—			11,005,215
Change in fair value of warrants		(5,082,969	)		—			(5,082,969	)
Other		—			13,457			20,646
Changes in operating assets and liabilities
Prepaid and other current assets		(71,459	)		(147,893	)		(132,549	)
Accounts payable and accrued liabilities		(239,256	)		(1,051,610	)		4,808,106
Net cash used in operating activities		(4,566,474	)		(6,399,769	)		(92,928,260	)
Cash flows from investing activities
Purchases of property and equipment		(31,195	)		(39,056	)		(4,645,072	)
Proceeds from sale of property and equipment		—			—			145,926
Payments for patent applications		(17,669	)		(18,949	)		(1,087,542	)
Organization costs		—			—			(10,238	)
Deposits		(98,562	)		—			(888,835	)
Cash paid for Hapto acquisition, net of $37,074 cash received		(186,750	)		—			(186,750	)
Purchases of marketable securities		—			—			(594,986	)
Sale of marketable securities		—			—			522,532
Net cash used in investing activities		(334,176	)		(58,005	)		(6,744,965	)
Cash flows from financing activities
Proceeds from issuance of notes payable		690,000			3,026,700			14,338,126
Proceeds from issuance of common stock		—			4,978,567			61,701,458
Proceeds from exercise of warrants		197			—			1,362,822
Proceeds from insurance premium financing		220,500			220,000			720,500
Share issuance expenses and other financing costs		(4,429	)		—			(5,388,676	)
Purchase of treasury stock		—			—			(177,645	)
Proceeds from issuance of loan payable		—			—			1,446,229
Proceeds from obligations under revenue interest assignment		—			—			10,000,000
Proceeds from issuance of convertible debentures		—			—			5,908,000
Proceeds from issuance of preferred stock		5,526,829			—			15,486,829
Advances received		—			—			130,000
Repayment of capital lease obligations		(8,444	)		(45,175	)		(593,238	)
Repayment of loan payable		(20,609	)		(99,674	)		(1,259,770	)
Repayment of obligations under revenue interest assignment		—			—			(11,414	)
Repayment of insurance premium financing payable		(121,361	)		(96,311	)		(621,361	)
Repayment of promissory notes		(440,000	)		(141,201	)		(1,235,751	)
Repayment of notes payable		—			—			(515,500	)
Net cash provided by financing activities		5,842,683			7,842,906			101,290,647
Net Increase in Cash And Cash Equivalents		942,033			1,385,132			1,617,422
CASH AND CASH EQUIVALENTS
Beginning of period		675,389			227,370			—
End of period	$	1,617,422		$	1,612,502		$	1,617,422

10

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

						Cumulative from March 12, 1991 (inception to) June 30, 2006
	Six months ended June 30,
	2006		2005
	(restated)		(restated)			(restated)
Supplemental disclosures of cash flow information:
Noncash investing and financing activities
Assets acquired under capital leases	$	—	$	7,717		$	628,523
Deferred offering costs included in accrued professional fees		—		—			314,697
Financing costs – other long-term obligations		—		—			59,500
Forgiveness of rent payable		—		—			40,740
Share issuance expenses – warrants		—		—			255,000
Deferred compensation		—		778,744			751,584
Dividends on series B preferred stock paid in common shares		—		—			2,099,011
Dividends on series C preferred stock paid in common shares		—		(17,891	)		576,013
Accretion of discount on preferred stock and warrants		258,112		6,420,665			13,267,807
Series B preferred stock converted to common stock		—		270,859			270,859
Series C preferred stock exchanged for common stock		—		3,529,289			3,529,289
Series C preferred stock converted o common stock		—		—			137,645
Series D preferred stock converted to common stock		820,428		—			820,428
Series D preferred stock issued in lieu of common stock		—		9,629,055			12,343,678
Series E basis increased fro stock dividend		79,887		—			79.887
Share issuance expenses for
Series B preferred stock incurred through issuance of warrants		—		—			391,307
Series C preferred stock incurred through issuance of warrants		—		—			272,386
Fair value of warrants reclassified to warrant liability		20,829,822		—			20,829,822
Share issuance of series D preferred stock in exchange for series B preferred stock		—		—			2,628,602
Equipment transferred in satisfaction of deposit		—		—			100,000
Discount on promissory notes		—		—			1,033,202
Accounts payable converted to promissory notes		—		—			837,468
Advances converted to promissory notes		—		—			130,000
Warrant issued in connection with lease		—		—			18,500
Warrant issued in connection with liability settlement		54,982		—			54,982
Promissory notes forgiven for warrant participation		—		—			100,000
Promissory notes repaid with common stock		301,333		9,626,626			13,413,959
Promissory notes interest due repaid with common stock		—		674,587			658,776
Common stock and warrants issued to settle liability		424,300		—			424,300
Contribution of capital of amount due to founder		—		—			398,967
Cash paid for interest	$	43,793	$	35,018		$	904,419
Cash paid for income taxes	$	—	$	—		$	203,411

See accompanying notes to condensed unaudited financial statements.

11

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - FINANCIAL STATEMENTS AND RESTATEMENT

The condensed consolidated balance sheet as of June 30, 2006, and the condensed consolidated statements of operations and cash flows for the three and six month periods ended June 30, 2006 and 2005, and for the period from March 12, 1991 (inception) to June 30, 2006, and condensed consolidated statements of shareholders’ equity (deficit) for the period from March 12, 1991 (inception) to June 30, 2006, have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of June 30, 2006, results of operations and cash flows for the three and six month periods ended June 30, 2006 and 2005, and from March 12, 1991 (inception) through June 30, 2006, and statements of shareholders’ equity (deficit) for the period from March 12, 1991 (inception) to June 30, 2006, have been made. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto in the Company’s December 31, 2005 annual report on Form 10-KSB filed with the Securities and Exchange Commission. The results of operations for the three and six month period ended June 30, 2006, are not necessarily indicative of the operating results for the full year or any other interim period.

During the fourth quarter of 2006, we received a comment letter from the SEC’s Division of Corporation Finance (“Staff”) relating to a routine review of our Form 10-KSB for the year ended December 31, 2005 and Form 10-QSB/A for the quarter ended June 30, 2006. In the course of responding to the Staff’s comments, we reviewed the accounting treatment for the various transactions. We determined that certain transactions, specifically our accounting for the Series C preferred stock exchange in the first quarter of 2005 and our accounting for the reduction in Series E warrant prices to $0.001 in relation to the issuance of promissory notes in the second quarter of 2005 were recorded incorrectly. Additionally, in the first quarter of 2007, we discovered while preparing for the December 31, 2006 audit, that although we had properly disclosed the issuance of a warrant to our investment bankers in connection with our Hapto acquisition in the second quarter of 2006 in our Form 10-QSB filing, we had inadvertently failed to record the related non-cash charge for the warrant issuance. As a result of the SEC’s review and our internal findings, on December 26, 2006 and on April 17, 2007, after discussion with our independent registered accounting firm, BDO Seidman, LLP (“BDO”), and consultation with our Audit Committee, we concluded that we should restate our financial statements for the quarterly periods ended March, June, and September, 2005, June and September 2006, and the fiscal year ended December 31, 2005 to reflect these changes.

A summary of significant effects of the restatement are as follows:

An additional $4,227,474 deemed dividend was recorded in the first quarter of 2005 to reflect the excess of the fair value of the common stock over the fair value of the Series C preferred stock exchanged as part of our January 5, 2005 private placement.We determined that this adjustment was necessary under EITF Topic D-42. Topic D-42 requires that if convertible preferred stock is converted to other securities pursuant to an inducement offer, we should record the excess of 1) the fair value of all securities transferred to the Series C holders over 2) the fair value of securities issuable pursuant to the original conversion terms as a reduction of net earnings to arrive at net loss available to common shareholders. Though we accounted for the fair value of the warrants as a deemed dividend on the day of the transaction we did not account for the excess of the fair value of the common shares transferred over the fair value of the securities issuable pursuant to the original conversion terms of the Series C.

In the second quarter of 2005 a $2,212,436 charge for the Series E warrant price reduction originally recorded as a deemed dividend in the second quarter was reversed and recorded as a debt discount for the same amount. Since the repricing of the warrants is related to the issuance of debt we believe the amount should have been recorded as a debt discount on the day of issuance and amortized to financing expense over the life of the debt. We originally recorded this amount as a deemed dividend. This debt discount was then amortized to interest expense as follows: $154,698 in the second quarter of 2005, $1,315,671 in the third quarter of 2005, and the balance of $742,067 in the fourth quarter of 2005.

In the second quarter of 2006, we failed to record a $717,000 charge for the Black Scholes value of a warrant issued to our investment banker in connection with the Hapto transaction. The warrant will be recorded as a charge to purchased in-process research and development costs with a corresponding credit to additional paid-in capital.

12

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Statement of Operations	Three Months EndedJune 30, 2005(As Previously Reported)			Amount of Change			Three MonthsEnded June 30, 2005(As Restated)
Interest and other expense	$	1,704,057		$	154,698		$	1,858,755
Net loss		(4,148,045	)		(154,698	)		(4,302,743	)
Preferred Stock and warrants deemed dividends and discounts		2,279,653			(2,212,436	)		67,217
Net loss applicable to common shareholders		(6,427,698	)		2,057,738			(4,369,960	)
Net loss per share-basic and diluted	$	(3.16	)	$	1.01		$	(2.15	)

Statement of Operations	Six Months EndedJune 30, 2005(As Previously Reported)			Amount of Change			Six MonthsEnded June 30, 2005(As Restated)
Interest and other expense	$	3,254,221		$	154,698		$	3,408,919
Net loss		(19,050,326	)		(154,698	)		(19,205,024	)
Preferred Stock and warrants deemed dividends and discounts		4,405,627			2,015,038			6,420,665
Net loss applicable to common shareholders		(23,438,062	)		(2,169,736	)		(25,607,798	)
Net loss per share-basic and diluted	$	(12.69	)	$	(1.18	)	$	(13.87	)

Statement of Operations	Three Months EndedJune 30, 2006(As Previously Reported)			Amount of Change			Three MonthsEnded June 30, 2006(As Restated)
Purchased in-process research and development costs	$	10,288,215		$	717,000		$	11,005,215
Net loss		(10,160,191	)		(717,000	)		(10,877,191	)
Net loss applicable to common shareholders		(10,498,190	)		(717,000	)		(11,215,190	)
Net loss per share-basic and diluted	$	(1.61	)	$	(0.11	)	$	(1.72	)

Statement of Operations	Six Months EndedJune 30, 2006(As Previously Reported)			Amount of Change			Six MonthsEnded June 30, 2006(As Restated)
Purchased in-process research and development costs	$	10,288,215		$	717,000		$	11,005,215
Net loss		(14,954,085	)		(717,000	)		(15,671,085	)
Net loss applicable to common shareholders		(15,292,084	)		(717,000	)		(16,009,084	)
Net loss per share-basic and diluted	$	(2.82	)	$	(0.13	)	$	(2.95	)

13

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Statement of Operations	Cumulative From March 12, 1991 (inception) to June 30, 2006 (As Previously Reported)			Amount of Change			CumulativeFromMarch 12, 1991(inception) toJune 30, 2006(As Restated)
Interest and other expense	$	31,308,305		$	2,212,436		$	33,520,741
Purchased in-process research and development costs		10,288,215			717,000			11,005,215
Net loss		(157,359,575	)		(2,929,436	)		(160,289,011	)
Preferred Stock and warrants deemed dividends and discounts		11,252,769			2,015,038			13,267,807
Net loss applicable to common shareholders	$	(171,703,805	)	$	(4,944,474	)	$	(176,648,279	)

Balance Sheet	June 30, 2006(As Previously Reported			Amount of Change			June 30, 2006(As Restated
Additional paid-in capital	$	109,496,434		$	4,944,474		$	114,440,908
Deficit accumulated during the developmental stage		(171,703,805	)		(4,944,474	)		(176,648,279	)

NOTE 2 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION

Formation of the Company

Ortec International, Inc. (“Ortec” or the “Company”) was incorporated in March 1991 as a Delaware corporation to secure and provide funds for the further development of the technology developed by Dr. Mark Eisenberg of Sydney, Australia, to replicate in the laboratory, a tissue engineered skin substitute for use in skin regeneration procedures (the “Technology”). Pursuant to a license agreement dated September 7, 1991, Dr. Eisenberg had granted Ortec a license for a term of ten years, with automatic renewals by Ortec for two additional ten-year periods, to commercially use and exploit the Technology for the development of products. In April 1998, Dr. Eisenberg assigned his patent for the Technology to Ortec.

Basis of Presentation

We are a development stage enterprise which had no operating revenue prior to December 2001. During 2001, we received Food and Drug Administration approval for the use of the fresh form of our ORCEL product for the treatment of patients with recessive dystrophic epidermolysis bullosa and for donor sites in burn patients. We began marketing and selling our product for use on patients with one of these indications using a contract sales organization. Our sales and marketing efforts were active only for a brief period and accordingly our revenues were not significant. We terminated our sales efforts and elected to focus our attention on completing development of a cryopreserved form of our product for treatment of chronic wounds affecting larger populations. As a result, we completed a clinical trial during 2003 for the use of the cryopreserved form of ORCEL to treat venous stasis ulcers and filed an application for pre-market approval (PMA) with the FDA in February 2004. In a letter dated April 25, 2005, although the FDA concluded that cryopreserved ORCEL showed promise for the effective treatment of venous stasis ulcers, the FDA determined that additional data would be necessary to confirm cryopreserved ORCEL’s effectiveness and safety treating venous stasis ulcers. The clinical data from the pivotal trial of 136 patients submitted to the FDA showed that in 60 patients who had typical venous ulcers (defined as those ulcers with partial or full-thickness ulcers in which the wound base is visible and the ulcer extends through the dermis but not into the subcutaneous tissue to fascia, muscle or bone), 59% of the ORCEL treated patients achieved wound closure versus 36% of the patients who received the standard of care treatment. The FDA agreed that data of these 60 patients would be combined with that of the 60 patients to be enrolled in a confirmatory clinical trial and the combined results will be analyzed using Bayesian statistics. We obtained FDA approval for our confirmatory trial protocol in mid July 2005 and began the confirmatory trial in mid August 2005. We completed enrollment for this clinical trial in April 2006. In September 2006, we expect to complete the confirmatory trial designed to confirm the superiority of cryopreserved ORCEL in the treatment

14

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

of difficult-to-heal venous leg ulcers in comparison to the standard of care therapy. During the third quarter, we expect to move forward with integrating the clinical data from the current confirmatory trial with the efficacy data from the 12-week pivotal trial previously submitted to the FDA as part of our PMA. We expect to submit a supplemental PMA to the FDA in the fourth quarter of this year. In addition, we are working with Cambrex Bio Science Walkersville, Inc., a subsidiary of Cambrex Corporation (Cambrex) to limit expenditures under our manufacturing agreement primarily to those which are essential for obtaining regulatory approval. Together, we are working on process improvements that we expect will drive down the cost of producing ORCEL as we plan for the potential commercial sales of our product. In February 2006, Cambrex assisted us financially by agreeing to accept our common stock and warrants in exchange for approximately $800,000 of production suite charges incurred during the first half of 2006. See Note 7.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. We incurred a net loss applicable to common shareholders of $16 million during the six months ended June 30, 2006, and, as of that date, our current liabilities exceeded our current assets by $47.5 million, our total liabilities exceeded our total assets by $46.5 million and we have a deficit accumulated in the development stage of $176.6 million. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

In the first quarter of 2006, we received an aggregate of $445,000 in short-term bridge loans: $195,000 was from two of our executive officers repayable without interest and $250,000 was a convertible note from an outside investor. In early April 2006 we received an additional $45,000 bridge loan from another of our executive officers and a $200,000 bridge note from an outside investor. In mid April 2006, we completed a private placement of our convertible preferred stock and warrants in which we raised gross proceeds of approximately $6.2 million. Out of these proceeds we repaid all of the executive officer loans without interest, repaid the $200,000 bridge note, and converted the $250,000 loan into the preferred stock and warrants we sold in the private placement.

We expect to incur obligations of approximately $875,000 per month primarily for personnel, rent, insurance, fees to Cambrex for a production suite and technology transfer activities, clinical trial charges, various research and development activities, and payment of past due obligations. We will require substantial funding to enable us to continue our research and development activities, pay a portion of our past due obligations, complete the additional clinical trial necessary to obtain PMA for our ORCEL to treat venous stasis ulcers, and provide for our general and corporate working capital requirements for 2006.

While we have arranged for payment of some of our obligations over a period of time, and have to make other payments of past due obligations to our current and ongoing suppliers, our ability to make payments we have agreed to pay and to insure continued receipt of needed supplies and services, and to continue reducing our past due obligations, will depend on our ability to secure needed financing or our ability to issue our equity securities in satisfaction of certain obligations.

We hope to obtain additional funds through the sale of our securities to the public and through private placements, debt financing or other short-term loans. We may not be able to secure any financing nor may we be able to reach the larger patient population markets of persons with venous stasis ulcers and diabetic foot ulcers, with funds that we may be able to raise. We are also likely to continue to encounter difficulties which are common to development stage companies, including unanticipated costs relating to development, delays in the testing of products, regulatory approval and compliance and competition.

15

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our capital funding requirements depend on numerous factors, including:

• the progress and magnitude of our research and development programs;

• the time involved in obtaining regulatory approvals for the commercial sale of our ORCEL product in its cryopreserved form to treat venous stasis ulcers and, later, diabetic foot ulcers;

• the costs involved in filing and maintaining patent claims;

• technological advances;

• competitive and market conditions;

• the successful implementation of the agreements we have entered into with Cambrex for manufacturing and sales of our ORCEL product;

• our ability to establish and maintain other collaborative arrangements and

• the cost and effectiveness of commercialization activities and arrangements.

We believe that our cash and cash equivalents on hand at June 30, 2006, $1,617,422, and additional funds we will need to raise in 2006, may enable us to continue our operations for the next twelve months. There can be no assurances that we can raise additional funds.

These financial statements have been prepared assuming that we will continue as a going concern. Successful future operations depend upon the successful development and marketing of our ORCEL product. Historically we have funded our operating losses by periodically raising additional sources of capital. If additional funding is not available to us when needed, we may not be able to continue operations. No adjustments have been made to the accompanying financials as a result of this uncertainty.

Reclassifications

Certain reclassifications have been made to the 2005 amounts to conform to the 2006 presentation.

Common Stock Reverse Split

On July 24, 2006, we effected a reverse stock split of our outstanding common stock, whereby every stockholder received one new share of common stock for every fifteen shares previously owned. All share and per share data in these financial statements have been adjusted to give effect to the reverse stock split. The par value of the common stock remained unchanged at $.001 per share. The exercise prices of all our warrants and options outstanding were adjusted as a result of this reverse split. The conversion rates of the preferred stock outstanding were also adjusted because of this reverse split.

NOTE 3 – SHARE BASED COMPENSATION

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R)). We adopted SFAS 123(R) using the modified prospective method of adoption, and accordingly, financial statement amounts for prior periods presented have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. Compensation expense was recognized during the six months ended June 30, 2006, for all share-based option awards granted after January 1, 2006, based on the grant date fair value in accordance with the provisions of SFAS 123(R). The effect of the adoption in 2006 was an additional expense of $20,292 related to stock options.

The fair value of stock options granted during the three and six months ended June 30, 2006 was estimated at $2.12 and $1.81, respectively using the Black-Scholes option-pricing model. This model used the following assumptions:

	Three Months Ended June 30, 2005		Six Months Ended June 30, 2005
Dividend yield	0.00	%	0.00	%
Volatility	86.00	%	86.00	%
Risk-free rate of return	4.63- 5.01	%	4.41- 5.01	%
Expected life	5 years		5 years

16

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The fair value of each of our stock option awards is expensed on a straight-line basis over the vesting period of the options, which is generally four years. Expected volatility is based on the historical volatility of our stock with reasonable assumptions regarding projected future events. The risk-free rate of interest for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. We use historical data to estimate forfeitures within our valuation model. The expected life of our stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.

Under the recognition and measurement principles of Accounting Principles Board No 25 (APB 25), we estimated the fair value of stock options granted during the three and six months ended June 30, 2005, to be $5.40 and $7.68 using the Black-Scholes option-pricing model. The assumptions used in the model for the three and six months ended periods respectively were a dividend yield of 0.00%, volatility of 86% and 82%, risk-free rate of return of 3.96 % and 4.01% and expected life of 7 years. The following table illustrates the effect on net loss applicable to common shareholders and loss per share had we applied the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” for the three and six months ended June 30, 2005:

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss applicable to common shareholders, as reported	$	(4,369,960	)	$	(25,607,798	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(52,038	)		(53,851	)
Pro forma net loss	$	(4,421,998	)	$	(25,661,649	)
Basic and diluted loss per share:
As reported	$	(2.15	)	$	(13.87	)
Pro forma		(2.17	)		(13.90	)

Changes in options outstanding under the plans for the six months ended June 30, 2006 were as follows:

	Sharessubjectto option			Weighted-averageexercise price		Aggregateintrinsicvalue		Weighted-averageremaining life
December 31, 2005		544,546		$	21.15
Granted		9,800			3.13
Cancelled		(1,357	)		19.64
Outstanding June 30, 2006		552,989		$	20.78	$	1,600		5.7
Exercisable June 30, 2006		540,521		$	20.54	$	—		5.6

515,576 of the above outstanding stock options were granted outside of our employee stock option plan.

17

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes information concerning currently outstanding and exercisable options:

					Options outstanding						Options exercisable
Range ofexercise price					Numberoutstandingat 06/30/06		Weighted-averageremaining life		Weighted-averageexercise price		Numberexercisableat 06/30/06		Weighted-averageexercise price
$	3.00	—	$	14.85		437,316		6.3	$	3.79		428,007	$	3.72
	27.00	—		33.75		57,144		3.7		28.49		54,127		26.86
	45.00	—		131.25		52,912		3.5		54.82		52,770		54.66
	523.50	—		907.50		3,522		2.2		756.38		3,522		756.38
	930.00	—		1,500.00		2,095		1.1		1,260.91		2,095		1,260.91
$	3.00	—	$	1,500.00		552,989		5.7	$	20.78		540,521	$	20.54

In April 1996, the stockholders approved the adoption of a stock option plan (the “Plan”). The Plan provided for the grant of options to purchase up to 2,333 shares of our common stock. These options may be granted to employees, our officers, our non-employee directors, consultants, and advisors. The Plan provides for granting of options to purchase our common stock at not less than the fair value of such shares on the date of the grant. Some of the options generally vest ratably over a four-year period, while others vest immediately. The options generally expire after seven years.

In August 1998, the stockholders ratified and approved an amended and restated 1996 Stock Option Plan increasing the maximum number of shares of our common stock for which stock options may be granted from 2,333 to 10,333 shares. In August 2000, the stockholders ratified and approved the second amendment to our Amended and Restated 1996 Stock Option Plan increasing the number of shares of our common stock for which options have been or could be granted under the Plan from 10,333 to 20,000 shares.

In February 2003, the stockholders ratified and approved an amended and restated Stock Option Plan, increasing the maximum number of shares of our common stock for which stock options may be granted from 20,000 to 30,000 shares. As of June 30, 2006 no options were available for grant under the Plan.

In July 2005, the stockholders approved the adoption of the 2005 Stock Option Plan (the “2005 Plan”). The 2005 Plan provides for the grant of options to purchase up to 66,667 shares of our common stock. These options may be granted to employees, our officers, our non-employee directors, consultants, and advisors. The 2005 Plan provides for granting of options to purchase our common stock at not less than the fair value of such shares on the date of the grant. As of June 30, 2006, 59,254 of these options were available for grant under the 2005 Plan.

Our Board of Directors or its Stock Option Committee has determined the exercise price for all stock options awarded.

Share-based compensation expense is included in personnel expense.

NOTE 4 - NET LOSS PER SHARE

As of June 30, 2006, an aggregate of 5,378,485 shares issuable on exercise of outstanding warrants and options and an aggregate of 1,586,297 and 2,159,111 shares of common stock issuable upon the conversion of our Series D and Series E preferred stock outstanding, respectively, were excluded from the weighted average share calculations, as the effect was antidilutive. Basic and diluted loss per share for the quarter and six months ended June 30, 2006 includes warrants to purchase 811,333 shares of common stock, exercisable at $.015 per share reflected as outstanding from the date of grant. The weighted average share calculations include those common shares subject to registration rights and potential liquidated damages classified on the balance sheet as temporary equity.

As of June 30, 2005, an aggregate of 1,033,951 shares issuable on exercise of outstanding warrants and options and an aggregate of 948,638 shares of common stock issuable upon the conversion of Series D preferred stock outstanding were excluded from the weighted average share calculations, as the effect was antidilutive. Basic and diluted loss per share per share for the quarter and six months ended June 30, 2005 includes warrants to purchase 802,896 shares of common stock, exercisable at $.015 per share reflected as outstanding from the date of grant.

18

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5 - WARRANTS

The following represents warrant activity during the six months ended June 30, 2006:

Balance at December 31, 2005	2,796,609
Granted	2,980,891
Exercised	(139,734	)
Expired or cancelled	(937	)
Balance at June 30, 2006	5,636,829

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following at June 30, 2006:

Accounts payable	$	1,613,634
Accrued professional fees		141,500
Due to officers		598,427
Accrued expenses		282,695
Accrued compensation		126,561
Deferred income		50,000
	$	2,812,817

NOTE 7 – FINANCING TRANSACTIONS

Modifications of Registration Rights Agreement: In October 2005 we closed a private placement in which we sold our common stock and Series F warrants to a group of accredited investors. In connection with such sales we entered into an agreement with such investors whereby we undertook to register all of the shares of our common stock they purchased, and the shares of our common stock issuable upon exercise of our Series F warrants they acquired, in that private placement. We agreed that if we did not file that registration statement by January 6, 2006, or have that registration statement declared effective by March 14, 2006, we would pay liquidated damages to the purchasers. Our agreement with those purchasers provided that the holders of a majority of the shares of our common stock we were required to register pursuant to that agreement (the “majority holders”) could modify and/or waive our obligations under that agreement and such modification and/or waiver would be binding on all the purchasers in that private placement. On January 30, 2006 the majority holders (i) waived our obligation to pay any liquidated damages for our failure to file the registration statement by January 6, 2006; (ii) extended to June 7, 2006, then later extended to September 15, 2006, the time by which the registration statement had to be declared effective before we had to pay any liquidated damages and (iii) permitted us to include in such registration statement shares of our common stock we may issue, or that will be issuable, in (x) a transaction in which we acquire by merger another biotechnology company and/or (y) a new private placement of our securities in which we raise up to $10,000,000.

Such modification and waiver enabled us to pursue such acquisition and private placement without incurring those liquidated damages expenses. The registration statement covering such shares went effective August 7, 2006.

Reduction of Liquidation Preference: All 5,948.6148 outstanding shares of our Series D Convertible Preferred Stock are owned by North Sound Capital LLC (North Sound) and SDS Capital Group SPC, Ltd. (SDS). On January 30 and 31, 2006 North Sound and SDS entered into agreements with us agreeing to exchange all of their shares of our Series D Convertible Preferred Stock into an equal number of shares of our new Series D-1 Convertible Preferred Stock. The only difference between our Series D Preferred shares and our Series D-1 Preferred shares is that the liquidation preference of the Series D Preferred shares is $10,000 per share and that of the Series D-1 Preferred shares is $10 per share. Each Series D-1 Preferred share will be convertible (as is each Series D Preferred share) into 266.666 shares of our common stock. As of August 14, 2006 we had not yet exchanged the Series D Preferred shares for Series D-1 Preferred shares.

19

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Series E warrant conversions: Various investors holding Series E warrants to purchase 13,144 shares of our common stock at $0.015 exercised such rights. Additionally on May 15, 2006 investors holding Series E warrants to purchase 126,590 shares of our common stock at $0.015 exercised such right on a cashless basis. Based on a $3.60 closing price they received 126,063 shares of our common stock.

Vendor Settlement: On March 17, 2006, we settled a vendor liability of approximately $102,000 for $35,000 payable in seven equal monthly installments of $5,000 and a three-year warrant to purchase 19,000 shares of our common stock at an exercise price of $3.75 per share. The warrant was valued at $54,982 utilizing a Black Scholes model with the following assumptions: expected life of 3 years, volatility factor of 86%, risk free rate of 4.64%, and no expected dividend yield. The warrant has piggyback registration rights for the underlying shares of common stock.

Cambrex Suite Deal II: On February 13, 2006 we entered into an agreement with our manufacturing and marketing partner, Cambrex, whereby for the six-month period January 1 to June 30, 2006 the $132,612 monthly charges we incur for rental of a production suite used to produce ORCEL at their Maryland facility, Cambrex agreed to accept 49,116 shares of our common stock monthly in lieu of cash payment. Accordingly, we issued 294,693 shares for six months of suite fees during the first half of 2006. The shares were valued at $1,119,834 using the closing market price of our common stock at the end of each monthly performance period. We also issued to Cambrex a three-year warrant exercisable July 1, 2006 to purchase 73,673 shares of our common stock at $11.25 per share. The warrant was valued at $67,505 on the date of agreement utilizing a Black Scholes model with the following assumptions: expected life of 3 years, volatility factor of 86%, risk free rate of 4.66%, and no expected dividend yield. The warrant is being amortized over the six-month period of the agreement. Each of these securities carry certain registration rights. The common shares issued to Cambrex were subject to registration rights and potential liquidated damages and have been classified on the balance sheet as temporary equity.

Fees due former investment banker: In April 2006, pursuant to an agreement reached in December 2005 to settle certain advisory fees ($250,000) and placement fees ($174,300) due to our former investment banker, we issued 113,147 shares of our common stock at $3.75 per share and Series F warrants to purchase 56,573 shares exercisable at $7.50 per share in lieu of a cash payment of the $424,300. Separately, the former investment banker received a $50,000 fee from our April 2006 placement as a termination fee. This $50,000 fee was treated as a cost of doing the private placement and accordingly offset the proceeds. It was also agreed that the investment banker would receive placement agent fees for any funds raised in the April 2006 private placement related to investor monies received by us in connection with investments made in the private placement by participants in previous Ortec financing rounds in which the investment banker or its principals acted as placement agent. In this regard we paid the investment banker $25,000, and issued Series H warrants to purchase 10,000 shares of our common stock at $7.50 per share to the investment banker and its designees.

Conversion of Series D preferred stock: In May 2006, the holder of 323.4008 shares of Series D preferred stock converted such shares into 86,240 shares of our common stock.

Bridge Financing: In March 2006, we received $445,000 in short-term loans. We received two loans for $130,000 and $65,000, respectively, from two of our executive officers. These loans were non-interest bearing and payable from the proceeds of our future financings. $35,000 was repaid on April 6, 2006 with the balance paid from the proceeds of our April 17, 2006 private placement of our equity securities. The third loan for $250,000 bore interest at 8% per annum and was from the investor who had committed to provide us with $1,058,000 by the later of the filing of our pre-market approval application for our confirmatory venous leg ulcer trial, or March 31, 2006. This $250,000 loan automatically converted into the equity securities we issued in our April 2006 private placement at 1.2 times the note’s principal and accrued interest amount. This amounted to $301,333. For this amount the investor received 301.333 shares of Series E preferred stock and a Series H warrant to purchase 100,444 shares of our common stock at $7.50 per share. We recorded the fair value of the warrants similar to the other Series H warrants as described under “Private Placement and forced conversion” below. Additionally we agreed that since the investor provided us with the funds earlier than was required, upon conversion of such $250,000 loan to our equity securities, we would forego such investor’s remaining commitment to provide us with $808,000 of additional financing, and that the earlier repricing (upon commitment) of our warrants held by such investor would not be affected.

On April 3, 2006, we received a non-interest bearing short-term loan of $45,000 from another of our executive officers which was repaid from our April 17, 2006 private placement plus a $500 transaction fee.

20

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On April 5, 2006, we received a $200,000 short-term loan from a third party due April 30, 2006 to be repaid at 110% of principal plus accrued interest at 8% per annum on the original $200,000 principal balance. We issued a three-year warrant to purchase 3,333 shares of our common stock at an exercise price of $7.50 per share to the lender. The warrant was valued at $7,262 utilizing a Black Scholes model with the following assumptions: expected life of 3 years, volatility factor of 86%, risk free rate of 4.79%, and no expected dividend yield. On April 18, 2006, we repaid this note with interest, or $220,778. Accordingly, we charged the $7,262 warrant value to interest expense.

Private Placement and forced conversion: On April 17, 2006, we completed a private placement sale for aggregate gross proceeds from accredited investors of $6,176,000. We issued an aggregate of 6,176 shares of our 6% Series E Convertible Preferred Stock and five-year warrants to purchase 2,058,667 shares of our common stock at $7.50 per share. We incurred placement fees of $608,200 (inclusive of $50,000 termination fee to former placement agent described above), legal expenses of $36,856, and other expenses of $4,115, or an aggregate cost of the financing of $649,171. In addition to cash fees we issued warrants to our investment banker, Rodman & Renshaw, LLC (R&R), who served as placement agent. R & R received warrants to purchase 153,017 shares at $7.50 per share. Another finder received a warrant to purchase 39,517 shares at $7.50 per share. The Series E Convertible Preferred Stock is entitled to vote on an “as converted” basis on all matters submitted to a vote by the holders of our common stock. At any time these investors can convert their preferred stock into common stock at a $3.00 conversion price. On September 6, 2006, the investors in the April 17, 2006 private placement are obligated to convert their preferred stock by dividing their $1,000 per preferred share purchase price plus dividends at 6% per annum from April 17, 2006, by the lesser of $3.00, or 90% of the average of the volume weighted average prices for our common stock for the twenty trading days following July 24, 2006 (the effective date of the 1 for 15 reverse split of our common stock). The warrants carry full ratchet price reset provisions should we sell our common stock or our other securities convertible into, or exercisable for, our common stock, at an effective price per common share less than the $7.50 exercise price of the warrants. We have registered under the Securities Act of 1933, all of the shares of our common stock issuable upon conversion of the 6% Series E Convertible Preferred Stock and upon exercise of such warrants. The registration statement for those shares was declared effective on August 7, 2006.

Under Section 170 of the Delaware General Corporation Law, we were prohibited from paying a dividend in cash to the holders of Series E preferred stock. We notified such investors that we would increase the basis of their preferred stock for any accrued dividends. Such investors were given the right to notify us not to increase their basis but receive our common stock instead. No investors notified us that they elected to receive our common stock. For the period ended June 30, 2006 we have increased the basis of the Series E preferred stock by $79,887, the amount of the dividend due for that period.

Warrant reclassification: Due to the nature of the volume weighted average calculation required under the Series E Convertible Preferred Stock whereby the final conversion price of the underlying common stock remained unknown at June 30, 2006, and under the rules promulgated by Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (EITF No. 00-19), we were required to reclassify the fair value of all of our existing outstanding warrants from our equity accounts at the date of the Series E Convertible Preferred Stock transaction and record them as a warrant liability. This was because it was unknown at June 30, 2006 whether we would have enough authorized shares to settle our outstanding warrants due to the unknown number of shares needed for the Series E Convertible Preferred Stock. At April 17, 2006, we recorded a liability for the fair value of all of our outstanding warrants, or $20,829,822, inclusive of an $8,878,822 fair value for our Series H warrants. We recorded a charge of $3,050,666 to our statement of operations for the excess of the fair value of our Series H warrants over the aggregate $5,828,162 consideration received ($5,526,829 net proceeds in private placement and a $301,333 of promissory note converted as described above for the Series E Convertible Preferred Stock) in the April 17, 2006 private placement. At June 30, 2006 we were required under EITF No. 00-19 to mark to market the fair values of the outstanding warrants. As of June 30, 2006 the fair value of our warrants was revised to $12,696,187. The decline in the fair value of the warrants at June 30, 2006 from the initial value recorded on April 17, 2006 for the warrants, resulted in income of $8,133,635. The net amount of $5,082,969 on our statements of operations under the caption “Change in fair value of warrants” represents the net effect of the decline in fair value of the warrants ($8,133,635) offset by the charge for the excess value of the Series H warrants over the consideration received in the April 17, 2006 private placement ($3,050,666). A Black Scholes model using the remaining expected lives of our warrants, a dividend yield of zero, estimated volatility of approximately 86%, and a risk free rate of 4.93% was used to calculate the respective fair values at June 30, 2006. Based on our knowledge of the convertible preferred calculation at August 14, 2006 we expect to be able to reclassify this amount to stockholders equity in the third quarter of 2006 when the conversion price will be known and we will be able to determine that there are enough authorized shares to settle all our outstanding equity securities.

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ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Escrow Claim: On May 3, 2006, 26,214 shares of our common stock was returned from escrow by certain former shareholders of Hapto Biotech, Inc. because of $126,614 of legal expenditures we paid which were owed by Hapto, and which Hapto and we agreed exceeded the permitted amount of Hapto liabilities surviving our acquisition of Hapto.

Deemed Dividend: Our private placement in April 2006 resulted in the repricing of our Series E and Series F warrants because of the anti-dilution provisions of those warrants. Series E warrants to purchase 47,840 shares of common stock at $22.50 per share were repriced to $11.85 per share resulting in a deemed dividend of $27,501. Series E warrants to purchase 254,279 shares of our common stock at $27.00 per share were repriced to $13.65 per share resulting in a deemed dividend of $155,171. Series F warrants to purchase 1,162,926 shares of our common stock at $7.50 per share were repriced to $6.75 per share resulting in a deemed dividend of $75,440. We calculated aggregate deemed dividends of $285,112 utilizing a Black Scholes model that compared the exercise price of the new warrants to the old warrant with the following assumptions for the Series E and F warrant: expected life of 5 (Series E) and 7 (Series F) years, volatility factor of 86%, risk free rate of 4.93% (Series E) and 4.96% (Series F), and no expected dividend yield.

Forbearance Expiration: On July 1, 2006, our December 13, 2004 agreement with Paul Royalty Fund, L.P. (PRF), whereby PRF agreed not to compel us to repurchase their interest in our revenues expired. As part of an overall restructuring of the debt, we are currently having discussions with PRF to extend the forbearance agreement but have not as yet reached an agreement. Although PRF has had the right for a long period of time to compel us to repurchase its interest in our revenues to date it has not exercised that right. Should PRF compel us to repurchase its interest in our revenues we would more likely not be able to satisfy the debt and PRF’s ability to recover the obligation we would owe it would likely be dependent on our ability to continue as a going concern to obtain our products approval.

NOTE 8 – PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS

On April 14, 2006, we closed our acquisition of Hapto Biotech (Hapto), a privately-held company focused on the development of two proprietary fibrin derived platform technologies: Fibrin Micro Beads (FMB’s) and Fibrin based peptides, (Haptides^™). Hapto’s research indicates that FMB’s have the ability to optimize the recovery, potential delivery and therapeutic value of adult stem cells. In October 2004, we initiated our relationship with Hapto by forming a joint venture to combine our proprietary collagen biomaterial technology and Hapto’s Haptide^™ peptide technology to develop non cellular, biologically active enhanced biomaterials to promote the attraction and attachment of cells for wound healing, reconstructive, cosmetic, tissue regeneration and dental applications. We believe that due to the early stages of the development of Hapto’s technology, that the Hapto assets we acquired do not constitute a business. In addition, at the date of acquisition, the technological feasibility of the acquired technology had not yet been established and the technology has no future alternative uses. On May 3, 2006, 26,214 shares of our common stock was returned from escrow by certain former shareholders of Hapto Biotech, Inc. because of $126,614 of legal expenditures we paid which were owed by Hapto, and which Hapto and we agreed exceeded the permitted amount of Hapto liabilities surviving our acquisition of Hapto. For such acquisition we issued a total of 2,031,119 shares of our common stock to the Hapto shareholders and granted them warrants to purchase an additional 200,000 shares of our common stock at $4.50 per share.. The investment banking firm of Rodman and Renshaw, LLC (R&R) acted as our advisor in this acquisition. R&R received three-year warrants to purchase 266,667 shares of our common stock at $4.50 per share for their advisory services. Such warrant was valued using the Black Scholes formula at $717,000. Based on the market price of our common stock on April 14, 2006, and valuing the warrants issued to Hapto’s shareholders as well as those issued to our investment advisor using the Black Scholes formula, the purchase price for Hapto was $10,694,571. Based on a preliminary purchase price allocation, the purchase price of $10,694,571, together with legal and other charges of $223,824, and negative goodwill of $86,820, or $11,005,215, was recorded as purchased in-process research and development, and accordingly, expensed immediately.. The Black Scholes model used to calculate the value of the warrants to the Hapto shareholders and R & R utilized the following factors: a three year term, risk-free rate of 3.73%, 86% volatility and no dividend yield.

NOTE 9 – COMMITMENTS & CONTINGENCIES

Legal Challenge Withdrawn: In January 2006 we were informed that Advanced Tissue Sciences withdrew its appeal against the grant of our European patent for our ORCEL product. We were originally granted the European patent in December 1997 and received notification in November 1998 that it was being challenged by Advanced Tissue Sciences. In March 2002, we announced that we had successfully defended Advanced Tissue Sciences’ opposition filed with the European Patent office and, subsequently, Advanced Tissue Sciences appealed the patent offices’ decision, but is now withdrawing that appeal. Withdrawal of the appeal by Advanced Tissue Sciences concludes this litigation and our European

22

ORTEC INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

patent remains as originally issued.

Third Amendment of Lease: On March 16, 2006 we agreed to a two-year extension of our lease for our 14,320 square foot New York City laboratory and office facility, effective January 1, 2006. We agreed to a monthly rental of $60,860 or $730,320 per annum. We have the option to renew the lease for an additional two years after 2007 at the rate of $63,843 per month, or $766,120 annually.

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Item 2. MANAGEMENT’S PLAN OF OPERATION

The following discussion should be read in conjunction with our financial statements and notes thereto. This discussion may be deemed to include forward-looking statements

Forward Looking Information May Prove Inaccurate

This Quarterly Report on Form 10-QSB contains certain forward looking statements and information relating to Ortec that are based on the beliefs of management, as well as assumptions made by and information currently available to us. When used in this document, the words “anticipate,” “believe,” “estimate,” and “expect” and similar expressions, as they relate to Ortec, are intended to identify forward looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including those described in this discussion and elsewhere in this Quarterly Report on Form 10-QSB. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. We do not intend to update these forward-looking statements.

Plan of Operation

We are a development stage enterprise which had no operating revenue prior to December 2001. During 2001, we received Food and Drug Administration approval for the use of the fresh form of our ORCEL product for the treatment of patients with recessive dystrophic epidermolysis bullosa and for donor sites in burn patients. We began marketing and selling our product for use on patients with one of these indications using a contract sales organization. Our sales and marketing efforts were active only for a brief period and accordingly our revenues were not significant. We terminated our sales efforts and elected to focus our attention on completing development of a cryopreserved form of our product for treatment of chronic wounds affecting larger populations. As a result, we completed a clinical trial during 2003 for the use of the cryopreserved form of ORCEL to treat venous stasis ulcers and filed an application for pre-market approval (PMA) with the FDA in February 2004. In a letter dated April 25, 2005, although the FDA concluded that cryopreserved ORCEL showed promise for the effective treatment of venous stasis ulcers, the FDA determined that additional data would be necessary to confirm cryopreserved ORCEL’s effectiveness and safety treating venous stasis ulcers. The clinical data from the pivotal trial of 136 patients submitted to the FDA showed that in 60 patients who had typical venous ulcers (defined as those ulcers with partial or full-thickness ulcers in which the wound base is visible and the ulcer extends through the dermis but not into the subcutaneous tissue to fascia, muscle or bone), 59% of the ORCEL treated patients achieved wound closure versus 36% of the patients who received the standard of care treatment. The FDA agreed that data of these 60 patients would be combined with that of the 60 patients to be enrolled in a confirmatory clinical trial and the combined results will be analyzed using Bayesian statistics. We obtained FDA approval for our confirmatory trial protocol in mid July 2005 and began the confirmatory trial in mid August 2005. We completed enrollment for this clinical trial in April 2006. In September 2006, we expect to complete the confirmatory trial designed to confirm the superiority of cryopreserved ORCEL in the treatment of difficult-to-heal venous leg ulcers in comparison to the standard of care therapy. During the third quarter, we expect to move forward with integrating the clinical data from the current confirmatory trial with the efficacy data from the 12-week pivotal trial previously submitted to the FDA as part of our PMA. We expect to submit a supplemental PMA to the FDA in the fourth quarter of this year. In addition, we are working with Cambrex Bio Science Walkersville, Inc., a subsidiary of Cambrex Corporation (Cambrex) to limit expenditures under our manufacturing agreement primarily to those which are essential for obtaining regulatory approval. Together, we are working on process improvements that we expect will drive down the cost of producing ORCEL as we plan for the potential commercial sales of our product. In February 2006, Cambrex assisted us financially by once again agreeing to accept our common stock and warrants in exchange for approximately $800,000 of production suite charges incurred during the first half of 2006.

In July 2006, we submitted a Humanitarian Device Exemption (HDE) supplement to the FDA to obtain marketing approval for use of cryopreserved ORCEL in the treatment of Recessive Dystrophic Epidermolysis Bullosa (RDEB), the most severe type of Epidermolysis Bullosa (EB). RDEB is a devastating congenital skin disorder characterized by painful ulcers and widespread, permanent scarring resulting in the deformity of hands and feet. As a result, many RDEB patients require surgeries to allow greater use of their extremities resulting in need for replacement skin.

The FDA has advised us that it could approve, without the need for additional data, an HDE supplement allowing for the use of cryopreserved ORCEL in those RDEB patients undergoing hand reconstruction as well as to cover donor sites created during the surgery (the area where skin was removed from another part of the patient’s body). In February 2001, the FDA previously granted us an HDE for this indication to market the non frozen version of ORCEL.

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We have deferred conducting a pivotal clinical trial for the use of ORCEL in the treatment of diabetic foot ulcers until after FDA determination of whether we may make commercial sales of cryopreserved ORCEL to treat venous stasis ulcers. We completed a pilot clinical trial for the use of ORCEL, in its fresh, not cryopreserved, form in the treatment of diabetic foot ulcers in the latter part of 2001. The results of that clinical trial showed a 75% improvement over the standard of care as well as a daily healing rate that was twice as fast as the standard of care, for those patients treated with ORCEL. On January 6, 2005, we submitted a modified protocol to the FDA for the conduct of a clinical trial of cryopreserved ORCEL to treat diabetic foot ulcers. In February 2005, the FDA completed a review of our modified protocol and gave us permission to initiate a pivotal trial evaluating cryopreserved ORCEL in the treatment of diabetic foot ulcers. We expect to initiate patient enrollment for the diabetic foot ulcers pivotal clinical trial shortly after receiving FDA clearance for commercial sales of ORCEL in the treatment of venous stasis ulcers. We expect that the diabetic foot ulcers clinical trial will be conducted at up to 25 clinical centers and involve up to approximately 200 patients.

In the past twelve months, in anticipation of commercial sales of ORCEL, our operations were focused towards finalizing the ORCEL production process at Ortec and transferring the commercial manufacturing operations to Cambrex. During this time we enhanced and validated the ORCEL production process at Ortec allowing for the transfer of the production process and full validation at Cambrex. Work was also ongoing in the area of process development to improve the consistency, increase the scale and reduce the cost of producing ORCEL. To increase scale and reduce the cost of producing ORCEL, we developed a cell factory process to provide for the ability to accomplish larger scale cell expansion which will facilitate the production of additional cell inventory. Development efforts were also ongoing to improve the process, and reduce the cost of producing our collagen sponge matrix, which included developing a prelaminated sponge and finding alternative sources of supply of bovine hide collagen and various grades of sponges that could provide new business opportunities. We validated several assay methods used to qualify incoming raw materials and to monitor both the ORCEL production process and the final ORCEL product, all required by the FDA. Other manufacturing cost reduction projects may be delayed, or may be accomplished in collaboration with Cambrex. Preliminary discussions with Cambrex have taken place with respect to the transfer of our cell expansion processes as well as co-development of other cost reduction and increased production projects. The costs associated with these projects will be negotiated with Cambrex.

The following is a listing of the projected development activities on which we expect to focus during the next twelve months:

• Transfer to Cambrex of a process which doubles the ORCEL production lot size,

• Production and expansion of cell inventory,

• Completion of prelaminated sponge project,

• Completion of development of the cell factory project,

• Completion of all FDA required tests and validations, and

• Validation of “BSE-free” collagen.

Additionally we plan to:

• Expand our focus to application of our technologies to opportunities in regenerative medicine such as stem cells, wound healing, and cosmetic tissue augmentation;

• Further develop Fibrin Micro Beads and Haptides™ (see next section);

• Explore opportunities where we can use our FDA approved facility, cell culturing biomaterials and regulatory knowledge and expertise as an income source or to secure interests in other companies’ biotechnology products or in their business operations;

• Examine potential licensing opportunities for use of our biomaterials in other tissue engineering applications;

• Pursue co-development opportunity using growth factor media in development of cosmeceutical products, and

• Submit proposals to the appropriate agencies for the purpose of securing available research grants.

We recently formed a Stem Cell and Regenerative Medicine Scientific Advisory Board and appointed noted stem cell expert Daniel Marshak Ph.D. as its Chairman. Currently, we have identified candidates we may wish to add to our advisory board and have initiated discussions with some of those candidates. We plan to announce new appointments to the board during the next few months.

We may invest approximately $125,000 for equipment which will allow us to expand our collagen sponge manufacturing capacity.

25

We expect that the above projects will require our current level of staffing. We periodically review and adjust our staffing levels and operational expenses for maximum efficiency. We do not presently expect any significant changes in personnel in 2006.

We will need to secure additional financing for the approximately $875,000 of expenses we are currently incurring on a monthly basis. The amount of cash we consume each month fluctuates, depending, among other things, on whether we are incurring expenses from services provided by third party suppliers in connection with a clinical trial and what payments we have to make on our outstanding debt.

While we have arranged for payment of some of our obligations over a period of time, and have to make other payments of past due obligations to our current and ongoing suppliers, our ability to make payments we have agreed to pay and to insure continued receipt of needed supplies and services, and to continue reducing our past due obligations, will depend on our ability to secure needed financing or our ability to issue equity in satisfaction of certain obligations.

We hope to obtain additional funds through the sale of our securities to the public and through private placements, debt financing or other short-term loans. We may not be able to secure any financing nor may we be able to reach the larger patient population markets of persons with venous stasis ulcers and diabetic foot ulcers, with funds that we may be able to raise. We are also likely to continue to encounter difficulties which are common to development stage companies, including unanticipated costs relating to development, delays in the testing of products, regulatory approval and compliance and competition.

Acquisition of Hapto Biotech

We closed our acquisition of Hapto Biotech (Hapto) on April 14, 2006. Hapto was a privately-held company involved in the field of tissue engineering focused on the development of two proprietary fibrin derived platform technologies: Fibrin Micro Beads (FMB’s) and Fibrin based peptides (Haptides^™), which have demonstrated the ability to optimize the recovery, potential delivery and therapeutic value of adult stem cells. Hapto’s research indicates that FMB’s have the ability to efficiently recover adult stem cells from mixed cell populations, as well as allow for their growth, proliferation and potential reimplantation into the patient. Hapto’s research also indicates that Haptides^™ have the ability to enhance cell attraction and attachment, as well as effect cellular internalization of macromolecules and nanoparticles, allowing for the potential development of products for the stem cell, tissue regeneration and tissue augmentation, gene therapy and drug delivery markets.

We believe that due to the early stages of the development of Hapto’s technology, that the Hapto assets we acquired do not constitute a business. For such acquisition we issued a total of 2,057,333 shares of our common stock to the Hapto shareholders and granted them warrants to purchase an additional 200,000 shares of our common stock at $4.50 per share. The investment banking firm of Rodman & Renshaw, LLC (R&R) acted as our advisor in this acquisition. R&R received three-year warrants to purchase 266,667 shares of our common stock at $4.50 per share for their advisory services. Based on the market price of our common stock on April 14, 2006, and valuing the warrants using the Black Scholes formula, the value of the shares and warrants we issued to Hapto’s shareholders and R & R was approximately $10,800,000. The purchase price will be allocated to in-process research and development costs, and accordingly, expensed immediately.

Haptides^™

Since acquiring the Haptides^™ cell attachment technology, we have concentrated on implementing a pro-active product development and outlicensing commercialization strategy. This technology, which is a fibrin-based natural human peptide sequence with superior cell attraction properties, is simple and inexpensive to manufacture; offers a good safety profile in that it is non-immunogenic, non-inflammatory and non-toxic; and has demonstrated preclinical validation of its ability to enhance cell attachment. Our initial application of the Haptides^™ technology is to the active biomaterial collagen. Our findings have shown that Haptides^™ modified collagen improved cell attachment and growth In Vitro by 40-50%, and In Vivo implantation studies continued to show promising results as well. These findings provide the basis for our belief that Haptides^™ modified collagen can be developed as an enhanced injectable dermal filler for the very significant and growing cosmetic tissue augmentation market.

We believe that a micronized Haptide-enhanced acellular injectable dermal filler can have major competitive advantages over leading products available today, by providing the same immediate enhanced cosmetic effect as current products, but with the added advantage of providing the ability for those improved results to last significantly longer. According to the American Society for Aesthetic Plastic Surgeons and Medical Insight, Inc., the global dermal filler market is growing at 25% per year. Valued at $442 million in 2005, this market is projected to grow to $1.5 billion by 2011. (© 2006 Medical Insight, Inc.: Medical Insights Executive Summary: Global Market for Dermal Fillers 2005 –2011).

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In addition, we are focused on achieving several other key objectives in 2006 with our Haptides^™ technology, including evaluating other product opportunities for Haptized collagen in the areas of chronic wound healing, periodontal regeneration and as a matrix for Mesenchymal type adult stem cell differentiation and delivery. Further, we plan to evaluate the application of the Haptides^™ technology to implantable materials, including dental and orthopedic implants.

Earlier this month, we were notified by the U.S. patent office that the claims of our patent application, “Novel Haptotactic Peptides” related to our Haptides^™ technology platform, have been allowed. The patent incorporating these claims is expected to be issued by the end of 2006. We are currently evaluating the opportunity for additional patent claims and filings around the Haptides^™ technology.

We have initiated preliminary discussions with companies focused on the orthopedic, dental, and cosmetic markets, which have expressed interest in potentially partnering with Ortec to structure co-development and licensing agreements for our Haptides^™ technology platform.

Fibrin Microbeads

Also acquired with our acquisition of Hapto, Fibrin Microbeads (Fibrin MB) are cross linked, heat-treated Fibrin beads that can be used to isolate matrix-dependent cells, including Mesenchymal-type Adult Stem Cells. We believe Fibrin MB represent valuable and unique intellectual property, with five U.S. patents issued and a notice of allowance recently received for a European patent, and is a technology which has significant advantages over comparable technology positioning it to be the product of choice in adult stem cell based therapeutics.

The Fibrin MB stem cell technology, we believe, is a flexible, comprehensive, one solution approach for adult stem cell therapy. Fibrin MB have the unique potential to provide the clinician the ability to isolate stem cells from multiple sources including blood, which is the least invasive tissue source that previously was not considered to be a viable source of a sufficient quantity of stem cells for therapeutic application. Additionally, Fibrin MB have the flexibility to deliver the isolated stem cells therapeutically as an initial cell product or as an expanded or differentiated stem cell product. Fibrin MB may also ultimately be used to reimplant the stem cells to the patient. All the current autologous adult stem cell methods we are aware of do not have the ability to provide this comprehensive solution to adult stem cell therapy.

In preclinical tests, Fibrin MB has successfully demonstrated the ability to isolate stem cells, yielding four to eight times the current standard from rat and mouse bone marrow, and a good yield from GCSF-mobilized human blood. The technology has also proven effective with adipose tissue derived stem cells. Moreover, it has shown the ability to allow those stem cells to expand five to ten-fold after five to seven days’ in culture. In terms of differentiation, Fibrin MB has demonstrated the differentiation of human cells to bone, cartilage and fat and has shown a commitment to differentiation by five to seven days, with full differentiation by 14 days.

Our milestone driven development plan for this novel stem cell product currently provides for the ability to initiate an FDA clinical trial in bone regeneration within approximately 18 months. A preclinical trial evaluating Fibrin MB for bone regeneration has recently been initiated.

We also have initiated discussions with potential strategic partners to explore collaborations and licensing arrangements for our Fibrin MB technology platform.

Other Liquidity Matters

Our agreement with Paul Royalty Fund (PRF) provides that in certain events PRF may, at its option, compel us to repurchase the interest in our revenues that we sold to PRF for a price equal to the $10,000,000 PRF paid us plus an amount that would yield PRF a 30% per annum internal rate of return on its $10,000,000 investment. Among the events that would entitle PRF to compel us to repurchase its interest in our revenues at that price is if we are insolvent or if we are unable to pay our debts as they become due. Our agreement with PRF provides that in determining such insolvency any amount we owe to PRF is excluded in calculating our net worth (or negative net worth). In addition, although we are currently trying to manage our debt we are not paying our debts as they become due. As defined in our agreement with PRF we are currently insolvent. As a result of this insolvency our obligation under the revenue interest assignment is stated at $33,676,000, the amount PRF could compel us to pay to repurchase their revenue interest at June 30, 2006. Although in December 2004 we entered into an eighteen-month forbearance agreement providing that PRF would not prior to July 1, 2006 compel us to repurchase its interest in our revenues because of our insolvency, as of June 30, 2006 we were still considered insolvent and therefore were required to record as an obligation we owe PRF the amount to provide PRF with a 30% internal rate of return on its $10,000,000 investment. As part of an overall restructuring of the debt, we are currently having discussions

27

with PRF to extend the forbearance agreement but have not as yet reached an agreement. Although PRF has had the right for a long period of time to compel us to repurchase its interest in our revenues to date it has not exercised that right. Should PRF compel us to repurchase its interest in our revenues we would more likely not be able to satisfy the debt and PRF’s ability to recover the obligation we would owe to it would likely be dependent on our ability to continue as a going concern to obtain our products approval. If in the future PRF exercised its right to compel us to repurchase its interest in our revenues and we did not have the funds to do so, PRF could foreclose its security interest in our U.S. patents, patent applications and trademarks and in such event we may have to discontinue our business operations. Outside of a repurchase event, more fully explained in Note 10 of the consolidated financial statements of our Form 10-KSB for the year ended December 31, 2005, PRF would be entitled to the applicable royalty percentages of our future revenues in North America. We estimate that we would need to achieve a North American sales level of approximately $1,321,000,000 during the approximate remaining five sales years under the revenue interest assignment agreement to offset the principal balance of the $33,676,000 revenue interest obligation. We are prohibited by SFAS 15 from making a reasonable estimation of our future sales to assess the amount of our future debt payments and therefore are precluded from reducing the liability and recognizing a gain at this time. We believe we will likely record a gain on the revenue interest assignment obligation to PRF in 2011 or upon termination, if sooner.

Our capital funding requirements depend on numerous factors, including:

• the progress and magnitude of our research and development programs;

• the time involved in obtaining regulatory approvals for the commercial sale of our ORCEL product in its cryopreserved form to treat venous stasis ulcers and, later, diabetic foot ulcers;

• the costs involved in filing and maintaining patent claims;

• technological advances;

• competitive and market conditions;

• the successful implementation of the agreements we have entered into with Cambrex for manufacturing and sales of our ORCEL product;

• our ability to establish and maintain other collaborative arrangements and

• the cost and effectiveness of commercialization activities and arrangements.

Unless we obtain additional financing we will not be able to continue to operate our business.

On March 17, 2006, we settled a vendor liability of approximately $102,000 for $35,000 cash payable in seven equal monthly installments and a three-year warrant to purchase 19,000 shares of our common stock at an exercise price of $3.75 per share. The warrant has piggyback registration rights for the underlying shares of common stock.

In March 2006, we received $445,000 in short-term loans. We received two loans for $130,000 and $65,000, respectively, from two of our executive officers. These loans were non-interest bearing and payable from the proceeds of our future financings. $35,000 was repaid on April 6, 2006 with the balance paid from the proceeds of our April 17, 2006 private placement of our equity securities. The third loan for $250,000 bore interest at 8% per annum and was from the investor who had committed to provide us with $1,058,000 by the later of the filing of our pre-market approval application for our confirmatory venous leg ulcer trial, or March 31, 2006. This $250,000 loan automatically converted into the equity securities we issued in our recent private placement, at 1.2 times the note’s principal and accrued interest amount. Additionally we agreed that upon conversion of such $250,000 loan to our equity securities, since the investor provided us with the funds earlier than was required, we would forego such investor’s remaining commitment to provide us with $808,000 of additional financing, and that the earlier repricing (upon commitment) of our warrants held by such investor would not be affected.

On April 3, 2006 we received another short-term loan of $45,000 from another of our executive officers. This loan was also repaid from the proceeds of our recent private placement. On April 17, 2006, with the completion of our recent private placement, we converted the $250,000 short-term loan with its then outstanding loan balance of $301,333 into 301.333 shares of our Series E Preferred Stock, and issued a warrant to purchase 100,444 shares of our common stock at an exercise price of $7.50 per share. On April 5, 2006 we received a $200,000 short-term loan due April 30, 2006 which was repaid out of the proceeds of our April 17, 2006 private placement at 110% of principal plus accrued interest at 8% per annum on the original $200,000 principal balance. We issued a three-year warrant to purchase 3,333 shares of our common stock at an exercise price of $7.50 per share to the lender.

On April 17, 2006, we completed a private placement sale for aggregate gross proceeds of $6,176,000 to accredited investors. We issued an aggregate of 6,176 shares of our 6% Series E Convertible Preferred Stock and five-year warrants to purchase 2,058,677 shares our common stock at $7.50 per share. The Series E Convertible Preferred Stock is entitled to

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vote on an “as converted” basis on all matters submitted to a vote by the holders of our common stock. At any time these investors can convert their preferred stock into common stock at a $3.00 conversion price. On September 6, 2006, the investors are obligated to convert their preferred stock by dividing their $1,000 per preferred share purchase price plus dividends at 6% per annum from April 17, 2006 by the lesser of $3.00, or 90% of the average of the volume weighted average prices for our common stock for the twenty trading days following July 24, 2006 (the effective date of the 1 for 15 reverse split of our common stock). The warrants carry full ratchet price reset provisions should we sell our common stock or our other securities convertible into, or exercisable for, our common stock, at an effective price per common share less than the $7.50 exercise price of the warrants. We have registered under the Securities Act of 1933, all of the shares of our common stock issuable upon conversion of the 6% Series E Convertible Preferred Stock, and upon exercise of such warrants. We had to pay investors 2% per month for any failure to timely file the registration statement by June 18, 2006 or have it declared effective by August 17, 2006. Both dates were met and our registration statement was declared effective August 7, 2006.

Due to the nature of the volume weighted average calculation required under the Series E Convertible Preferred Stock whereby the final conversion price of the underlying common stock remained unknown at June 30, 2006, and under the rules promulgated by Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, we were required to reclassify the fair value of all of our existing outstanding warrants from our equity accounts at the date of the Series E Convertible Preferred Stock transaction and record a warrant liability of $12,696,187. This was because it was unknown at June 30, 2006 whether we would have enough authorized shares to settle our outstanding warrants due to the unknown number of shares needed for the Series E Convertible Preferred Stock. Based on our knowledge of the convertible preferred calculation at August 14, 2006 we expect to be able to reclassify this amount to stockholders equity in the third quarter of 2006 when the conversion price will be known and we will be able to determine that there are enough authorized shares to settle all our outstanding equity securities.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2006.

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Item 3. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30, 2006 (“Evaluation Date”) have concluded that our disclosure controls and procedures were not effective in timely alerting us to material information relating to usrequired to be included in our periodic filings with the Securities and Exchange Commission.

Management identified the following material weaknesses which has caused management to conclude that, as of June 30, 2006, our disclosure controls and procedures were not effective:

• In relation to the preferred stock transaction completed on April 17, 2006 that caused the Company’s outstanding warrants to be classified as a liability, the Company’s financial reporting close review controls did not identify a material clerical error that was made when transferring the computed fair value of all the warrants to a computerized spreadsheet.

• During the fourth quarter of 2006, we received a comment letter from the SEC’s Division of Corporation Finance (“Staff”) relating to a routine review of our Form 10-KSB for the year ended December 31, 2005 and Form 10-QSB/A for the quarter ended June 30, 2006. In the course of responding to the Staff’s comments, we reviewed the accounting treatment for the various transactions. We determined that certain transactions, specifically our accounting for the Series C preferred stock exchange in the first quarter of 2005 and our accounting for the reduction in Series E warrant prices to $0.001 in relation to the issuance of promissory notes in the second quarter of 2005 were recorded incorrectly. Additionally, in the first quarter of 2007, we discovered while preparing for the December 31, 2006 audit, that although we had properly disclosed the issuance of a warrant to our investment bankers in connection with our Hapto acquisition in the second quarter of 2006 in our Form 10-QSB filing, we had inadvertently failed to record the related non-cash charge for the warrant issuance.

Remediation of Material Weaknesses

Management has corrected the financial statements and disclosures and discussed this matter with the audit committee. Due to limited funding we rely primarily on one person to handle all of the various accounting responsibilities we encounter as well as to determine the appropriate accounting for the various complex accounting transactions we enter into. To remediate the material weaknesses in our disclosure controls and procedures identified above, in addition to working with our independent auditors, we plan to:

• add an additional computational check control to our future spreadsheet calculations,

• dedicate additional time and resources to training, and

• consider allocating our limited resources to hiring outside financial consultants to assist with the review of our more complex financing transactions.

The control deficiencies will be fully remediated when in the opinion of our management, the revised control processes have been operating for a sufficient period of time to provide assurance as to their effectiveness. We believe we will be able to make this assessment by December 31, 2007.

Our management, including the Certifying Officers, do not expect that our disclosure controls and procedures will prevent all errors and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, a design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons, or by management override of the control. Further, the design of any system of controls is also based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in

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conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations and a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

(b) Changes in internal controls.

There were no changes in our internal controls or in other factors that could materially affect, or are likely to materially affect, our internal controls over financial reporting in the second quarter of 2006.

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Item 6. EXHIBITS

	(a)	Exhibit No.	Description
		31.1 *	Rule 13a-14(a) / 15d- 14 (a) Certification of Principal Executive Officer
		31.2 *	Rule 13a-14(a) / 15d –14 (a) Certification of Principal Financial Officer
		32.1 *	Section 1350 Certification of Principal Executive Officer
		32.2 *	Section 1350 Certification of Principal Financial Officer
* filed herewith

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	Registrant:
	ORTEC INTERNATIONAL, INC.
Date: April 17, 2007	By:	/s/ Ron Lipstein
		Ron Lipstein
		Chief Executive Officer
Date: April 17, 2007	By:	/s/ Alan W. Schoenbart
		Alan W Schoenbart
		Chief Financial Officer

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