10-K

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended December 31, 2004

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 0-27046

                            ORTEC INTERNATIONAL, INC.
                 (Name of small business issuer in its charter)

                Delaware                                         11-3068704
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                          Identification No.)

             3960 Broadway
           New York, New York                                      10032
(Address of principal executive offices)                         (Zip Code)

                    Issuer's telephone number (212) 740-6999

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 par value

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 [ ]

          Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

          State issuer's revenues for its most recent fiscal year - $0 -

          State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: $17,833,121 as of March
11, 2005.

          State the number of shares outstanding of each of the issuer's class
of common equity, as of the latest practicable date: 26,211,749 as of March 11,
2005. (giving effect to issuance of 242,931 shares as a result of conversion of
60.7309 shares of Series B preferred stock for which the Series B preferred
stock certificates have not been surrendered.)

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None






                            ORTEC INTERNATIONAL, INC.
                      INDEX TO ANNUAL REPORT ON FORM 10-KSB
                FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                              ITEMS IN FORM 10-KSB



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Facing page

Part I
           Item 1.   Description of Business..................................1
           Item 2.   Description of Property.................................19
           Item 3.   Legal Proceedings.......................................19
           Item 4.   Submission of Matters to a Vote of Security Holders.....19

Part II
           Item 5.   Market for Common Equity and Related Stockholder
                        Matter...............................................20
           Item 6.   Management's Plan of Operation..........................22
           Item 7.   Financial Statements....................................24
           Item 8.   Changes in and Disagreements with Accountants on
                        Accounting and Financial Disclosure..................24
           Item 8.A. Controls and Procedures.................................24
           Item 8.B. Other Information.......................................24

Part III
           Item 9.   Directors and Executive Officers of the Registrant......25
           Item 10.  Executive Compensation..................................28
           Item 11.  Security Ownership of Certain Beneficial Owners
                        and Management.......................................30
           Item 12.  Certain Relationships and Related Transactions..........32
           Item 13.  Exhibits................................................33
           Item 14.  Principal Accountant Fees and Services..................34
Signatures...................................................................35







               INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve a number of risks and uncertainties. Such
forward-looking statements include statements about our strategies, intentions,
expectations, goals, objectives, discoveries, collaborations, preclinical and
clinical programs, and our future achievements. These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as "may," "will," "intends," "plans," "believes,"
"anticipates," "expects," "estimates," "predicts," "potential," "continue," or
"opportunity," the negative of these words or words of similar import. For such
statements, we claim the protection of the Private Securities Litigation Reform
Act of 1995. Readers of this Annual Report on Form 10-KSB are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. These forward-looking statements are based
largely on our expectations and projections about future events and future
trends affecting our business, and are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated in the
forward-looking statements. Important factors that could cause actual results to
differ materially from those in these forward-looking statements are disclosed
in this Annual Report on Form 10-KSB, including, without limitation, those
discussions under "RISK FACTORS" in "Item 1. Business". In addition, past
financial and/or operating performance is not necessarily a reliable indicator
of future performance and you should not use our historical performance to
anticipate results or future period trends. We can give no assurances that any
of the events anticipated by the forward-looking statements will occur or, if
any of them do, what impact they will have on our results of operations and
financial condition. Except as required by law, we undertake no obligation to
publicly revise our forward-looking statements to reflect events or
circumstances that arise after the filing of this Form 10-KSB or documents
incorporated by reference herein that include forward-looking statements.

In this Annual Report on Form 10-KSB, "Ortec," "we," "us" and "our" refer to
Ortec International, Inc. and our wholly owned subsidiary, Orcel LLC, unless the
context otherwise provides.

                                     PART I

Item 1. DESCRIPTION OF BUSINESS

Overview

We are a development stage tissue engineering company that has developed a
proprietary and patented technology that we call OrCel (R) (ORCEL), which is
used to stimulate the repair and regeneration of human skin. ORCEL is a
two-layered tissue engineered dressing that consists of human derived skin
cells, both dermal and epidermal, supported within a porous collagen matrix. The
composite matrix is seeded with keratinocytes (epidermal cells) and fibroblasts
(dermal cells). When ORCEL is applied to the wound site, it produces a mix of
growth factors that stimulates wound closure.

We completed a pivotal clinical trial for the use of ORCEL in its cryopreserved
form for the treatment of venous stasis ulcers. Venous stasis ulcers are open
lesions on the legs which result from the poor circulation of the blood
returning from the legs to the heart. In February 2004, we filed with the Food
and Drug Administration (FDA) our application for clearance to market ORCEL for
the treatment of venous stasis ulcers. The FDA is still in the process of
reviewing our application and has asked for clarification of various information
provided by us. On February 28, 2005, in response to our request for a meeting,
we met with the FDA in Washington, D.C. for the purpose of gaining clarity on
outstanding issues related to our pre-market approval application for venous
stasis ulcers. The primary items discussed at the meeting included the safety
profile of ORCEL as well as the statistical methodologies we used in presenting
our clinical data. Subsequently we followed up that meeting with an additional
submission to the FDA addressing all the issues raised at the meeting. After
this additional submission we requested and have been granted a follow-up
meeting in Washington, D.C. expected to take place in April 2005. The purpose of
this meeting will be to discuss any remaining issues with respect to our
additional submission and attempt to resolve any other outstanding issues.

We have developed the technology for the cryopreservation of ORCEL without
diminishing its effectiveness. Cryopreservation is the freezing of our product
to give it a minimum shelf life of seven months, as opposed to only a few days
with the non-cryopreserved product. We believe that the longer shelf life will
reduce the cost per unit of producing ORCEL as well as provide us with a
marketing advantage over non-frozen competitive products.


                                        1






Our primary target patient populations for the use of ORCEL are persons with
venous stasis and diabetic foot ulcers, which we believe are large potential
markets for the use of ORCEL. We also believe that ORCEL could be used to treat
other medical conditions, such as decubitis ulcers. Decubitis ulcers are
pressure sores, commonly known as bed sores. Decubitis ulcers range from a small
wound to a very deep wound extending to and sometimes through a bone into
internal organs. ORCEL may also have applications for cosmetic surgery.

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. 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 the use 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.

We have entered into an agreement with Cambrex Bio Science Walkersville, Inc., a
subsidiary of Cambrex Corporation (Cambrex), for Cambrex to produce ORCEL for us
in Cambrex' production facilities in Walkersville, Maryland. Cambrex is
experienced in producing cell based medical products such as ORCEL. Having
Cambrex produce ORCEL for us alleviated the need for us to build and equip our
own production and distribution facility, thus avoiding a large capital outlay,
and is otherwise more cost effective for us. We have also entered into an
agreement with Cambrex for Cambrex to be the exclusive distributor of ORCEL in
the United States, Canada and Mexico. Our sales agency agreement with Cambrex
requires Cambrex to spend $4,000,000 in a sixteen month period to create a sales
force for, and otherwise to arrange for the sale of ORCEL. That agreement also
provides us with a share of revenues from the sale of ORCEL, a dedicated sales
force, and an amendment to our Cell Therapy Manufacturing Agreement with Cambrex
resulting in a $1,500,000 reduction in the amount we were required to contribute
to building a larger production facility, all of which are more favorable to us
than what we were offered by other distributors. We believe that our production
and sales agreements with Cambrex will enable us to begin commercial sales of
ORCEL in the United States shortly after, and if, we get clearance from the FDA
to begin commercial sales of cryopreserved ORCEL for the treatment of venous
stasis ulcers.

We are currently also seeking agreements for the sale of ORCEL outside North
America. We have already entered into an agreement with a subsidiary of Teva
Pharmaceuticals Industries, Limited (Teva), a major pharmaceutical company, for
Teva to distribute ORCEL in Israel.

While our immediate focus continues to be the commercialization of our core
technology for chronic wounds and wound management, we expect to continue to
look at opportunities in which we can leverage our cell culturing biomaterials
and regulatory knowledge base and expertise and broaden our potential sources of
revenue. In October 2004 we entered into a collaboration agreement with Hapto
Biotech Inc., a company involved in the field of tissue engineering. The
collaboration, utilizing each company's proprietary technologies, will evaluate
the safety and efficacy of a non cellular peptide based collagen biomaterial in
promoting the attraction and attachment of healthy cells within the patient's
body in regenerating new tissue or repairing wounds. If the collaboration is
successful, we believe that this approach, being non cellular in nature, could
provide a low cost alternative treatment for less hard to heal wounds.
Additionally we believe that this advanced biomaterial can be used for the
cosmetic, reconstructive orthopedic and dental procedures, as well.

During 2004 we also announced an agreement with ES Cell International Pte, Ltd
(ESI) to collaborate in the development of ESI's human Embryonic Stem Cell (hES)
derived cell therapy products. Under the terms of the agreement, we will supply
ESI with human skin cells generated from cell lines developed and manufactured
by us for our ORCEL product. We have conducted extensive testing for viruses of
the cells we are providing to ESI in accordance with FDA guidelines. ESI will
use the cells we provide in research and development and in commercialization of
their stem cell products. Under the terms of the agreement, we have received and
may receive upfront payments and payments on the achievement of milestones in
ESI's human hES cell derived cell therapy programs. The agreement also provides
for payment of royalties to us from future commercial sales of ESI's cell
therapy products.


                                        2






Ortec was organized in 1991 under the laws of the State of Delaware for the
purpose of acquiring, developing, testing and marketing our skin replacement
product. Our executive offices are located at 3960 Broadway, New York, New York,
and our telephone number is (212) 740-6999. Our website address is
www.ortecinternational.com.

The Product

ORCEL is produced from cells derived from infant foreskins obtained during
routine circumcisions. The immature, neonatal cells are highly reproductive and
provide enhanced proliferation and rapid remodeling of the human skin. We
separate the epidermis from the dermis and treat each of these layers to release
individual keratinocyte (epidermal) and fibroblast (dermal) cells, which are the
primary cellular components of human skin. We grow the fibroblast and
keratinocyte cells in cultures in large quantities, then freeze and store them
as a cell bank, ready for use. Prior to the use of each cell line, we conduct
extensive testing and screening in accordance with current FDA guidelines to
ensure that the cells are free of presence of bacterial contaminants, viruses,
pathogens, tumorigenicity or other transmittable diseases. We then apply the
dermal fibroblast cells to a proprietary, cross-linked bovine collagen sponge to
form the dermal layer matrix and we grow the epidermal keratinocyte cells on a
separate non-porous layer of collagen. We then incubate and supply this
composite matrix with the proper nutrients to allow the cells to multiply and
for the fibroblasts to permeate inside and anchor to the porous collagen sponge.
The top layers of keratinocyte cells and bottom layers of fibroblast cells in
the collagen matrix, together, constitute our proprietary ORCEL.

Original Research

Dr. Mark Eisenberg, a physician in Sydney, Australia, developed our technology.
Dr. Eisenberg is a director and one of the founders of Ortec. He has been
involved in biochemical and clinical research at the University of New South
Wales in Australia for over twenty-five years, focusing primarily on treating
the symptoms of epidermolysis bullosa. In 1987, through his work on
epidermolysis bullosa, Dr. Eisenberg first succeeded in growing epidermal layers
of human skin, which he successfully applied as an allograft on an epidermolysis
bullosa patient. An allograft is a transplant other than with the patient's own
skin. Dr. Eisenberg continued his research which eventually led to the
development of ORCEL: a tissue-engineered dressing which consists of both the
dermal and epidermal layers.

Government Regulation

We are subject to extensive government regulation. Products for human treatment
are subject to rigorous pre-clinical and clinical testing procedures as a
condition for approval by the FDA and by similar authorities in foreign
countries prior to commercial sale. Presently, we are awaiting a decision from
the FDA regarding our application for the use of ORCEL to treat venous stasis
ulcers. However, it is not possible for us to determine whether the results
achieved from our human clinical trial will be sufficient to obtain FDA
clearance.

The FDA Clearance Process

Pursuant to the Federal Food Drug and Cosmetic Act and regulations promulgated
thereunder, the FDA regulates the manufacture, distribution and promotion of
medical devices in the United States. ORCEL is considered by the FDA to be a
medical device and is therefore regulated by the Center for Device and
Radiological Health. We must receive pre-market clearance from the FDA for any
commercial sale of our product. Before receiving such clearance we must provide
proof in human clinical trials of the safety and efficacy of ORCEL. Pre-market
clearance is a lengthy and expensive process.

The steps in the FDA clearance process may be summarized as follows:

     o    The sponsor (such as Ortec) prepares a protocol which sets forth in
          detail all aspects of the proposed clinical trial. The information
          includes the number of patients to be treated, the number of sites
          (hospitals and clinics) at which the patients in the clinical trial
          are to be treated, the then current standard of care with which the
          patients in the control group (in comparable medical condition as the
          patients to be treated with the medical device which is the subject of
          the clinical trial) are to be treated, the treatment frequency and the
          statistical plan that will be utilized to analyze the data derived
          from the clinical trial.

     o    The protocol also has to establish the safety of the use of the
          medical device to be studied in the trial. Safety can be established
          in a number of ways. One is by showing the results of use of the
          medical device in treatments in other clinical trials, in hospital
          approved treatments elsewhere in


                                        3






          the world or by use in animal clinical trials and/or in an FDA cleared
          "pilot" clinical trial in which far fewer patients are treated than in
          the definitive "pivotal" clinical trial.

     o    The sponsor submits the protocol to the FDA.

     o    The FDA staff gives their comments, objections and requirements on the
          submitted protocol.

     o    The sponsor redrafts the protocol and otherwise responds to the FDA's
          comments.

     o    The sponsor recruits hospitals and clinics as sites at which the
          patients in the study are to be treated. Such recruitment begins with
          or prior to the preparation of the protocol.

     o    After the FDA clears the protocol the trial sites and the sponsor
          recruit the patients to be treated in the study.

     o    The patients are treated at not more than the number of trial sites
          specified in the protocol. One half of the patients are treated with
          the medical device being studied and the other half, the control
          group, with the then current standard of care for treatment of the
          same medical condition.

     o    The sites follow up each treated patient (for the period and the
          number of times provided in the FDA cleared protocol) to determine the
          efficacy of the medical device being studied in the treatment of the
          medical condition identified in the protocol, as against the efficacy
          of the standard of care used in the study.

     o    The sponsor assists and monitors compliance with the protocol's
          requirements in each site's conduct of the study.

     o    The sponsor collects the clinical data of each patient's treatment and
          progress from the sites.

     o    The data is analyzed by or for the sponsor. The sponsor prepares a
          report of the results of the study and submits the report and the
          supporting clinical data to the FDA staff reviewers for their comments
          and questions.

     o    After staff review of the submitted data, the sponsor responds to the
          FDA's comments and questions.

     o    After completion of its review, the FDA staff may submit a report of
          the results of the trial to an advisory medical panel consisting of
          experts in the treatment of the medical condition which the studied
          medical device is intended to treat.

     o    The panel submits its advice as to the efficacy and safety of the
          device to the FDA official who is the Director of the FDA Division to
          which the protocol and the results of the pivotal trial were
          originally submitted. If no advisory panel is required, the FDA staff
          reviewers submit their recommendation directly to the Division
          Director.

     o    The FDA Division Director is the FDA official who determines whether
          or not to clear the medical device for commercial sale for treatment
          of that medical condition. The sponsor may appeal a Division
          Director's negative determination through appeal levels within the
          FDA, up to the Commissioner of the FDA.

     o    After FDA clearance the sponsor must submit all labeling information
          for the medical device to the FDA to make certain that the claims on
          the label accurately state the uses for which the medical device has
          been cleared.

We have completed the treatment and follow-up of 136 patients in the pivotal
clinical trial of the use of ORCEL in its cryopreserved form for the treatment
of venous stasis ulcers. We have also collected the clinical data of treatment
and patient follow up from all the 19 sites that participated in the study. We
submitted the manufacturing and controls section of our pre-market approval
application in December 2003 and in February 2004 we filed the final section of
our pre-market approval application, which included the summary of safety and
effectiveness in the


                                        4






clinical studies and device labeling. From February 2004 through March 2005 we
have responded to various questions from the FDA relating to our pre-market
approval application. We have most recently met with FDA and have submitted
additional information regarding the safety profile of cryopreserved ORCEL as
well as the statistical methodologies we used in presenting our clinical data.
We have scheduled a further meeting with the FDA in April 2005 to discuss the
issues in this additional submission and attempt to resolve any other
outstanding issues.

Although we have completed an FDA cleared pilot clinical trial for the use of
the fresh form of ORCEL for the treatment of diabetic foot ulcers, we have
deferred conducting a pivotal clinical trial for the use of ORCEL in its
cryopreserved form for the treatment of diabetic foot ulcers until after we
receive FDA clearance of our application for the use of ORCEL in the treatment
of venous stasis ulcers. We do not expect to begin the FDA clearance process for
a pivotal trial for cryopreserved ORCEL for the treatment of diabetic foot
ulcers until we believe that we can secure financing for the conduct of that
trial.

In 2001, the FDA granted our application for the commercial sale of ORCEL for
the treatment of donor site wounds. A donor site wound is created in an area of
the patient's body from which the patient's skin was taken to cover a wound at
another part of such patient's body. In 2001, the FDA also granted our
application for the commercial sale of ORCEL for use on patients with recessive
dystrophic epidermolysis bullosa undergoing hand reconstruction, as well as to
treat the donor site wounds created during the surgery. Recessive dystrophic
epidermolysis bullosa is a condition in which a newborn infant's skin instantly
blisters and can peel off at the slightest touch and leave painful ulcerations
and permanent scarring resulting in deformity of the hands and feet. From
December 2001 through December 2002, our gross revenues from the sale of ORCEL
were $265,665. We discontinued our sales efforts and the manufacture of fresh
ORCEL for commercial sale preferring to use our limited financial resources for
the completion of our clinical trial for the use of cryopreserved ORCEL in the
treatment of venous stasis ulcers. Cryopreserved ORCEL has a significantly
longer shelf life, costs less per unit to produce, and provides us with a
marketing advantage over non-frozen competitive products. Based on published
information we believe that the use of ORCEL for the treatment of patients
suffering from venous stasis ulcers, and of patients suffering from diabetic
foot ulcers, each represents a significantly larger potential market than the
use of ORCEL for the treatment of donor site wounds or epidermolysis bullosa.

Regulatory Strategies

We employ a team of regulatory and clinical professionals, both full time
employees and consultants, with extensive knowledge in strategic regulatory and
clinical trial planning to support our product development efforts through every
stage of the development and FDA clearance process. We also employ persons with
extensive knowledge and experience in the marketing and sale of new FDA approved
products for treatment of many medical conditions, including experience in
securing approval of insurance companies to reimburse their insured patients for
the cost of the use of new medical products used in medical treatments. We have
secured approval for Medicare payments for the use of ORCEL under Medicare's
Outpatient Prospective Payment System (OPPS). This approval covers the use of
ORCEL in hospitals, other hospital-owned facilities and for hospital outpatient
treatment. However, we will still need to secure the approval of Medicare
designated contractors in different parts of the country for approval of the
different medical conditions for which Medicare reimbursement of the use of
ORCEL will be made. We can only secure that further approval after we have
received FDA clearance for use of ORCEL for the treatment of that medical
condition. We will also seek to secure approval for private health insurance
providers' reimbursement for the cost of ORCEL. We believe that securing
Medicare reimbursement approval for ORCEL will be of significant assistance to
us in securing reimbursement approval by private health insurance companies.

Sales Agency Agreement

As noted above our business strategy is to combine our efforts with Cambrex for
the production and commercial sale of ORCEL. On October 18, 2004, we entered
into a Sales Agency Agreement with Cambrex, providing for Cambrex to be the
exclusive sales agent in the United States for our ORCEL product or any other
future bi-layered cellular matrix product of ours for the treatment of venous
stasis ulcers, diabetic foot ulcers or any other therapeutic indication for
dermatological chronic or acute wound healing. The agreement is for a period of
six years beginning sixty days after we receive clearance from the FDA for the
commercial sale of ORCEL for the treatment of venous stasis ulcers, but the
agreement's six-year term will not commence before April 1, 2005. The agreement
requires us to pay commissions to Cambrex ranging from initially at 40% of net
sales and decreasing to 27% of net sales as the amount of sales increases. Based
upon our negotiations with other distributors, we believe these commission rates
are favorable for us. The agreement requires Cambrex to spend $4,000,000 for
marketing efforts during the sixteen-month period after the FDA clears our sale
of ORCEL for the treatment of venous stasis ulcers.


                                        5






Cambrex has the right to terminate the agreement if (a) we do not receive FDA
clearance for commercial sale of ORCEL for the treatment of venous stasis ulcers
by April 1, 2005 or (b) if for any period of six consecutive months beginning in
2007, sales are less than 9,000 units. We may terminate the agreement if sales
of ORCEL are less in any twelve month period than amounts targeted in the
agreement for that period (ranging from 10,000 units in the first twelve month
period to 100,000 units in the sixth twelve month period). Although we will not
have received FDA clearance by April 1, 2005 we have received no indication from
Cambrex that they plan to terminate our agreement in the immediate future.

Concurrent with the Sales Agency Agreement we entered into a License Agreement
pursuant to which we licensed certain intellectual property rights to Cambrex.
We also entered into a Security Agreement with Cambrex to secure the performance
of our obligations under the Manufacturing, License, and Sales Agreement. The
secured collateral consists of all accounts, cash, contract rights, payment
intangibles, and general intangibles arising out of or in connection with the
sale of products pursuant to the sales agreement and/or license agreement. The
lien and security interest under this security agreement are subordinate and
junior in priority to the perfected lien and security interest we granted to
Paul Royalty Fund under the Paul Royalty Security Agreement

Production and Supply

On October 29, 2003, we entered into an agreement commencing November 1, 2003,
with Cambrex for Cambrex to manufacture ORCEL in its Walkersville, Maryland
facilities. The Cambrex manufacturing facility is required to meet FDA's good
manufacturing processes standards. Cambrex is experienced in the manufacture of
cell-based medical products such as our ORCEL. On October 18, 2004, in
connection with our Sales Agency Agreement with Cambrex, we amended certain
terms of this manufacturing agreement.

Our manufacturing agreement with Cambrex requires us to currently pay Cambrex
$128,750 per month, or $1,545,000 per year, for the use of a Cambrex production
facility in Walkersville, Maryland. The payments we will make to Cambrex will
increase to $175,000 monthly, or $2,100,000 per year, if we require Cambrex to
build us a larger production facility to meet our requirements for the
production of ORCEL. Such annual payments include some services and overhead
expenses provided and paid for by Cambrex. These annual payments we are required
to make increase 3% per annum on the anniversary of the commencement date. We
are required to pay 50% of the cost of the construction of that larger
production facility up to a maximum payment by us of $1,000,000 (up to
$2,500,000 if we terminate our Sales Agency Agreement with Cambrex). However,
the amount we contribute to the construction of that larger facility will be
repaid to us by credits against a portion of the future annual payments and of
certain other payments we are required to make to Cambrex after the larger
facility is in use. We are also required to pay specified hourly charges for the
Cambrex employees engaged in the production of ORCEL as well as certain other
charges. After construction of the larger production facility we are required to
acquire from Cambrex virtually all of our requirements for ORCEL that Cambrex
can produce. Prior to our election to have Cambrex construct the larger
production facility for us, either we or Cambrex may terminate the agreement on
six months notice by us and twelve months notice by Cambrex. If we elect to have
Cambrex construct the larger production facility for us the agreement will
continue for six years after the larger production facility is constructed.
However, even after such construction we and Cambrex may elect to scale down
over the following three years the portion of our requirements for ORCEL that
Cambrex will produce for us. We may elect the scale down period at any time
after one year after the larger production facility is constructed and in
operation in which event there are additional payments we must make to Cambrex.
If we elect the scale down period after one year we must pay Cambrex $2,625,000
and if we elect the scale down period after two years we must pay Cambrex
$1,050,000. If we elect the scale down periods in either of those two years, we
forfeit our right to receive any further credits (up to the amount of our
contribution to the cost of the larger production facility) against payments we
are thereafter required to make to Cambrex. Either Cambrex or we may elect the
scale down period later than three years after that facility is in operation and
neither of us will be required to make any additional payments to the other
because of that election.


                                        6






If after the construction of the larger production facility, we breach a
material term of our agreement with Cambrex, or elect to terminate the
agreement, we will have to pay Cambrex the following amounts:



If termination occurs after the following      Amount
anniversary of the construction of the           of
larger production facility                    Payment
- -----------------------------------------   ----------
                                         
6 years                                     $1,050,000
5 years, but less than 6 years               1,575,000
4 years, but less than 5 years               2,625,000
3 years, but less than 4 years               3,675,000
2 years, but less than 3 years               5,250,000
1 year, but less than 2 years                6,300,000


In addition, upon such termination we will forfeit our right to receive any
further credits (up to the amount of our contribution to the cost of the larger
production facility) against future payments we may have to make to Cambrex.

The raw materials that we use to manufacture ORCEL come from a limited number of
suppliers. We currently purchase collagen corium, a component of the collagen
matrix in ORCEL, from a single supplier but we are in the process of qualifying
a secondary source. The collagen matrix used in ORCEL is manufactured for us to
our specifications at another supplier, and we are in the process of identifying
a secondary source for collagen matrix also. On December 30, 2004 we entered
into a two-year supply agreement with the manufacturer of the collagen matrix.
Under such agreement we agreed to minimum purchase commitments. We also rely on
a limited number of suppliers for other materials used in the manufacture of
ORCEL. While there may be other sources from where we could purchase such
materials, a disruption in the supply chain for any of those materials would
have a significant negative impact on our ability to manufacture and sell ORCEL
and in any event would likely cause us delays and additional expenses in the
manufacturing of ORCEL.

Competition

We are aware of several companies that are actively engaged in the research and
development of products for the repair and regeneration of skin. There are
currently three primary and distinct approaches to the repair and regeneration
of skin: the acellular (no cell) approach, including the use of cadaver based
products; the cell-based unilayered (epidermal or dermal cell) approach, and the
cell-based bi-layered (epidermal and dermal cell) approach. A cell-based
approach makes use of donor cells. The approach we believe to be the most
advanced and effective is the cell-based bi-layered approach, making use of
donor cells. The production of ORCEL consists of a top layer of epidermal cells
and a bottom layer of dermal cells in a collagen matrix, that is a bi-layered
approach utilizing donor cells.

There are many products available for treating skin wounds. However, as already
noted, we believe that the use of donor cells delivered to the wound on a matrix
is the most effective process for healing skin wounds and in particular hard to
heal skin wounds. Therefore, we believe that only products using donor cells
placed on a matrix will compete with ORCEL.

We consider the Apligraf product manufactured by Organogenesis, Inc. and the
Dermagraft product manufactured by Smith & Nephew (formerly by Advanced Tissue
Sciences, Inc.) to be our principal competitors. Each manufactures and sells an
FDA cleared product using donor cells placed on a matrix, for the treatment, in
the case of Organogenesis' Apligraf, of both venous stasis and diabetic foot
ulcers, and in the case of Smith & Nephews' Dermagraft for the treatment of
diabetic foot ulcers. Smith & Nephews' Dermagraft is manufactured in a
cryopreserved form while Organogenesis' Apligraf is not. Both Organogenesis and
Smith & Nephew are substantially larger than we are and have significantly
greater resources than we have.

The biomedical field is continually undergoing rapid and significant
technological changes. Other companies may succeed in developing other products
that are more effective than ORCEL. If such new products are accepted by the
medical community, or if those products receive FDA approval for treatment of
venous stasis and diabetic foot ulcers before ORCEL does, or if other companies
develop products that are more effective than ORCEL, any such developments could
impede our ability to continue our operations.


                                        7






Patents and Proprietary Rights

We have four United States patents, one European patent covering thirteen
countries, and ten patents in ten other countries, issued. We also have one
United States and eight international patent applications (filed under the
Patent Cooperation Treaty) pending for our technology and processes:

     o    The first of these patents covers the structure of ORCEL. It is an
          epidermal layer of cultured epidermal cells and a bilayered collagen
          sponge structure that includes a layer of highly purified, non-porous
          collagen on top of a porous cross-linked collagen sponge containing
          cultured dermal cells. This patent expires on February 1, 2011. This
          is also the technology covered by the European and other foreign
          patents which have been issued to us. These foreign patents also
          expire in 2011.

     o    Another United States patent provides for the extension of the use of
          the collagen sponge structure described above which may contain cells
          other than epidermal and/or dermal cells, such as cells for
          regenerating such organs and tissues as heart muscle, blood vessels,
          ligaments, cartilage and nerves. This patent also expires on February
          1, 2011. We have not performed, nor are we planning to perform in the
          near future, any clinical trial using our platform technology for use
          of donor cells other than epidermal and dermal cells.

     o    Another United States patent covers a manufacturing process which,
          when implemented, can reduce the cost of producing ORCEL. This new
          manufacturing process creates an improvement over our collagen
          structures described above in that a third layer of collagen which is
          hospitable to cell growth is deposited on the non-porous collagen
          layer. This patent expires on December 28, 2020.

     o    Our fourth United States patent covers a process for the
          cryopreservation of ORCEL. This patent expires on December 26, 2021.

Despite such patents our success will depend, in part, on our ability to
maintain trade secret protection for our technology.

We successfully defended challenges by Organogenesis to our United States patent
and by Advanced Tissue Sciences to our European patent in the respective patent
offices where those patents were issued. However, those successful defenses do
not preclude future challenges in court. Advanced Tissue Sciences has appealed
our favorable European patent determination and the appeal is currently pending.
We do not know if any of the other patents issued to us will be challenged,
invalidated or circumvented. Patents and patent applications in the United
States may be subject to interference proceedings brought by the U.S. Patent and
Trademark Office, or to opposition proceedings initiated in a foreign patent
office by third parties or to re-examination proceedings in the United States.
We might incur significant costs defending such proceedings and we might not be
successful.

The validity and breadth of claims in medical technology patents involves
complex legal and factual questions and, therefore, are highly uncertain. We do
not know if any pending patent applications or any future patent application
will issue as patents, that the scope of any patent protection obtained will be
enough to exclude competitors or that any of our patents will be held valid if
subsequently challenged in court proceedings. We do not know if others have or
will develop similar products, duplicate any of our products or design around
any of our patents issued or that may be issued in the future. In addition,
whether or not patents are issued to us, others may hold or receive patents
which contain claims having a scope that covers aspects of our products or
processes.

Several of our competitors have been granted patents, including those granted to
Organogenesis and Advanced Tissue Sciences, Inc., relating to their particular
skin technologies which also utilize donor cells on a collagen sponge matrix. To
that extent they may be considered similar to our ORCEL technology.


                                        8






Paul Royalty Fund Agreement

In August 2001 and in 2002, we entered into agreements with Paul Royalty Fund,
L.P. (PRF) pursuant to which we agreed in consideration of PRF paying us
$10,000,000, to pay to PRF 3.33% of the end user sales prices paid for our ORCEL
product in the United States, Canada and Mexico through the period ending in
2011. Such percentage interest in our revenues in those three countries may be
adjusted upward or downward based on the volume of sales to end users of ORCEL
in those three countries. As security for the performance of our obligations to
PRF, we have granted PRF a security interest in all of our U.S. patents, patent
applications and trademarks. Our agreement with 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 $22,738,110, the amount PRF could compel us to
repurchase their revenue interest at December 31, 2004. In December 2004, PRF
entered into a forbearance agreement with us agreeing that they cannot exercise
their right to compel us to repurchase their interest in our revenues because of
our insolvency prior to July 2006. If PRF exercised its right to compel us to
repurchase its interest in our revenues and we did not have the funds to pay the
purchase price, PRF could foreclose its security interest in our U.S. patents,
patent applications and trademarks and in such event we will have to discontinue
our business operations.

The agreement with PRF is more fully described in Note 11 of the accompanying
financial statements. As described in Note 11, in accordance with accounting
promulgated by Statements of Financial Accounting Standards No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS 15) even if we
are no longer insolvent as long as our future cash payments relating to the
revenue interest assignment obligation are indeterminate, the revenue interest
assignment obligation would remain at the value that achieves the 30% internal
rate of return for PRF through the last date of our insolvency. We believe that
it is highly improbable we will ever owe PRF the amount of this obligation.

SFAS 15 allows debtors that can predict with certainty the absolute amounts of
future cash flow payments to record an immediate gain if the maximum future cash
payments are less than the carrying amount of the obligation. In the case where
the future cash payments are indeterminate, as ours are considered, the gain is
not recognized until the end of the term of the outstanding debt, December 31,
2011, or upon termination. We estimate that we would need to achieve a North
American sales level of approximately $750,000,000 during the approximate
remaining six years under the revenue interest assignment agreement to offset
the principal balance of the $22,738,110 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.

Research and Development Expenses

Research and development expenses consist primarily of salaries; amounts paid to
Cambrex, facility costs and laboratory supplies. Research and development
expenses were $7,139,733 for the year ended December 31, 2004, compared to
$7,474,067 for the year ended December 31, 2003.

Compliance with Environmental Regulations

We are subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, the Controlled Substances Act and other present
and potential future federal, state or local regulations. Our research and
development programs involve the controlled use of hazardous materials,
chemicals, biological materials and various radioactive compounds.

Although we believe that our operations comply in all material respects with
applicable environmental laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result, and the extent of that liability


                                        9






could exceed our resources. Our compliance with these laws and regulations did
not, and is not expected to, have a material effect upon our capital
expenditures, earnings or competitive position.

Employees

We presently employ 40 people on a full-time basis, including four executive
officers. We also have three part-time employees.

Available Information

Our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current
reports on Form 8-K and all amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge on our website (www.ortecinternational.com) as soon as
reasonably practicable after they are filed with, or furnished to, the
Securities and Exchange Commission.


                                       10






                                  RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
If any of the following risks actually occur, our business could be harmed. In
such case, the trading price of our common stock could decline, and you may lose
all or part of your investment.

Risks Related to Our Business

We do not have sufficient funds to bring our product to market for use by large
 patient populations. Unless we secure additional financing we will not be able
                      to continue to operate our business.

We anticipate that the proceeds we received from our private placement in
January 2005 will be sufficient to meet our cash requirements only through April
2005. We will need to secure additional financing for the approximately $830,000
of cash we are currently consuming per month. 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.

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.

Our capital funding requirements depend on numerous factors, including:

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

     o    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;

     o    the costs involved in filing and maintaining patent claims;

     o    technological advances;

     o    competitive and market conditions;

     o    our ability to establish and maintain collaborative arrangements;

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

     o    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. We have no current commitments from any persons that they will
provide any additional financing.

 Because of our history of ongoing losses and because we may never generated a
profit and our lack of cash or other current assets, we have received an opinion
from our auditors that there is substantial doubt about our ability to continue
                              as a going concern.

Since our organization in 1991 we have sustained losses each year because, among
other reasons, we have had very limited sales of our product. In the year ended
December 31, 2004, we incurred a net loss applicable to common stockholders of
$17,144,804. During the year ended December 31, 2004, our current liabilities
exceeded our current assets by $14,595,624, and our total liabilities exceeded
our total assets by $36,356,354, and we have a deficit accumulated in our
development stage of $120,452,544. Our auditors advised us that these factors,
among others, raise substantial doubt about our ability to continue as a going
concern. Unless we obtain additional financing we will not be able to continue
as a going concern.


                                       11






  We have accumulated obligations that we are required, but are unable, to pay
   currently. This also raises doubt as to our ability to continue as a going
                                    concern.

As of December 31, 2004, payment of approximately $2,605,000 of the
approximately $3,203,000 we owed to our trade creditors was past due. We have
entered into agreements with creditors to whom we owe an aggregate of $961,000
(as of December 31, 2004) to pay $732,000 in 2005 and $229,000 in 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 to continue reducing our past
due obligations, will depend on our ability to secure needed financing.

  Unless we secure FDA clearance for the sale of ORCEL to treat venous stasis
    ulcers it will be difficult for us to continue to operate our business.

We completed the treatment and follow-up of 136 patients in our pivotal clinical
trial of the use of ORCEL in its cryopreserved form for the treatment of venous
stasis ulcers, and in February 2004 we filed our pre-market approval application
with the FDA to market ORCEL for the treatment of venous stasis ulcers. We may
not obtain FDA clearance for the commercial sale of the cryopreserved form of
ORCEL for the treatment of venous stasis ulcers and later for diabetic foot
ulcers. Among the factors which may contribute to that finding are a negative
assessment of our manufacturing processes, raw materials used in manufacturing
our product, our freezing technique, and ORCEL's clinical results. For example,
the clinical results submitted in our application show statistically significant
differentials between ORCEL and the standard of care therapy for both primary
clinical endpoints and certain secondary endpoints in the overall group of
patients treated in the clinical trial. However, the overall group of patients
treated in the trial included patients with venous ulcers which were complicated
by other factors (including diseases other than venous insufficiency). In
reaching our conclusion of statistical significance, we used standard and
generally accepted statistical analytical methods to account for the impact that
patients who had ulcers which were complicated by other factors, had on the
overall clinical results. However, the FDA may disagree with our analysis and
therefore with our claim of statistical significance. If we do not obtain FDA
clearance for the sale of ORCEL in its cryopreserved form for the treatment of
venous stasis ulcers, it will be difficult for us to continue our business
operations.

Unless we later secure FDA clearance for the sale of ORCEL in its cryopreserved
 form to treat diabetic foot ulcers our sales of ORCEL will be more limited and
                   thereby limit our ability to earn profits.

Although we have completed an FDA cleared pilot clinical trial for the use of
the fresh form of ORCEL for the treatment of diabetic foot ulcers, we do not
have the funds available to conduct a pivotal clinical trial for the use of
ORCEL in its cryopreserved form for the treatment of diabetic foot ulcers. The
cryopreserved form of ORCEL has a shelf life of approximately seven months as
opposed to only approximately three days for the fresh form of ORCEL. We expect
to initiate patient enrollment only after, and if, we receive clearance for the
sale of cryopreserved ORCEL in the treatment of venous stasis ulcers currently
under FDA review. We do not expect to begin the FDA clearance process for a
pivotal trial for cryopreserved ORCEL for the treatment of diabetic foot ulcers
until we believe that we can secure financing for the conduct of that trial. If
we are unable to later obtain FDA clearance for the sale of cryopreserved ORCEL
for the treatment of diabetic foot ulcers, and to a lesser extent for the
treatment of donor site wounds, our sales of ORCEL will be more limited and
thereby limit our ability to earn profits.

  Clinical trials for ORCEL are expensive, time consuming and their outcome is
                                   uncertain.

Clinical trials are very expensive and difficult to design and implement. The
clinical trial process is also time consuming. Before we can obtain regulatory
clearance for the commercial sale of any product that we wish to develop, we are
required to complete extensive human clinical trials to demonstrate its safety
and efficacy. The timing of the commencement, continuation and completion of
clinical trials may be subject to significant delays relating to various causes,
including:

     o    delays or inability to manufacture or obtain sufficient quantities of
          materials for use in clinical trials;

     o    delays in obtaining regulatory approvals to commence a study;

     o    delays in identifying and reaching agreement on acceptable terms with
          prospective clinical trial sites;


                                       12






     o    slower than expected rates of patient recruitment and enrollment;

     o    uncertain dosing issues;

     o    inability or unwillingness of medical investigators to follow our
          clinical protocols;

     o    variability in the number and types of subjects available for each
          study and resulting difficulties in identifying and enrolling subjects
          who meet trial eligibility criteria;

     o    scheduling conflicts with participating clinicians and clinical
          institutions;

     o    difficulty in maintaining contact with subjects after treatment,
          resulting in incomplete data;

     o    unforeseen safety issues or side effects;

     o    lack of effectiveness during the clinical trials; or

     o    other regulatory delays.

Even if our ORCEL receives regulatory clearance, ORCEL will still be subject to
extensive post-market regulation which will result in significant expense to us.

If we receive regulatory clearance for ORCEL, we will also be subject to ongoing
FDA obligations and continued regulatory review, such as continued safety
reporting requirements, and we may also be subject to additional FDA
post-marketing obligations, all of which may result in significant expense and
limit our ability to commercialize our product.

If we receive United States regulatory clearance, the FDA may still impose
significant restrictions on the indicated uses for which the product may be
marketed or impose ongoing requirements for potentially costly post-approval
studies. In addition, regulatory agencies subject a product, its manufacturer
and the manufacturer's facilities to continual review and periodic inspections.
The subsequent discovery of previously unknown problems with a product,
including adverse medical effects, or problems with the facility where the
product is manufactured, may result in restrictions on the marketing of that
product, and could include withdrawal of the product from the market. Failure to
comply with applicable regulatory requirements may result in:

     o    issuance of warning letters by the FDA;

     o    fines and other civil penalties;

     o    criminal prosecutions;

     o    injunctions, suspensions or revocations of marketing licenses;

     o    suspension of any ongoing clinical trials;

     o    suspension of manufacturing;

     o    delays in commercialization;

     o    refusal by the FDA to approve pending applications or supplements to
          approved applications filed by us or our collaborators;

     o    refusals to permit products to be imported or exported to or from the
          United States;

     o    restrictions on operations, including costly new manufacturing
          requirements; and

     o    product recalls or seizures.

The FDA's policies may change and additional government regulations may be
enacted that could prevent or delay regulatory clearance of our ORCEL or further
restrict or regulate post-clearance activities. We cannot predict the
likelihood, nature or extent of adverse government regulation that may arise
from future legislation or administrative action, either in the United States or
abroad. If we are not able to maintain regulatory compliance, we might not be
permitted to market ORCEL and our business could suffer.

In order to market any products outside of the United States, we and our
collaborators must establish and comply with numerous and varying regulatory
requirements of other countries regarding safety and efficacy. Approval
procedures vary among countries and can involve additional product testing and
additional administrative review periods. The time required to obtain clearance
in other countries might differ from that required to obtain FDA clearance. The
regulatory clearance process in other countries may include all of the risks
associated with FDA clearance as well as additional presently unanticipated
risks. Regulatory clearance in one country does not ensure regulatory clearance
in another, but a failure or delay in obtaining regulatory clearance in one
country may negatively impact the regulatory process in others. Failure to
obtain regulatory clearance in other countries or any delay or setback in
obtaining such clearance could have the same adverse effects associated with
regulatory clearance in the United States, including the risk that our product
may not be cleared for all indications requested and that such clearance may be
subject to limitations on the indicated uses for which ORCEL may be marketed.


                                       13






  Because ORCEL is our only product, our failure to sell ORCEL on a profitable
            basis will limit our ability to continue our operations.

To date ORCEL is the only product that we have developed. In the event we fail
to develop additional products, or if the FDA does not grant us clearance to use
ORCEL for the treatment of venous stasis ulcers and later diabetic foot ulcers,
or if ORCEL is not favorably received by the medical community or it becomes
obsolete, we will be unable to become profitable and we may be required to
discontinue our operations.

  We may lose our U.S. patents, patent applications and trademarks because of
                  security interests we have granted in them.

See the description of our agreement with Paul Royalty Fund (PRF) in Part I,
Item 1 of this report on Form 10-KSB. 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 will have to discontinue
our business operations.

We are subject to extensive governmental regulation which increases the costs of
manufacturing our product and will thereby negatively impact our ability to earn
                                    profits.

Our business is subject to extensive regulation principally by the FDA in the
United States and corresponding foreign regulatory agencies in each country in
which we intend to sell ORCEL. These regulations affect:

     o    Product marketing clearances or approvals;

     o    Product standards;

     o    Packaging requirements;

     o    Design requirements;

     o    Manufacturing and quality assurance, including compliance by the
          manufacturing facility with good manufacturing process requirements,
          record keeping, reporting and product testing standards;

     o    Labeling;

     o    Periodic FDA inspections of the facility in which ORCEL will be
          manufactured;

     o    Import and export restrictions; and

     o    Tariffs and other tax requirements.

Our need to comply with these regulatory requirements will increase the cost of
manufacturing our ORCEL product and negatively impact our ability to earn
profits.

 The medical community may not accept ORCEL which will prevent us from selling
               ORCEL and prevent us from continuing our business.

Market acceptance for ORCEL will depend upon a number of factors, including:

     o    The receipt and timing of FDA regulatory approvals for use of ORCEL,
          in its cryopreserved form, for the treatment of venous stasis ulcers
          and later for diabetic foot ulcers;

     o    Acceptance by the medical community of ORCEL for the treatment of the
          medical conditions that it is intended to treat, the demonstration of
          its safety and its cost effectiveness; and

     o    Securing approval of third parties, such as Medicare and insurance
          companies, for reimbursement for the cost of ORCEL.

Unless we secure market acceptance for ORCEL we will be unable to sell ORCEL and
as a result we will be unable to conduct any business.


                                       14






Our potential competitors have greater financial, sales and marketing resources
      than we do so that we may have difficulty in competing against them.

See the description of "Business - Competition" in Part I, Item 1 of this report
on Form 10-KSB. As there noted sales of Apligraf are now being made directly by
Organogenesis and sales of Dermagraft are being made by Smith & Nephew, a
medical device company which purchased Advance Tissue Science's interest in
Dermagraft. Both Organogenesis and Smith & Nephew are substantially larger than
we are and have significantly greater resources than we have. The biomedical
field is continually undergoing rapid and significant technological changes.
Other companies may succeed in developing other products that are more effective
than ORCEL. If such new products are accepted by the medical community, or if
those products receive FDA clearance for treatment of venous stasis and diabetic
foot ulcers before ORCEL does, or if other companies develop products that are
more effective than ORCEL, any such developments could impede our ability to
continue our operations.

We rely on a limited number of key suppliers to manufacture ORCEL and therefore
run the risk of delay in securing needed materials from other suppliers. We also
  rely on only one distributor to sell ORCEL in the United States, Canada and
Mexico and run the risk that such distributor may not successfully market ORCEL.

See the discussion of "Business-Production and Supply" in Part I, Item 1 of this
report on Form 10-KSB where we describe our production and sales distribution
agreements with Cambrex and our agreements with other suppliers. If Cambrex does
not produce ORCEL at a per unit price well below the price at which we can sell
ORCEL in North America we may not be able to continue, or at least would be
seriously hampered in continuing, our business operations. Also, any disruption
in the supply of collagen or collagen matrix or other materials from our current
suppliers of such materials would have a significant negative impact on our
ability to manufacture and sell ORCEL or at least would cause us delays and
additional expenses in the manufacturing of ORCEL.

  We depend on our patents and proprietary technology which may not provide us
 with sufficient protection against technologies used, or which may be used by
 our competitors. We cannot protect our intellectual property rights throughout
                                   the world.

The validity and breadth of claims in medical technology patents involves
complex legal and factual questions and, therefore, are highly uncertain.
Although we successfully defended challenges to our United States and European
patents in the respective patent offices where those patents were issued, those
successful defenses do not preclude future challenges in court. The dismissal of
the challenge to our patent in Europe has been appealed. We do not know if any
of the other patents issued to us will be challenged, invalidated or
circumvented. Patents and patent applications in the United States may be
subject to an interference proceeding brought by the U.S. Patent and Trademark
Office, or to opposition proceedings initiated in a foreign patent office by
third parties. We might incur significant costs defending such proceedings and
we might not be successful. We do not know if any of our patents or any of our
pending patent applications or any future patent application of ours that will
issue as patents, will provide us with the scope of patent protection that will
be enough to exclude competitors. We also do not know that any of our patents
will be held valid if subsequently challenged or that others will not claim
rights in or ownership of the patents and other proprietary rights held by us.
We do not know if others have or will develop similar products, duplicate any of
our products or design around any of our patents issued or that may be issued in
the future. In addition, whether or not patents are issued to us, others may
hold or receive patents which contain claims having a scope that covers aspects
of our products or processes.

Filing patents on our ORCEL technology throughout the world would be
prohibitively expensive. Competitors may use our technology in jurisdictions
where we have not obtained patent protection to develop their own products.
These products may compete with ORCEL and may not be covered by any of our
patent claims or other intellectual property rights.

Patent law outside the United States is also uncertain and many countries are
currently reviewing and revising patent laws, particularly with respect to
biotechnology and pharmaceutical inventions. The laws of some countries do not
protect our intellectual property rights to the same extent as U.S. laws. It may
be necessary or useful for us to participate in proceedings to determine the
validity of our, or our competitors', foreign patents, which could result in
substantial cost and divert our efforts and attention from other aspects of our
business.


                                       15






   We may be subject to product liability claims which we might not be able to
              pay thereby causing us to discontinue our business.

ORCEL is designed to be used in the treatment of medical conditions and diseases
where there is a high risk of serious medical complications, amputation of the
leg or death. Although we have obtained product liability insurance coverage in
the amount of $3,000,000, such insurance coverage may not be adequate to protect
us against future product liability claims. In addition, the cost of obtaining
product liability insurance in the future may prevent us from securing such
insurance on terms acceptable to us, if at all. Furthermore there can be no
assurance that we will avoid significant product liability claims and the
attendant adverse publicity. Large product liability claims or other claims with
respect to uninsured or underinsured liabilities could make it impossible for us
to continue our business operations.

    If we lose our key employees we may not be able to continue our business
                                  operations.

Messrs. Lipstein and Papastephanou, two of our executive officers, manage our
day-to-day operations. The development and production of our product is managed
by a wide array of scientific personnel, two of whom we consider to be key
employees. Dr. Melvin Silberklang is our vice president for research and
development and our chief scientific officer. Mr. Steven Peltier coordinates and
supervises our clinical and regulatory matters, primarily our clinical trials
and our filings with the FDA. The loss of the services of Messrs. Lipstein,
Papastephanou, Silberklang or Peltier could cause delays in our ongoing business
operations, and could have a material adverse effect on our business, results of
operations and financial condition. Except for the termination of employment
agreements we have entered into with Messrs. Lipstein and Katz and with Alain
Klapholz we do not have employment contracts with any of our key personnel nor
any of our other employees nor do we carry key man insurance policies for any of
our employees.

   The market price of our common stock may also be highly volatile creating
           greater financial risk for the owners of our common stock.

The market price of our common stock has ranged from $0.68 to $69.90 during the
past three years. As of March 11, 2005, we had 26,211,749 shares outstanding.
Other factors that may affect the price of our common stock include:

     o    our ability to successfully market and sell our ORCEL product,

     o    our ability to develop other products for sale,

     o    our competitors' announcements concerning technological innovations,

     o    new commercial products or procedures,

     o    proposed government regulations,

     o    developments or disputes relating to patents, trade secrets or
          proprietary rights,

     o    the following substantial number of additional shares of our common
          stock we would have to issue:

          o    an aggregate of 14,229,566 shares upon conversion of our
               outstanding Series D convertible preferred stock;

          o    an aggregate of 25,761,334 shares upon the exercise of warrants
               to purchase the shares of our common stock we granted in
               connection with financings during the past three years;

          o    an aggregate of 1,802,724 shares upon exercise of options we have
               granted to our employees, and particularly to our executive
               officers, our directors and to consultants and vendors.

 Our largest stockholders may take actions that are contrary to your interests,
                         including selling their stock.

A small number of our stockholders hold a significant amount of our outstanding
stock. These stockholders may support competing transactions and have interests
that are different from those of our other shareholders. In addition, the
average number of shares of our stock that trade each day is generally low. As a
result, sales of a large number of shares of our stock by these large
stockholders or other stockholders within a short period of time could adversely
affect our stock price.


                                       16






We may have to sell additional equity securities in the future which will dilute
        the portion of Ortec's equity owned by our current stockholders

In the future we will probably have to sell even more shares of our common
stock, or other securities convertible into or otherwise entitling the holder to
purchase our common stock. In the future we will also issue additional options
to purchase our common stock to our employees, possibly including our executive
officers, and our directors, and possibly to consultants and vendors. All such
sales and issuances of our common stock, other equity securities and warrants
and options to purchase our common stock, will dilute the portion of our equity
owned by our current stockholders.

   The price protection provisions of most of our outstanding warrants might
           prevent increases in the market price of our common stock.

In 2002 and 2003, we granted to the purchasers of our Series B and Series C
convertible preferred stock, and to the placement agent and to designees of the
placement agent who arranged such preferred stock financings, warrants to
purchase our common stock. In the fourth quarter of 2004 and the first quarter
of 2005, we granted warrants to purchase our common stock to (a) purchasers of
our common stock in the special warrant offering we made in the fourth quarter
of 2004 to holders of our Series B-1, B-2 and C warrants, (b) purchasers of our
common stock in the private placement we closed on January 5, 2005, and one
other purchaser of our common stock later in the first quarter of 2005, (c) to
holders of approximately $9.6 million of our promissory notes upon conversion of
those notes to shares of our common stock, (d) holders of our Series C preferred
stock who exchanged their shares for common stock in the January 5, 2005 private
placement, (e) investors who exercised their rights to purchase additional
shares of our common stock not later than 45 days subsequent to the January 5,
2005 private placement on the same terms and conditions as the sales in the
January 5, 2005 private placement and (f) to the placement agent and its
designees who arranged the private placement financing which closed in the first
quarter of 2005. Our Series B-1, B-2, C and E warrants to purchase the following
number of shares of our common stock at the following exercise prices are
currently outstanding:

     o    102,000 shares at $3.60 per share (the "Series C Warrants")

     o    176,198 shares at $4.00 per share (the "Series B-1 Warrants")

     o    112,798 shares at $5.00 per share (the "Series B-2 Warrants")

     o    22,456,310 shares at $1.80 per share (the "Series E Warrants")

     o    2,746,376 shares at $0.95 per share (the "Series E Warrants")

The Series E Warrants provide that if we sell shares of our common stock at
prices below the exercise prices of those warrants, or issue other securities
convertible into, or which entitle the holder to purchase, shares of our common
stock, which could result in the sale of our common stock at a price which in
effect (taking into consideration the price paid for the convertible security or
the warrant or the option) is less than the exercise price of the Series E
Warrants, then the exercise price of the Series E Warrants is reduced by a
portion of the difference between the exercise price and the lower price at
which the common stock was, or effectively could be, acquired. That percentage
by which the exercise price of the Series E Warrants could be reduced depends
not only on the lower price at which our common stock was, or could be,
acquired, but also by the ratio that the number of shares of our common stock
that were, or could be, so acquired bears to the total number of shares of our
common stock that would be outstanding after such sale of our common stock, or
the conversion of securities convertible into, or the exercise of such warrants
or options to purchase, our common stock.

Such price protection provisions in our Series E Warrants could have the effect
of limiting any significant increase in the market value of our common stock.
However, the Series E warrants all have provisions that permit the holders who
could acquire the majority of the shares of our common stock issuable upon
exercise of all the warrants in that particular series, to waive the price
protection provisions for that series.

Although our Series B-1, B-2 and C Warrants contain (for our Series C Warrants)
similar or (for our Series B-1 and B-2 Warrants) more severe anti-dilution
provisions, our Series B-1, B-2 and C Warrants were amended (in accordance with
their terms) to provide that, except in situations not here applicable, the
exercise prices would not be reduced below those set forth above.

The closing price for our common stock on March 11, 2005 was $0.72.


                                       17






      Because we do not intend to pay any dividends on our common stock, an
investor in our common stock may only realize an economic gain from an increase,
                if any, in the market price of our common stock.

We have never paid, and have no intentions in the foreseeable future to pay, any
dividends on our common stock. Therefore, an investor who purchases our common
stock, in all likelihood, will only realize a profit on his investment if the
market price of our common stock increases in value.

       Termination of employment agreements we have entered into with our
  executive and other officers could negatively affect the market price of our
 common stock because they discourage open market purchases of our common stock
            by purchasers who might seek to secure control of Ortec.

We have entered into agreements with Messrs. Steven Katz and Ron Lipstein, two
of our executive officers, and with one other employee, Mr. Alain Klapholz, who
is not an executive officer, that provide for payments to them in the event that
their employment is terminated by us, including "constructive termination" as
defined in those agreements. We will pay to Messrs. Katz and Lipstein an amount
equal to 2.99 times, and to Mr. Klapholz 1.99 times, the average annual
compensation paid by us to such person in the five tax years prior to
termination of his employment. The agreements also provide that (a) in the event
of such termination of employment, the expiration dates of all options and
warrants which have been granted to such persons and which expire less than
three years after such termination of employment, will be extended so that such
options and warrants expire three years after such termination of employment,
and (b) that we will reimburse such persons for any federal excise taxes (and
for taxes on such reimbursements) payable by such persons because of such
termination of employment payments we make to them. The agreements further
provide that in the event of the death or disability of any of Messrs. Katz,
Lipstein or Klapholz, or the voluntary termination by either Messrs. Katz or
Lipstein of their employment with us, we will pay to such person an amount equal
to the compensation received by such officer from us in the previous twelve
months.

Such termination of employment agreements could also discourage persons from
making open market purchases of our common stock for the purpose of securing a
controlling interest in Ortec.

 Our operations might be interrupted by the occurrence of a natural disaster or
                           other catastrophic event.

We depend on our collaborators, contractors and vendors and on our laboratories
and other facilities for the continued operation of our business. Natural
disasters or other catastrophic events, including terrorist attacks, power
interruptions, wildfires and other fires, actions of animal rights activists,
earthquakes and wars could disrupt our operations or those of our collaborators,
contractors and vendors. Even though we believe we carry reasonably adequate
business interruption and liability insurance, and Cambrex and our suppliers may
carry liability insurance that protects us in certain events, we might suffer
losses as a result of business interruptions that exceed the coverage available
under our and such other entities' insurance policies or for which we or such
other entities do not have coverage. For example, we are not insured against a
terrorist attack. Any natural disaster or catastrophic event could have a
significant negative impact on our operations and financial results.

 New laws and regulations affecting corporate governance may impede our ability
  to retain and attract board members and executive officers, and increase the
                 costs associated with being a public company.

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley
Act of 2002. The new act is designed to enhance corporate responsibility through
new corporate governance and disclosure obligations, increase auditor
independence, and provide tougher penalties for securities fraud. In addition,
the Securities and Exchange Commission and NASDAQ have adopted rules in
furtherance of the act and are considering adopting others. This act and the
related new rules and regulations will likely have the effect of increasing the
complexity and cost of our company's corporate governance and the time our
executive officers spend on such issues, and may increase the risk of personal
liability for our board members, chief executive officer, chief financial
officer and other executives involved in our company's corporate governance
process. As a result, it may become more difficult for us to attract and retain
board members and executive officers involved in the corporate governance
process. In addition, we have experienced, and will continue to experience,
increased costs associated with being a public company, including additional
professional and independent auditor fees.


                                       18






   New Accounting Pronouncements May Negatively Impact our Future Results of
                                   Operations

In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123(R) "Share-Based
Payment." This statement, which will be effective in our first quarter of 2006,
will change how we account for share-based compensation, and may have a
significant impact on our future results of operations.

We currently account for share-based payments to employees and directors using
the intrinsic value method. Under this method, we generally do not recognize any
compensation related to stock option grants we issue under our stock option
plans.

SFAS 123(R) will require us to recognize share-based compensation as
compensation expense in the statement of operations based on the fair values of
such equity on the date of the grant, with the compensation expense recognized
over the period in which the recipient is required to provide services in
exchange for the equity award. This statement will also require us to adopt a
fair value-based method for measuring the compensation expense related to
share-based compensation. We have begun, but have not completed, evaluating the
impact of the adoption of SFAS 123(R) on our results of operations. In
connection with evaluating the impact of SFAS 123(R), we are considering the
potential implementation of different valuation methods to determine the fair
value of share-based compensation. We believe the adoption of SFAS 123(R) will
have a material impact on our results of operations, regardless of the valuation
method used. SFAS 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow. This requirement will reduce our net operating
cash flows and increase our net financing cash flows in periods after adoption.
SFAS 123(R) may also delay when we become profitable, if ever.

Future changes in generally accepted accounting principles, including
pronouncements relating to revenue recognition, may have a significant effect on
our reported results, including reporting of transactions completed before the
effective date of such pronouncements.

Item 2. DESCRIPTION OF PROPERTY

We occupy an aggregate of approximately 14,800 square feet of space in Columbia
University's Audubon Biomedical Science and Technology Park in New York City,
for laboratory and office space. We use our laboratories for assay development,
wound healing research, biomaterial development, bioprocess development,
histology, quality assurance testing and for two clean rooms where we produce
ORCEL. 11,800 square feet are occupied pursuant to a lease which expires
December 31, 2005, and 3,000 square feet are occupied on a month-to-month basis.
Rent for the entire 14,800 square feet is $39,355 per month. We owed Columbia
University approximately $588,000 in past due rent, including rent for space we
no longer occupy. Pursuant to an agreement we entered into with Columbia, we are
paying this obligation in monthly installments of approximately $25,600 each
beginning February 2004. As of December 31, 2004, the past due rent amount was
reduced to approximately $409,000.

Item 3. LEGAL PROCEEDINGS

We have successfully defended challenges to our United States and European
patents in the past. Advanced Tissue Sciences (ATS) challenged, in the European
Patent Office, the grant of our European Patent upon the ground that the patent
lacks novelty and is not inventive over prior art. The proceeding began November
5, 1998 and involved ATS as the opposer and Ortec, as the patentee. The first
hearing was resolved in our favor. That is, the European Patent Office Tribunal
affirmed the grant of the patent, ruling against ATS. ATS has appealed that
decision in our favor and the appeal is pending. ATS seeks cancellation of the
patent. We expect an oral hearing date to be set for the appeal in a year or
later.

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

There were no matters submitted to a vote during the three months ended December
31, 2004.


                                       19






                                     PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock commenced trading on January 19, 1996, under the symbol "ORTC."
The common stock traded on the NASDAQ Small Cap market until August 2002, when
it was delisted from the Small Cap market and commenced trading on the National
Association of Securities Dealers' Bulletin Board, where it presently trades
under the symbol "ORTN.OB." The following table sets forth the high and low
sales prices of our common stock as reported by the Bulletin Board for each full
quarterly period within the two most recent fiscal years.



                HIGH    LOW
               -----   -----
                 
2004 Quarter
First          $3.55   $1.95
Second          2.95    2.05
Third           2.40    1.35
Fourth          2.30    0.89

2003 Quarter
First           5.00    1.50
Second          2.70    1.70
Third           2.25    1.25
Fourth          2.55    1.45


Security Holders

To the best of our knowledge, at February 28, 2005, there were 279 record
holders of our common stock. We believe there are more than 1,500 beneficial
owners of our common stock whose shares are held in "street name."

Dividends

We have not paid and have no current plans to pay dividends on our common stock.
Under of our Agreement with Paul Royalty Fund we agreed not to issue any new
debt or equity securities that contain cash dividend or mandatory redemption
provisions.

Recent Sales of Unregistered Securities

On October 25, 2004, we issued 52,372 shares of our common stock upon conversion
of 17.55733 shares of Series C preferred stock. The issuance of the shares was
exempt from registration pursuant to Section 3(a)(9) of the Securities Act of
1933, as securities exchanged by an issuer with its existing security holders
where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.

In November 2004, we issued 32,460 shares of our common stock upon exercise by
three holders of warrants who exercised their right to purchase those shares at
$0.01 per share. The issuance of the shares was exempt from registration
pursuant to Section 4 (2) of the Securities Act of 1993, as a transaction by an
issuer not involving any pubic offering.

On December 16, 2004, Paul Royalty Fund, L.P. (PRF), approximately concurrent
with its execution of a forbearance agreement with Ortec, exercised the Series
B-1 and the Series B-2 warrants held by it, on the same terms as other holders
of our Series B-1, B-2 and C warrants participated in a Special Warrant Offer
which was concluded on December 3, 2004 and reported on the Form 8-K report we
filed on December 9, 2004. PRF's Series B-1 warrants entitled it to purchase
25,000 shares of our common stock at an exercise price of $15.00 per share and
its Series B-2 warrants entitled it to purchase another 25,000 shares at an
exercise price of $20.00 per share. PRF exercised its warrants to purchase
27,778 shares of our common stock for $27,889 upon the same terms that were
available in the Special Warrant Offer, that is a reduced effective exercise
price of $1.00 per share. PRF surrendered


                                       20






its right to purchase an additional 22,222 shares at their original $15.00 and
$20.00 exercise prices. There were no placement agent fees paid in connection
with such sale and such sale was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4 (2) of such Act, as a
transaction by an issuer not involving any public offering and pursuant to the
provisions of Regulation D since PRF is an accredited investor.

In the fourth quarter of 2004, we issued 27,500 shares, and we are obligated to
issue an additional 176,831 shares, of our common stock to our placement agent,
Burnham Hill Partners, a division of Pali Capital, Inc. and its designees for
services they rendered in securing $4,086,620 of short-term loans for us during
2004. The issuance of these shares was exempt from registration pursuant to
Section 4 (2) of the Securities Act of 1993, as a transaction by an issuer not
involving any public offering.


                                       21






Item 6. 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

Plan of Operation

On January 5, 2005 we entered into a number of agreements with institutional and
accredited investors that provided us with gross aggregate proceeds of
$5,403,302 from the sale of our common stock. All of our outstanding promissory
notes to investors at December 31, 2004 totaling $9,626,626 including accrued
interest of approximately $675,000 ($658,776 at December 31, 2004) were
exchanged for common stock and warrants valued at approximately $20,600,000
resulting in an approximate loss on extinguishment of $10,300,000. Additionally
the 913 outstanding shares at December 31, 2004 of Series C preferred stock were
exchanged for common stock. We also converted the 50 shares of Series B
preferred stock outstanding at December 31, 2004 into common stock. Certain
purchasers, Series C Holders and holders of the Notes whose participation in
these transactions would result in ownership of common stock in excess of 9.99%
of our issued and outstanding shares of common stock could, and did elect, to
receive instead of our common stock, shares of our Series D convertible
preferred stock convertible into the same number of shares of our common stock.
Investors in this placement were given the right to purchase on the same terms
additional common stock within 45 days of the original placement. We raised an
additional $127,719 as a result of the exercise by certain investors of this
right.

In February 2005 we completed a single private placement which raised an
additional $100,000. Also in February 2005 we obtained $220,000 of short-term
financing to fund our directors and officers insurance policy.

The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. As discussed in Note 1 to the
accompanying consolidated financial statements included in Item 7, we incurred a
net loss applicable to common shareholders of $17.1 million during the year
ended December 31, 2004, and, as of that date, our current liabilities exceeded
our current assets by $14.6 million, our total liabilities exceeded our total
assets by $36.4 million and we have a deficit accumulated in the development
stage of $120.5 million. These factors, among others, raise substantial doubt
about our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The report of our independent registered public accounting
firm contains an explanatory paragraph regarding our ability to continue as a
going concern.

We incur slightly in excess of $800,000 monthly primarily on personnel and
occupancy costs, insurance, fees to Cambrex for a production suite and
technology transfer activities, various research and development activities, and
payment of past due obligations. We anticipate that we will have to raise
additional funds in the next twelve months. Our funds on hand, together with
funds raised by us through February 2005, at our current utilization rate should
carry us through April 2005. We require substantial funding to continue our
research and development activities, clinical trials, manufacturing, sales,
distribution and administrative activities, and commercialization processes. The
funding we require will enable us to execute our production and distribution
plans with Cambrex and prepare for sales in 2005, pay a portion of our past due
obligations, initiate the pivotal clinical trial for the use of ORCEL in its
cryopreserved form for the treatment of diabetic foot ulcers, and provide for
our general and corporate working capital requirements for 2005. We believe that
our cash and cash equivalents on hand at December 31, 2004, (approximately $.2
million) and proceeds from the $5.6 million financing we completed in the first
quarter of 2005, as well as an additional $10 million we hope to raise in 2005,
may enable us to continue our operations for the next twelve months. There can
be no assurances that we can raise additional funds.

Our plan of operation for the next twelve months is to work towards obtaining
regulatory clearance for commercial sales of cryopreserved ORCEL to heal venous
stasis ulcers. In anticipation of regulatory clearance, we are working with
Cambrex, our manufacturer and distribution agent, to be in a position to launch
commercial sales of ORCEL. We expect to continue our preparatory
commercialization activities throughout 2005. These preparatory
commercialization activities include defining our market and advertising
strategy, branding, market research, interviews with physicians, publishing
articles, attending trade shows, reimbursement strategy and sales force
training. Our research and development activities are focused on increasing
production capacity without requiring Cambrex to construct a larger production
facility for ORCEL and on lowering the cost of producing ORCEL. In addition to
our continuing expenditures for personnel we have budgeted approximately
$325,000 for capital equipment related to these process development efforts. We
hope to complete the transfer of our technology to produce ORCEL to Cambrex.
This includes transferring our current ORCEL production process, and developing


                                       22






processes to increase manufacturing capacity and reduce manufacturing costs. We
also intend to transfer to Cambrex our cell growth and expansion processes and
new processes designed to increase capacity and reduce costs of the cell
expansion process. Additionally we plan to:

     o    invest approximately $175,000 for equipment which will allow us to
          expand our collagen sponge manufacturing capacity;

     o    invest approximately $300,000 in developing more advanced thaw-rinse
          equipment which can be used by medical practitioners to prepare our
          cryopreserved product for patient application;

     o    begin clinical trials to evaluate the use of ORCEL for the treatment
          of diabetic foot ulcers;

     o    continue our collaboration with Hapto Biotech Inc. in developing an
          advanced biomaterial that may be used for wound healing as well as for
          cosmetic, reconstructive orthopedic and dental purposes; and

     o    explore opportunities where we can leverage our cell culturing
          biomaterials and regulatory knowledge base and expertise, especially
          with respect to application to embryonic stem cell research.

We do not presently expect any significant changes in personnel in 2005.

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 $22,738,110, the amount PRF could compel us to repurchase their
revenue interest at December 31, 2004. 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 December 31, 2004 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. 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 will have to discontinue our business operations. Outside of a
repurchase event, more fully explained in Note 11 of the consolidated financial
statements included in Item 7, PRF would be entitled to the applicable royalty
percentages of our future revenues in North America. We estimate that PRF will
need us to sell, over the remaining approximate six years under our agreement,
at least $300,000,000 of ORCEL to recoup an amount approximately equivalent to
their initia1 $10,000,000 investment.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of December 31, 2004.


                                       23






Item 7. FINANCIAL STATEMENTS

See Financial Statements and Financial Statement Index commencing on page F-1
hereof.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE

On October 29, 2004, we filed a Form 8-K/A disclosing that Grant Thornton LLP
had resigned as our independent accountants with no disagreements. On January
21, 2005 we filed a Form 8-K/A disclosing that BDO Seidman, LLP had been
retained as our independent accountants.

Item 8A. 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 15-d-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 December 31, 2004 ("Evaluation Date") have concluded that our disclosure
controls and procedures are effective in timely alerting us to material
information relating to us and our consolidated subsidiary, required to be
included in our periodic filings with the Securities and Exchange Commission.

(b)  Changes in internal controls.

There were no significant changes in our internal controls or in other factors
that could significantly affect our disclosure controls and procedures in the
fourth quarter of 2004, nor any significant deficiencies or material weaknesses
in such disclosure controls and procedures requiring corrective actions. As a
result, no corrective actions were taken.

Item 8B. OTHER INFORMATION

None.


                                       24






                                    PART III

Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

Set forth below are our directors and executive officers, their respective names
and ages, positions with us, principal occupations and business experiences
during at least the past five years and the dates of the commencement of each
individual's term as a director and/or officer.



Name                              Age                   Position
- ----                              ---                   --------
                                  
Steven Katz, Ph.D.                 60   Chairman of the Board of Directors
Ron Lipstein                       49   Chief Executive Officer, Vice Chairman
                                        of the Board of Directors, Secretary and
                                        Treasurer
Constantin Papastephanou, Ph.D.    59   President and Chief Operating Officer
Alan W. Schoenbart                 46   Chief Financial Officer
Mark Eisenberg, M.D.               67   Director
Steven Lilien, Ph.D.               57   Director
Allen I. Schiff, Ph.D.             58   Director
Gregory B. Brown, M.D.             51   Director


Directors

Steven Katz, one of our founders, has been a Director since our inception in
1991 and was elected Chairman of our Board of Directors in September 1994. We
have employed him since 1991. Dr. Katz has also been a Professor of Economics
and Finance at Bernard M. Baruch College in New York City since 1972. He has a
Ph.D. in Finance and Statistics as well as an MBA and an MS in Operations
Research, both from New York University.

Ron Lipstein, one of our founders, has been the Secretary, Treasurer, and a
Director of Ortec since 1991. Mr. Lipstein was elected Vice Chairman of our
Board of Directors in January 2001 and as our Chief Executive Officer in March
2003. He was our Chief Financial Officer from our inception in 1991 until
December 2004. We have employed him since 1991. Mr. Lipstein is a Certified
Public Accountant.

Mark Eisenberg, one of our founders, has been a Director since 1991. Dr.
Eisenberg was formerly our Senior Vice President and a consultant to us. See
"Certain Relationships and Related Transactions". He has been a physician in
private practice in Sydney, Australia since 1967. He is a member and co-founder
of the dystrophic epidermolysis bullosa clinic at the Prince of Wales Hospital
for children in Sydney, Australia. He has done extensive research on
epidermolysis bullosa disease.

Steven Lilien has been a Director since February 1998. He was Chairman of the
accounting department of Bernard M. Baruch College in New York City for fifteen
years and is currently the Weinstein Professor of Accounting there. He is a
Certified Public Accountant and has a Ph.D. in accounting and finance and an MS,
both from New York University.

Allen I. Schiff has been a Director since June 2001. He is a Professor of
Accounting and is currently the Area Chair of the undergraduate and graduate
accounting departments at Fordham University School of Business. He has also
served as Director of the MBA Consulting Program at Fordham University Graduate
School of Business since 1992. He has a Ph.D. in finance and economics and an MS
in accounting, both from New York University.

Gregory B. Brown has been a Director since March 2003. Since January 2003 Dr.
Brown has been a Partner at Paul Royalty Partners and serves as the Director
selected by Paul Royalty Fund (PRF). Pursuant to our agreement with PRF, we are
required to elect a person designated by PRF as a Director of Ortec. From 1997
to 2002 Dr. Brown


                                       25






served as a Managing Director of Adams, Harness & Hill, an investment banking
firm, and from April 2001 to December 2002 as head of its healthcare division
and co-head of investment banking. Prior to 1997 Dr. Brown was a thoracic and
vascular surgeon. He received a B.A. degree from Yale University, an M.D. from
Upstate Medical School and an M.B.A. from Harvard Business School.

All directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Drs. Mark Eisenberg, Steven
Lilien, Allen I. Schiff and Gregory B. Brown are non-employee directors.

Executive Officers

Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Two of our executive officers, Steven Katz
and Ron Lipstein, are also members of our Board of Directors. Information with
regard to such persons is set forth above under the heading "Directors." The
other executive officers are Constantin Papastephanou, our President, and Alan
W. Schoenbart, our Chief Financial Officer.

Constantin Papastephanou was employed by us in February 2001 as our President
and Chief Operating Officer. Prior to joining us he was employed by Bristol
Myers-Squibb for 30 years, the last 14 of which he was with Bristol Myers'
Convatec, a multinational ostomy and wound care management division. His last
position at Convatec was as president of the global chronic care division, where
he was responsible for that division's sales and marketing, clinical trials,
research and development, manufacturing, quality assurance and regulatory
affairs. He holds a Ph.D. in Biochemistry from the University of Miami as well
as a Master of Science in Microbial Biochemistry from the University of London.

Alan W. Schoenbart has been our Chief Financial Officer since December 2004. He
had been acting as Director of Finance since joining us in March 2004. From
April 1999 to December 2003, he was Chief Financial Officer of Vizacom Inc., a
publicly traded provider of consumer software and information technology
services and products, and a designer of WiFi networks. From 1997 to 1999, he
was CFO of Windswept Environmental and from 1995 to 1997, he was CFO of Advanced
Media, Inc., both publicly held entities. From 1993 to 1995 he was Controller of
Goodtimes Entertainment, a privately held distributor of videos and software to
mass merchant chains. From May 1981 to August 1993, he worked at KMPG as a
Manager and at other public accounting firms. Mr. Schoenbart has a BS in
Accounting from Fairleigh Dickinson University and is a Certified Public
Accountant.

We do not have an employment agreement with either Dr. Papastephanou or Mr.
Schoenbart.

Significant Employees

Melvin Silberklang is our vice president for research and development and our
chief scientific officer. He has held those positions for all of the 10 years
that he has been employed by us. Dr. Silberklang is 55 years old.

Steven Peltier is our vice president for clinical and regulatory affairs. He
supervises our clinical trials and our filings with the FDA. He has held that
position for all the 5 years that he has been employed by us. Mr. Peltier is 56
years old.

We do not have an employment agreement with either Dr. Silberklang or Mr.
Peltier.

The Committees

During 2004 our Board of Directors had an Audit Committee, Compensation
Committee, and Stock Option Committee. On December 29, 2004 the Board of
Directors combined the Compensation Committee and the Stock Option Committee
into a single committee. The Board of Directors does not have a Nominating
Committee and the entire Board of Directors performs the usual functions of such
committee.

Audit Committee. The functions of the Audit Committee include recommendations to
the Board of Directors with respect to the engagement of our independent
certified public accountants and the review of the scope, cost and effect of the
audit engagement. The current members of the Audit Committee are Drs. Lilien and
Schiff. Dr. Lilien serves as chairman of the Audit Committee.


                                       26






Both Drs. Lilien and Schiff are independent directors and both are Audit
Committee financial experts in that each has:

     o    an understanding of generally accepted accounting principles and
          financial statements;

     o    the ability to assess the general application of such principles in
          connection with the accounting for estimates, accruals and reserves;

     o    experience preparing, auditing, analyzing or evaluating financial
          statements that present a breadth and level of complexity of
          accounting issues that are generally comparable to the breadth and
          complexity of issues that can reasonably be expected to be raised by
          our financial statements, or experience actively supervising one or
          more persons engaged in such activities;

     o    an understanding of internal controls and procedures for financial
          reporting; and

     o    an understanding of audit committee functions.

As we noted above Dr. Lilien is a Certified Public Accountant, has a Ph.D. in
accounting and finance. He was Chairman of the accounting department of Bernard
M. Baruch College in New York City for fifteen years and is currently the
Weinstein Professor of Accounting there. Dr. Schiff has an M.S. in accounting
and a Ph.D. in finance and economics. He is a Professor of Accounting and is
currently the Area Chair of the undergraduate and graduate accounting
departments at Fordham University School of Business in New York City.

Compensation Committee. The function of the Compensation Committee is to make
recommendations to the Board of Directors with respect to the compensation of
our executive officers, including salary, bonus and other incentives. The
current members of the Compensation Committee are Drs. Schiff, who acts as its
Chairman, Katz and Lilien. A subcommittee of the Compensation Committee,
consisting of Drs. Schiff and Lilien, determines stock option grants under our
Stock Option Plan to employees, consultants and advisors. Dr. Katz is authorized
to grant in his discretion stock options to persons other than our directors and
executive officers. The Board of Directors reserves the right to grant stock
options.

Stock Option Committee. Prior to becoming part of the Compensation Committee at
the end of 2004 the Stock Option Committee determined the employees (other than
our executive officers), consultants and advisors, to whom options should be
granted under our Stock Option Plan and the number of options to be granted to
each such employee, consultant and advisor. The members of the Stock Option
Committee were Messrs. Katz and Lipstein. The Board of Directors determined any
other persons (our executive officers and directors) to whom options should be
granted and the number of options to be granted to each such person.

Attendance at Meetings

During 2004, the Board of Directors, Audit Committee, Compensation Committee and
Stock Option Committee each met or acted without a meeting pursuant to unanimous
written consent ten times, nine times, three times and two times, respectively.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 as amended (the "Exchange
Act") requires our officers and directors, and persons who own more than ten
percent of our common stock to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. These persons are also
required to furnish us with copies of all forms filed under Section 16(a).

Based solely on our review of the copies of those forms received by us, or
written representations from such persons, all Section 16(a) filing requirements
in the fiscal year ended December 31, 2004 were met. However, Steven Lilien was
late in his filing obligation to report the expiration of options in 2003.


                                       27






Code of Ethics

The Board of Directors has adopted a code of ethics requiring our employees,
including our executive officers and our directors, to act honestly and with
integrity with respect to us and our business dealings and to provide full and
fair disclosure about us that is required to, or will, be reported to the
public. The code of ethics requires our employees to disclose to our Board of
Directors any material transaction or relationship on the part of any Ortec
employee or director that could reasonably be deemed dishonest or that
reasonably could be expected to give rise to an actual or apparent conflict of
interest. We have filed a copy of our code of ethics with the Securities and
Exchange Commission.

Item 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by us for our fiscal years
ended December 31, 2004, 2003 and 2002 to (i) our Chief Executive Officer; (ii)
two other executive officers; and (iii) two additional individuals for whom
disclosure would have been provided but for the fact that the individuals were
not serving as executive officers at the end of the last completed fiscal year
(the "Named Executive Officers"). The number of shares of our common stock
issuable upon the exercise of options, the exercise prices and the potential
realizable values as of December 31, 2004 of those options granted in 2004, are
the number of shares, exercise prices and realizable values after giving effect
to the one share for ten shares reverse split of our common stock effective June
24, 2003.

                           SUMMARY COMPENSATION TABLE



                                                                         Long Term Compensation
                                               Annual Compensation               Awards
                                               -------------------       ----------------------
                                                 Salary    Bonus          Securities Underlying
Name and Principal Position             Year      ($)       ($)             Options / SARs (#)
- ---------------------------             ----    -------   -------         ---------------------
                                                                     
Ron Lipstein                            2004    260,000    80,747 (1)                 --
   CEO, Vice Chairman and Secretary     2003    224,366   118,300 (2)            476,431
                                        2002    201,115   150,850                210,082

Steven Katz                             2004    150,000    80,747 (1)                 --
   Chairman                             2003    158,558   118,300 (2)            476,431
                                        2002    225,058   150,850 (3)            210,082

Constantin Papastephanou                2004    220,500        --                     --
   President                            2003    207,493        --                 57,500
                                        2002    205,784        --                 19,000

Melvin Silberklang                      2004    185,000        --                     --
   VP, Chief Scientific Officer         2003    172,735    10,000                  7,500
                                        2002    132,051        --                  2,273

Steven Peltier                          2004    185,000    15,000                     --
   VP-Clinical and Regulatory Affairs   2003    172,482        --                  5,000
                                        2002    175,602        --                  2,700


(1)  The named individuals deferred these amounts. The bonus amount for each of
     these individuals is equal to 1% of the funds raised on our behalf (whether
     such funds are raised in equity or debt financings or as a result of
     licensing transactions) as well as options to purchase a number of shares
     equal to up to 10% of the number of shares issued in any such financing
     transaction. To date, both individuals have elected not to receive such
     options.

(2)  Of these amounts, $108,300 has been deferred by each individual.

(3)  Of this amount, $52,820 has been deferred by this individual.


                                       28






The following tables show for the fiscal year ended December 31, 2004, certain
information regarding options granted to, exercised by, and held at year-end by,
the Named Executive Officers:

Option Grants in Last Fiscal Year

No options were granted to Named Executive Officers during the fiscal year ended
December 31, 2004.



                   Aggregated Option Exercises In Last Fiscal Year
                          and Fiscal Year-End Option Value
- ------------------------------------------------------------------------------------
                               Number of Securities
                                    Underlying
                              Unexercised Options at        Value of In-the-Money
                                    FY End (#)            Options at FY-End ($) (1)
                           ---------------------------   ---------------------------
          Name             Exercisable   Unexercisable   Exercisable   Unexercisable
- ------------------------   -----------   -------------   -----------   -------------
                                                                
Steven Katz                  719,441             --           --            --
Ron Lipstein                 716,826             --           --            --
Constantin Papastephanou      23,375         46,625           --            --
Melvin Silberklang             8,903          3,250           --            --
Steven Peltier                 7,150          3,350           --            --


There were no option exercises in the last fiscal year by any of the Named
Executive Officers.

     (1)  The product of (x) the difference between $0.98 (the closing price of
          our common stock at December 31, 2004, as reported on the over the
          counter Bulletin Board) and the exercise price of the unexercised
          options, multiplied by (y) the number of unexercised options.

Compensation of Directors

Drs. Mark Eisenberg, Steven Lilien, Allen I. Schiff and Gregory B. Brown were
all non-employee Directors in 2004. For Dr. Steven Lilien's services in 2004 as
a Director and as Chairman of our audit committee, we paid Dr. Lilien $20,000
and for his services in 2004 as a Director and as a member of our audit
committee, we paid Dr. Schiff $20,000. In addition to cash compensation we
granted Drs. Eisenberg, Lilien and Schiff each a five-year option to purchase
10,000 shares of our common stock at an exercise price of $0.98. We paid no
compensation to Dr. Brown for his services as our Director.

Employment Contracts, Termination of Employment and Change in Control Agreements

We have entered into agreements with Messrs. Katz and Lipstein that provide for
payments to them in the event that we terminate their employment; including
"constructive termination" as defined in those agreements. We will pay to such
terminated individuals an amount equal to 2.99 times the average annual
compensation paid by us to such person in the five tax years prior to
termination of his employment. These agreements also provide that in the event
of such termination of employment, the expiration dates of all options and
warrants which have been granted to such persons and which expire less than
three years after such termination of employment, will be extended so that such
options and warrants expire three years after such termination of employment.
These agreements further provide that in the event of the death or disability or
the voluntary termination of employment of Messrs. Katz and Lipstein we will pay
to such executive an amount equal to the compensation received by such executive
from us in the previous twelve months.

The Internal Revenue Code provides that in the event that payments to an
executive officer resulting from a change of control of a company exceeds three
times the average annual compensation paid by us to such executive officer in
the five year period prior to such change of control (a) such excess will not be
able to be deducted by us in calculating our income for income tax purposes and
(b) a special excise tax equal to 20% of such excess will have to be paid by the
executive officer receiving such excess payments. Such agreements are commonly
referred to as "golden parachutes." The agreements with Messrs. Katz and
Lipstein provide that we will pay such excise tax payable by such executive
officer, as well as income taxes payable by such executive officer as a result
of our payment of such excise tax.


                                       29






Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
our common stock as of March 11, 2005 by: (i) each director and nominee for
director; (ii) each of the Named Executive Officers; (iii) all our executive
officers and directors as a group; and (iv) all those known by us to be
beneficial owners of more than five percent of our common stock. All shares of
our common stock subject to options currently exercisable or exercisable within
60 days of March 11, 2005, are deemed to be outstanding for the purpose of
computing the percentage of ownership of the person holding such options, but
are not deemed to be outstanding for computing the percentage of ownership of
any other person. This table is based upon information supplied by officers,
directors and principal stockholders and Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, we believe that each of the
stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Applicable percentages
are based on 26,211,749 shares outstanding on March 11, 2005, adjusted as
required by rules promulgated by the SEC. Unless otherwise indicated in the
table, the address of each party listed in the table is 3960 Broadway, New York,
New York 10032.



                                                                  Beneficial Ownership
                                                              ----------------------------
                                                               Number of        Percentage
Beneficial Owner                                                Shares           Ownership
- -----------------------------------------------------------   ----------        ----------
                                                                             
Steven Katz                                                    1,082,098 (1)        4.0%

Ron Lipstein                                                   1,738,054 (2)        6.5%

Costa Papastephanou                                               26,500 (3)         *

Melvin Silberklang                                                10,153 (4)         *

Steven Peltier                                                     8,450 (5)         *

Mark Eisenberg                                                   160,600 (6)         *

Steven Lilien                                                      7,640 (7)         *

Allen I. Schiff                                                    3,500 (8)         *

Gregory Brown                                                         -- (9)         *

Crestview Capital Master LLC.
95 Revere Drive, Suite
Northbrook, Il 60062                                           2,424,315 (10)       8.9%

North Sound Capital LLC
53 Forest Avenue
Old Greenwich, CT 06870                                        2,608,134 (11)       9.9%

SDS Capital Group SPC, Ltd.
53 Forest Avenue, 2nd Floor
Old Greenwich, CT 06870                                        2,608,134 (12)       9.9%

All executive officers and directors as a group (8 persons)    3,018,392 (13)      10.9%


- ----------
* Less than one percent.


                                       30






(1) Includes 350,000 shares beneficially owned by Dr. Katz that had not been
processed for issuance on March 11, 2005. Includes 719,441 shares of common
stock underlying stock options, which are exercisable within 60 days of March
11, 2005. Does not include shares owned by Dr. Katz's children, their spouses
and his grandchildren. Dr. Katz disclaims any beneficial interest in such
shares. In addition, does not include shares issuable upon the exercise of
options that Dr. Katz is entitled to but that to date he has elected not to
receive. Pursuant to Dr. Katz's agreement with us, the number of shares that may
be issued upon the exercise of such options represents up to 10% of the number
of shares issued in financing transactions entered into by us.

(2) Includes 1,000,000 shares beneficially owned by Mr. Lipstein that had not
been processed for issuance on March 11, 2005. Includes 3,360 shares owned by
Mr. Lipstein's minor children. Mr. Lipstein disclaims any beneficial interest in
these shares. Also includes 716,826 shares of common stock underlying stock
options, which are exercisable within 60 days of March 11, 2005. Does not
include shares issuable upon the exercise of options that Mr. Lipstein is
entitled to but that to date he has elected not to receive. Pursuant to Mr.
Lipstein's agreement with us, the number of shares that may be issued upon the
exercise of such options represents up to 10% of the number of shares issued in
financing transactions entered into by us.

(3) Consists of 26,500 shares of common stock underlying stock options, which
are exercisable within 60 days of March 11, 2005.

(4) Consists of 10,153 shares of common stock underlying stock options, which
are exercisable within 60 days of March 11, 2005.

(5) Consists of 8,450 shares of common stock underlying stock options, which are
exercisable within 60 days of March 11, 2005.

(6) Includes 101,000 shares of common stock underlying stock options, which are
exercisable within 60 days of March 11, 2005.

(7) Includes 7,600 shares of common stock underlying stock options, which are
exercisable within 60 days of March 11, 2005.

(8) Consists of 3,500 shares of common stock underlying stock options, which are
exercisable within 60 days of March 11, 2005.

(9) Does not include 321,502 shares of common stock, all owned by Paul Royalty
Fund L.P., an affiliate of Paul Capital Partners, of which Mr. Brown is a
partner. Dr. Brown was selected by Paul Royalty Fund to serve as a director of
Ortec pursuant to our agreement giving Paul Royalty Fund the right to name one
director.

(10) Includes 1,051,810 shares of common stock underlying warrants, which are
exercisable within 60 days of March 11, 2005. According to our records some of
these securities are held in the name of Crestview Capital Fund II, L.P.

(11) Includes 167,000 shares of common stock underlying warrants, which are
exercisable within 60 days of March 11, 2005. According to a Schedule 13G filed
by North Sound Capital LLC on February 13, 2005, the managing member of that
entity is Thomas McAuley. North Sound Capital LLC may be deemed the beneficial
owner of the shares in its capacity as the managing member of North Sound Legacy
Fund LLC, North Sound Legacy Institutional Fund LLC and North Sound Legacy
International Ltd., which funds are the registered owners of such shares. As the
managing member of these funds, North Sound Capital LLC has voting and
investment control with respect to the shares of common stock held by these
funds.

(12) Includes 125,333 shares of common stock underlying warrants, which are
exercisable within 60 days of March 11, 2005. According to a Schedule 13G filed
jointly on February 6, 2005, by SDS Capital Group SPC, Ltd., SDS Management LLC,
its investment advisor, and Steve Derby, the sole manager of the investment
advisor, all three persons share voting and dispositive power over these shares.
According to our records some of these securities are held in the name of Bay
Star Capital II, L.P.

(13) Includes 1,574,867 shares of common stock underlying stock options, which
are exercisable within 60 days of March 11, 2005. Includes 1,000,000 and 350,000
shares beneficially owned by Messrs Lipstein and Katz, respectively, that had
not been processed for issuance on March 11, 2005.


                                       31






Securities authorized for issuance under equity compensation plans

                      Equity Compensation Plan Information



                                                                               Number of securities
                                                                             remaining available for
                                  Number of securities    Weighted average    future issuance under
                                    to be issued upon    exercise price of     equity compensation
                                       exercise of          outstanding          plans (excluding
                                  outstanding options,   options, warrants   securities reflected in
         Plan Category             warrants and rights       and rights            column (a))
- -------------------------------   --------------------   -----------------   -----------------------
                                           (a)                  (b)                    (c)
                                                                             
Equity compensation plans
   approved by security holders           428,324              $15.40                 21,676
Equity compensation plans not
   approved by security holders         1,592,319              $ 2.82                     --
                                        ---------                                     ------
Total                                   2,020,643                                     21,676
                                        =========                                     ======


Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Dr. Gregory Brown, one of our directors, was selected by Paul Royalty Fund, L.P.
as its board designee, as provided by the agreement between us and Paul Royalty
Fund.

In November 2004, we granted to Dr. Eisenberg options to purchase 100,000 shares
of our common stock at an exercise price of $2.00 per share as payment in full
of the $398,574 we previously owed to him. Of such amount, $304,478 was for
consulting services Dr. Eisenberg had provided to us under an agreement we had
with him, $65,215 was for payments Dr. Eisenberg made in our behalf for the
laboratory we maintained in Australia (including salaries and obligations to
suppliers) and $28,881 for rent we owe him for the space occupied by our
laboratory. We no longer operate a laboratory in Australia.


                                       32






Item 13. EXHIBITS



  No.                                  Description
  ---                                  -----------
      
2.1       Ortec International, Inc. Series B Special Warrant Offer (Incorporated
          by reference to Exhibit 2.1 of Form 8-K dated December 3, 2004, filed
          with the Commission on December 9, 2004, Commission File No. 0-27368)

2.2       Ortec International, Inc. Series C Special Warrant Offer (Incorporated
          by reference to Exhibit 2.2 of Form 8-K dated December 3, 2004, filed
          with the Commission on December 9, 2004, Commission File No. 0-27368)

3.1       Restated Certificate of Incorporation (Incorporated by reference to
          Exhibit 3.2 of our quarterly report on Form 10-Q for the period ended
          September 30, 2001, filed with the Commission on November 14, 2001,
          Commission File No. 0-27368)

3.2       Amendment to Restated Certification of Incorporation (Incorporated by
          reference to Exhibit 3.2 of our annual report on Form 10-K for the
          period ended December 31, 2002, filed with the Commission on April 15,
          2003, Commission File No. 0-27368)

3.3       Amendment to Certificate of Incorporation filed on August 26, 2002,
          being an Amended Certificate of Designation of the Relative Rights and
          Preferences of the Series B convertible preferred stock (Incorporated
          by reference to Exhibit 3.2 of our annual report on Form 10-K for the
          period ended December 31, 2002, filed with the Commission on April 15,
          2003, Commission File No. 0-27368)

3.4       Amendment to Certificate of Incorporation filed on May 23, 2003, being
          the Certificate of Designation of the Relative Rights and Preferences
          of the Series C convertible preferred stock (Incorporated by reference
          to Exhibit 3.5 of our quarterly report on Form 10-Q for the period
          ended June 30, 2003, filed with the Commission on August 14, 2003,
          Commission File No. 0-27368)

3.5       Amendment to Certificate of Incorporation filed on June 10, 2003 for
          the reverse split of our common stock (Incorporated by reference to
          Exhibit 3.6 of our annual report on Form 10-K for the period ended
          December 31, 2003, filed with the Commission on March 30, 2004,
          Commission File No. 0-27368)

3.6       Amendment to Certificate of Incorporation filed on August 19, 2003
          being the Certificate of Designation of the Relative Rights and
          Preferences of the Series D convertible preferred stock (Incorporated
          by reference to Exhibit 3.6 of our quarterly report on Form 10-Q for
          the period ended September 30, 2003, filed with the Commission on
          November 14, 2003, Commission File No. 0-27368)

3.7       By-Laws (Incorporated by reference to the Exhibit of our Registration
          Statement on Form SB-2, or Amendment 1 thereto, filed with the
          Commission, Commission File No. 33-96090)

10.1      Agreement with Cambrex Bio Science Walkersville, Inc.; redacted -
          certain portions marked by asterisks were omitted pursuant to a
          confidential treatment request and filed separately with the
          Securities and Exchange Commission (Incorporated by reference to
          Exhibit 10.1 of our annual report on Form 10-K for the period ended
          December 31, 2003, filed with the Commission on March 30, 2004,
          Commission File No. 0-27368)

10.2      Agreement with Paul Capital Royalty Acquisition Fund L.P. (name
          subsequently changed to Paul Royalty Fund, L.P.); redacted - certain
          portions marked by asterisks were omitted pursuant to a confidential
          treatment request and filed separately with the Securities and
          Exchange Commission (Incorporated by reference to Exhibit 10.1 of our
          annual report on Form 10-K/A for the period ended December 31, 2002,
          filed with the Commission on February 12, 2004, Commission File No.
          0-27368)

10.3      Termination of Employment Agreements between the Registrant and Steven
          Katz, Ron Lipstein and Alain Klapholz (Incorporated by reference to
          Exhibit 99.1 of Form 8-K dated December 11, 2002, filed with the
          Commission on December 13, 2002, Commission File No. 0-27368)

10.4      Lease with Audubon Biomedical Science and Technology Park
          (Incorporated by reference to Exhibit 10.2 of our annual report on
          Form 10-K/A for the period ended December 31, 2002, filed with the
          Commission on February 12, 2004, Commission File No. 0-27368)

10.5      Forbearance Agreement with Paul Royalty Fund, L.P. (Incorporated by
          reference to Exhibit 10.1 of Form 8-K dated December 13, 2004, filed
          with the Commission on December 14, 2004, Commission File No. 0-27368)

10.6*     Limited Liability Company Agreement dated October 11, 2004 between
          Ortec International, Inc. and Hapto Biotech, Inc.

10.7*     Sales Agency Agreement dated October 18, 2004 between Ortec
          International, Inc. and Cambrex Bio Science Walkersville, Inc.

10.8*     Amendment No. 1 dated October 18, 2004 to the Cell Therapy
          Manufacturing Agreement dated October 29, 2003 between Ortec
          International, Inc. and Cambrex Bio Science Walkersville, Inc.

10.9*     License Agreement dated October 18, 2004, by and among Orcel LLC and
          Ortec International, Inc. and Cambrex Bio Science Walkersville, Inc.

10.10*    Security Agreement dated October 18, 2004, by and among Orcel LLC and
          Ortec International, Inc. and Cambrex Bio Science Walkersville, Inc.

10.11*    Amended and Restated Security Agreement dated October 18, 2004 by and
          among Orcel LLC and Ortec International, Inc. and Paul Royalty Fund,
          L.P.

10.12*    Supply Agreement dated December 31, 2004 between Ortec and LSNE.

14        Code of Ethics (Incorporated by reference to Exhibit 14 of our annual
          report on Form 10-K for the period ended December 31, 2003, filed with
          the Commission on March 30, 2004, Commission File No. 0-27368)

23 *      Consent of BDO Seidman, LLP

23.1*     Consent of Grant Thornton LLP



                                       33






       
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.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following are the fees billed by BDO Seidman, LLP our principal accountant,
for services rendered thereby during the fiscal years ended December 31, 2004.
BDO Seidman, LLP was retained by us in January 2005.

Audit Fees

BDO Seidman, LLP billed $70,000 in the aggregate for professional services
rendered for the audit of our annual financial statements for the fiscal year
ended December 31, 2004.

BDO Seidman, LLP did not perform any other services for fiscal 2004.

The functions of the Audit Committee include recommendations to the Board of
Directors with respect to the engagement of our independent registered public
accounting firm and the review of the scope, cost and effect of the audit
engagement. The Audit Committee has determined that BDO Seidman, LLP's provision
of non-audit services is compatible with maintaining the independence of BDO
Seidman, LLP.

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
by BDO Seidman, LLP must be approved in advance by our Audit Committee to assure
that such services do not impair the auditors' independence from the Company.
Our Audit Committee specifically approved all audit services prior to them being
performed by BDO Seidman, LLP.


                                       34






                                   SIGNATURES

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

Dated: March 31, 2005                   Ortec International, Inc.


                                        By: /s/ Ron Lipstein
                                            ------------------------------------
                                            Ron Lipstein
                                            Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant on March 31, 2005 in the
capacities indicated below.



Signature                                                             Title
- ---------                                                             -----
                                 

/s/ Ron Lipstein                    Vice Chairman, Chief Executive Officer, Secretary, Treasurer, and Director
- ---------------------------------   (Principal Executive Officer)
Ron Lipstein


/s/ Alan W. Schoenbart              Chief Financial Officer (Principal Financial and Accounting Officer)
- ---------------------------------
Alan W. Schoenbart


/s/ Steven Katz                     Chairman and Director
- ---------------------------------
Steven Katz


/s/ Dr. Mark Eisenberg              Director
- ---------------------------------
Dr. Mark Eisenberg


/s/ Steven Lilien                   Director
- ---------------------------------
Steven Lilien


/s/ Allen I. Schiff                 Director
- ---------------------------------
Allen I. Schiff


/s/ Gregory B. Brown                Director
- ---------------------------------
Gregory B. Brown



                                       35






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                          INDEX TO FINANCIAL STATEMENTS



                                                                           Page
                                                                           -----
                                                                         
Report of Independent Registered Public Accounting Firm - BDO Seidman,
   LLP                                                                       F-2

Report of Registered Independent Public Accounting Firm - Grant Thornton
   LLP                                                                       F-3

Consolidated Balance Sheet as of December 31, 2004                           F-4

Consolidated Statements of Operations for the years ended December 31,
   2004 and 2003, and for the cumulative period from March 12, 1991
   (inception) to December 31, 2004                                          F-5

Consolidated Statements of Shareholders' Equity (Deficit) for the
   cumulative period from March 12, 1991 (inception) to December 31,
   2004                                                                      F-6

Consolidated Statements of Cash Flows for the years ended December 31,
   2004 and 2003, and for the cumulative period from March 12, 1991
   (inception) to December 31, 2004                                          F-8

Notes to Consolidated Financial Statements                                  F-10



                                       F1






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Ortec International, Inc.
New York, New York

We have audited the accompanying consolidated balance sheet of Ortec
International, Inc. (a development stage enterprise) as of December 31, 2004 and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for the year then ended and for the period from March 12, 1991
(inception) to December 31, 2004. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. We did
not audit the consolidated statements of operations, shareholders' deficit and
cash flows for the period from March 12, 1991 (inception) to December 31, 2003,
which reflect product revenue of approximately $.3 million, expenses of
approximately $96.9 million, preferred stock dividends and discounts of
approximately $6.7 million, cash used in operating activities of $69.9 million,
cash used in investing activities of approximately $6.2 million and cash
provided by financing activities of $77.4 million. Those financial statements
were audited by another auditor whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such period, is based
solely on the report of the other auditor.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
the other auditor provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Ortec International, Inc. at
December 31, 2004, and the results of the Company's operations and cash flows
for the year then ended and for the period from March 12, 1991 (inception) to
December 31, 2004, in conformity with accounting principles generally accepted
in the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company incurred a net loss applicable to common shareholders of $17.1 million
during the year ended December 31, 2004, and, as of that date, the Company's
current liabilities exceeded its current assets by $14.6 million, its total
liabilities exceeded its total assets by $36.4 million and the Company has a
deficit accumulated in the development stage of $120.5 million. These factors,
among others, as discussed in Note 1 to the consolidated financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


/s/ BDO Seidman, LLP
- ----------------------------------------
New York, New York
March 23, 2005


                                       F2






REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

Directors and Stockholders
   Ortec International, Inc.

We have audited the accompanying consolidated statements of operations, cash
flows and shareholders' equity (deficit) for the year ended December 31, 2003,
of Ortec International, Inc. and Subsidiary (a development stage enterprise)
(the "Company") and the related consolidated statements of operations, cash
flows and shareholders' equity (deficit) for the period from March 12, 1991
(inception) through December 31, 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of Ortec International, Inc. and
Subsidiary's operations, cash flows and changes in shareholders' equity
(deficit) for the year ended December 31, 2003 and the period from March 12,
1991 (inception) through December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
2003 financial statements, the Company incurred a net loss applicable to common
shareholders of $21,449,131 during the year ended December 31, 2003, and, as of
that date, the Company's current liabilities exceeded its current assets by
$25,360,740, its total liabilities exceeded its total assets by $24,476,407, and
the Company has a deficit accumulated in its development stage of $103,307,740.
These factors, among others, as discussed in Note 1 to the 2003 financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1 to the 2003 financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

GRANT THORNTON LLP
New York, New York
March 12, 2004, except for Note 14 to the 2003 financial statements as to which
date is March 23, 2004


                                       F3






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                           CONSOLIDATED BALANCE SHEET



                                                                    December 31,
                                                                        2004
                                                                   -------------
                                                                
                                 ASSETS

Current assets:
   Cash and cash equivalents                                       $     227,370
   Prepaid and other current assets                                      128,938
                                                                   -------------
Total current assets                                                     356,308
Property and equipment, net                                              326,946
Patent application costs, net                                            587,276
Deposits                                                                 139,159
Other assets                                                              39,667
                                                                   -------------
Total assets                                                       $   1,449,356
                                                                   =============

               LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
   Accounts payable and accrued expenses                           $   4,912,195
   Current maturities of loan payable                                    203,462
   Capital lease obligation - current                                     51,584
   Current maturities of promissory notes                              9,784,691
                                                                   -------------
Total current liabilities                                             14,951,932
   Obligation under revenue interest assignment                       22,738,110
   Promissory notes, less current portion                                 91,717
   Capital lease obligation, less current portion                         23,951
                                                                   -------------
Total liabilities                                                     37,805,710

COMMITMENTS AND CONTINGENCIES

Shareholders' deficit:
Preferred stock, $.001 par value; authorized, 1,000,000 shares:
   Redeemable convertible
      Series B, stated value $10,000 per share; authorized 1,200
      shares; 50 shares issued and outstanding; liquidation              270,859
      preference of $500,000
      Series C, stated value $6,000 per share; authorized 2,000
      shares; 913 shares issued and outstanding; liquidation
      preference of $5,476,254                                         3,529,289
   Convertible
      Series D, stated value $10,000 per share; authorized 2,000
      shares; 717 shares issued and outstanding; liquidation
      preference of $7,167,124                                         3,567,652
Common stock, $.001 par value; authorized, 200,000,000 shares;
   6,372,052 shares issued and 6,370,052 outstanding                       6,372
Additional paid-in capital                                            76,899,663
Deficit accumulated during the development stage                    (120,452,544)
Treasury stock, 2,000 shares at cost                                    (177,645)
                                                                   -------------
Total shareholders' deficit                                          (36,356,354)
                                                                   -------------
Total liabilities and shareholders' deficit                        $   1,449,356
                                                                   =============


     The accompanying notes are an integral part of these statements.


                                       F4






                            ORTEC INTERNATIONAL, INC
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                             Cumulative
                                                                                From
                                                                           March 12, 1991
                                                                           (inception) to
                                               Year ended December 31,      December 31,
                                             ---------------------------   --------------
                                                 2004           2003            2004
                                             ------------   ------------    -------------
                                                                   
Product Revenue                              $         --   $         --    $     265,665
                                             ------------   ------------    -------------

Expenses
   Product and laboratory costs                 3,014,461      2,956,217       27,166,585
   Personnel                                    3,857,052      3,938,116       37,185,487
   General and administrative                   1,664,294      2,586,476       19,035,351
   Rent                                           481,782        627,861        3,972,294
   Consulting                                      13,045        (27,735)       5,702,651
   Interest and other expense                   6,745,928      4,735,292       19,781,830
   Interest and other income                     (398,662)       (14,889)      (2,670,647)
   Lease termination costs                             --      1,119,166        1,119,166
  Loss on extinguishments of debt
      and series A preferred shares                    --             --        1,004,027
                                             ------------   ------------    -------------
                                               15,377,900     15,920,504      112,296,744
                                             ------------   ------------    -------------

Net loss                                      (15,377,900)   (15,920,504)    (112,031,079)
Preferred stock dividend                          643,904      1,259,627        3,029,465
Preferred stock and warrants
   deemed dividends and discounts               1,123,000      4,269,000        5,392,000
                                             ------------   ------------    -------------
Net loss applicable to common shareholders   $(17,144,804)  $(21,449,131)   $(120,452,544)
                                             ============   ============    =============

Net loss per share
   Basic and diluted                         $      (3.03)  $      (5.11)
                                             ============   ============

Weighted average shares outstanding
   Basic and diluted                            5,655,406      4,198,107
                                             ============   ============


     The accompanying notes are an integral part of these statements.


                                       F5






                            ORTEC INTERNATIONAL INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)



                                                         Common Stock              Preferred Stock
                                                       ----------------   ---------------------------------
                                                        Shares   Amount    Series B    Series C    Series D
                                                       -------   ------   ---------   ----------   --------
                                                                                     
March 12, 1991 (inception) to December 31, 1991
Founders                                               155,382    $155           --           --        --
First private placement ($3.00 per share)               21,744      22           --           --        --
The Director ($11.50 and $53.00 per share)              14,902      15           --           --        --
Second private placement ($94.25 per share)              5,302       5           --           --        --
Share issuance expense                                      --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1991                           197,330     197           --           --        --
Second private placement ($94.25 per share)              2,646       3           --           --        --
Second private placement ($94.25 per share)              2,286       2           --           --        --
Stock purchase agreement with the Director
   ($94.25 per share)                                    3,182       3           --           --        --
Share issuance expense                                      --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1992                           205,444     205           --           --        --
Third private placement ($100.00 per share)             10,965      11           --           --        --
Third private placement ($100.00 per share)              2,250       2           --           --        --
Stock purchase agreement with Home
   Insurance Company ($90.00 per share)                 11,112      11           --           --        --
Stock purchase agreement with the Director
   ($94.25 per share)                                    2,122       2           --           --        --
Shares issued in exchange for commission                    60       1           --           --        --
Share issuance expenses                                     --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1993                           231,953     232           --           --        --
Fourth private placement ($100.00 per share)             3,946       4           --           --        --
Stock purchase agreement with Home
   Insurance Company ($100.00 per share)                 5,000       5           --           --        --
Share issuance expense                                      --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1994                           240,899     241
Rent forgiveness                                            --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1995                           240,899     241           --           --        --
Initial public offering                                120,000     120           --           --        --
Exercise of warrants                                     3,389       3           --           --        --
Fifth private placement ($64.90 per share)              95,911      96           --           --        --
Share issuance expenses                                     --      --           --           --        --
Stock options issued for services                           --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1996                           460,199     460           --           --        --




Exercise of warrants                                   115,878     116           --           --        --
Share issuance expenses                                     --      --           --           --        --
Stock options and warrants issued for services              --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1997                           576,077     576           --           --        --
Exercise of warrants                                    22,149      22           --           --        --
Stock options and warrants issued for services              --      --           --           --        --
Sixth private placement                                 20,000      20           --           --        --
Sixth private placement - warrants issued                   --      --           --           --        --
Share issuance expenses                                     --      --           --           --        --
Purchase of 660 shares of treasury stock (at cost)          --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1998                           618,226     618           --           --        --
Exercise of warrants                                     1,410       1           --           --        --
Stock options and warrants issued for services              --      --           --           --        --
Seventh private placement ($87.50 per share)            38,916      39           --           --        --
Seventh private placement - investor warrants               --      --           --           --        --
Seventh private placement - placement agent warrants        --      --           --           --        --
Eighth private placement ($55.00 per share)            163,637     164           --           --        --
Share issuance expenses                                     --      --           --           --        --
Purchase of 910 shares of treasury stock (at cost)          --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 1999                           822,189     822           --           --        --
Exercise of options and warrants                        17,554      17           --           --        --
Stock options and warrants issued for services              --      --           --           --
Ninth private placement ($150.00 per share)              6,667       7           --           --        --
Ninth private placement - placement agent warrants          --      --           --           --        --
Tenth private placement ($67.50 per share)             124,757     125           --           --        --
Share issuance expenses                                     --      --           --           --        --
Purchase of 430 shares of treasury stock (at cost)          --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 2000                           971,167     971           --           --        --
Stock options issued for services                           --      --           --           --        --
Net loss                                                    --      --           --           --        --
                                                       -------    ----    ---------   ----------    ------
Balance at December 31, 2001 (carried forward)         971,167     971           --           --        --





                                                                       Deficit
                                                                     accumulated
                                                        Additional    during the                   Total
                                                         paid-in     development   Treasury    shareholders'
                                                         capital        stage        stock    equity deficit)
                                                       -----------   -----------   --------   ---------------
                                                                                   
March 12, 1991 (inception) to December 31, 1991
Founders                                               $       715            --         --    $        870
First private placement ($3.00 per share)                   64,978            --         --          65,000
The Director ($11.50 and $53.00 per share)                 249,985            --         --         250,000
Second private placement ($94.25 per share)                499,995            --         --         500,000
Share issuance expense                                     (21,118)           --         --         (21,118)
Net loss                                                        --      (281,644)        --        (281,644)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1991                               794,555      (281,644)        --         513,108
Second private placement ($94.25 per share)                250,003            --         --         250,006
Second private placement ($94.25 per share)                215,465            --         --         215,467
Stock purchase agreement with the Director
   ($94.25 per share)                                      299,995            --         --         299,998
Share issuance expense                                     (35,477)           --         --         (35,477)
Net loss                                                        --      (785,941)        --        (785,941)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1992                             1,524,541    (1,067,585)        --         457,161
Third private placement ($100.00 per share)              1,096,489            --         --       1,096,500
Third private placement ($100.00 per share)                224,998            --         --         225,000
Stock purchase agreement with Home
   Insurance Company ($90.00 per share)                    999,988            --         --         999,999
Stock purchase agreement with the Director
   ($94.25 per share)                                      199,998            --         --         200,000
Shares issued in exchange for commission                     5,999            --         --           6,000
Share issuance expenses                                   (230,207)           --         --        (230,207)
Net loss                                                        --    (1,445,624)        --      (1,445,624)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1993                             3,821,806    (2,513,209)        --       1,308,829
Fourth private placement ($100.00 per share)               397,708            --         --         397,712
Stock purchase agreement with Home
   Insurance Company ($100.00 per share)                   499,995            --         --         500,000
Share issuance expense                                      (8,697)           --         --          (8,697)
Net loss                                                        --    (1,675,087)        --      (1,675,087)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1994                             4,710,812    (4,188,296)        --         522,757
Rent forgiveness                                            40,740            --         --          40,740
Net loss                                                        --    (1,022,723)        --      (1,022,723)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1995                             4,751,552    (5,211,019)        --        (459,226)
Initial public offering                                  5,999,880            --         --       6,000,000
Exercise of warrants                                        33,882            --         --          33,885
Fifth private placement ($64.90 per share)               6,220,701            --         --       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                            15,577,325    (7,860,787)        --       7,716,998




Exercise of warrants                                    10,822,675            --         --      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                            26,402,492   (12,686,450)        --      13,716,618
Exercise of warrants                                     1,281,935            --         --       1,281,957
Stock options and warrants issued for services           1,920,111            --         --       1,920,111
Sixth private placement                                  1,788,678            --         --       1,788,698
Sixth private placement - warrants issued                  211,302            --         --         211,302
Share issuance expenses                                    (48,000)           --         --         (48,000)
Purchase of 660 shares of treasury stock (at cost)              --            --    (67,272)        (67,272)
Net loss                                                        --    (8,412,655)                (8,412,655)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1998                            31,556,518   (21,099,105)   (67,272)     10,390,759
Exercise of warrants                                        14,102            --         --          14,103
Stock options and warrants issued for services              64,715            --         --          64,715
Seventh private placement ($87.50 per share)             3,168,746            --         --       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 ($55.00 per share)              8,999,838            --         --       9,000,002
Share issuance expenses                                   (619,908)           --         --        (619,908)
Purchase of 910 shares of treasury stock (at cost)              --            --    (75,518)        (75,518)
Net loss                                                        --   (10,040,509)        --     (10,040,509)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1999                            43,652,302   (31,139,614)  (142,790)     12,370,720
Exercise of options and warrants                           327,265            --         --         327,282
Stock options and warrants issued for services              56,265            --         --          56,265
Ninth private placement ($150.00 per share)                999,998            --         --       1,000,005
Ninth private placement - placement agent warrants          23,000            --         --          23,000
Tenth private placement ($67.50 per share)               8,420,946            --         --       8,421,071
Share issuance expenses                                   (641,500)           --         --        (641,500)
Purchase of 430 shares of treasury stock (at cost)              --            --    (34,855)        (34,855)
Net loss                                                        --   (12,129,663)        --     (12,129,663)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 2000                            52,838,276   (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 (carried forward)          53,026,356   (59,154,654)  (177,645)     (6,304,972)



                                       F6






                            ORTEC INTERNATIONAL INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)



                                                        Common Stock                 Preferred  Stock
                                                     ------------------   --------------------------------------
                                                       Shares    Amount     Series B      Series C     Series D
                                                     ---------   ------   -----------   -----------   ----------
                                                                                       
Balance at December 31, 2001 (brought forward)         971,167      971            --            --           --
Exercise of options and warrants                        35,720       36            --            --           --
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     938,275      938    (3,479,043)           --           --
Shares issuance costs - preferred stock                     --       --      (866,612)           --           --
Preferred stock dividends                              375,315      375            --            --
Net loss                                                    --       --            --            --           --
                                                     ---------   ------   -----------   -----------   ----------
Balance at December 31, 2002                         2,320,477    2,320     5,037,087            --           --
Exercise of options and warrants                       398,750      399            --            --           --
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                         2,421,556    2,422    (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                               92,308       92            --            --           --
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              74       --            --            --           --
Net loss                                                    --       --            --            --           --
                                                     ---------   ------   -----------   -----------   ----------
Balance at December 31, 2003                         5,233,165    5,233       270,859     3,667,041    2,628,602




Common stock issued in connection with
   previously issued notes                             157,000      157            --            --           --
Common stock issued in
   connection with promissory notes                    331,831      332            --            --           --
Common stock (277,020) 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                                          32,460       32            --            --           --
Conversion of 35.62 shares of series C preferred
   stock into common stock                             106,872      107            --      (137,752)          --
Payment of dividends on 35.62 shares of series C
   preferred stock in common stock                      13,743       14            --            --           --
Common stock and series D preferred (233.83
   shares) issued in connection with special
   warrant offer                                       496,981      497            --            --      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                         6,372,052   $6,372   $   270,859   $ 3,529,289   $3,567,652
                                                     =========   ======   ===========   ===========   ==========





                                                                      Deficit
                                                                    accumulated
                                                      Additional     during the                      Total
                                                       paid-in      development     Treasury     shareholders'
                                                       capital         stage         stock     equity (deficit)
                                                     -----------   -------------   ---------   ----------------
                                                                                    
Balance at December 31, 2001 (brought forward)        53,026,356     (59,154,654)   (177,645)     (6,304,972)
Exercise of options and warrants                             321              --          --             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     3,485,443              --          --           7,338
Shares issuance costs - preferred stock                  304,615              --          --        (561,997)
Preferred stock dividends                              1,125,559      (1,125,934)         --              --
Net loss                                                      --     (21,578,021)         --     (21,578,021)
                                                     -----------   -------------   ---------   ----------------
Balance at December 31, 2002                          61,195,715     (81,858,609)   (177,645)    (15,801,132)
Exercise of options and warrants                          12,567              --          --          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                           3,251,149              --          --              --
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                                922,985        (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                          72,437,243    (103,307,740)   (177,645)    (24,476,407)




Common stock issued in connection with
   previously issued notes                                  (157)             --          --              --
Common stock issued in
   connection with promissory notes                      745,870              --          --         746,202
Common stock (277,020) 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                                               293              --          --             325
Conversion of 35.62 shares of series C preferred
   stock into common stock                               137,645              --          --              --
Payment of dividends on 35.62 shares of series C
   preferred stock in common stock                        30,085         (30,099)         --              --
Common stock and series D preferred (233.83
   shares) issued in connection with special
   warrant offer                                         498,472              --          --       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                         $76,899,663   $(120,452,544)  $(177,645)   $(36,356,354)
                                                     ===========   =============   =========   ================


The accompanying notes are an integral part of these statements.


                                       F7






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                                   Cumulative
                                                                                                      From
                                                                                                 March 12, 1991
                                                                     Year ended December 31,     (inception) to
                                                                   ---------------------------    December 31,
                                                                       2004           2003            2004
                                                                   ------------   ------------   --------------
                                                                                        
Cash flows from operating activities
   Net loss                                                        $(15,377,900)  $(15,920,504)  $(112,031,079)
   Adjustments to reconcile net loss to net cash
   used in operating activities
      Depreciation and amortization                                     466,966        651,661       5,274,872
      Allowance for doubtful accounts                                        --          5,374           5,374
      Unrealized loss on marketable securities                               --             --          11,404
      Realized loss on marketable securities                                 --             --           5,250
      (Gain) / loss on sale of property and equipment                   (26,802)       (40,204)        (58,642)
      Cost to terminate lease on New Jersey facility                         --        836,032         836,032
      Non-cash stock compensation                                        94,000         87,000       3,335,231
      Non cash interest                                               1,856,832             --       1,856,832
      Non-cash imputed interest                                       4,184,254      4,594,580      16,091,260
      Gain on loan adjustment                                          (236,000)            --        (236,000)
      Loss on extinguishments of debt & series A preferred stock             --             --       1,004,027
      Purchase of marketable securities                                      --             --     (19,075,122)
      Sales of marketable securities                                         --             --      19,130,920
      Change in operating assets and liabilities
         Other current assets and other assets                          (96,665)        54,804         (38,054)
         Accounts payable and accrued liabilities                     1,298,208        437,161       6,176,957
                                                                   ------------   ------------   -------------
   Net cash used in operating activities                             (7,837,107)    (9,294,096)    (77,710,738)
                                                                   ------------   ------------   -------------
Cash flow from investing activities
      Purchases of property and equipment                               (81,622)       (11,823)     (4,547,342)
      Proceeds from sale of property and equipment                       14,025         75,000         145,926
      Payments for patent applications                                  (48,975)       (11,589)     (1,020,706)
      Organization costs                                                     --             --         (10,238)
      Deposits                                                               --        (75,000)       (806,273)
      Purchases of marketable securities                                     --             --        (594,986)
      Sale of marketable securities                                          --             --         522,532
                                                                   ------------   ------------   -------------
   Net cash used in investing activities                               (116,572)       (23,412)     (6,311,087)
                                                                   ------------   ------------   -------------
Cash flows from financing activities
      Proceeds from issuance of notes payable                         6,506,626      3,140,000      10,162,126
      Proceeds from issuance of common stock                                 --             --      53,550,522
      Proceeds from exercise of warrants                              1,338,344         12,966       1,359,004
      Share issuance expenses and other financing costs                 (26,600)      (831,737)     (5,370,013)
      Purchase of treasury stock                                             --             --        (177,645)
      Proceeds from issuance of loan payable                                 --             --       1,446,229
      Proceeds from obligation under revenue interest assignment             --             --      10,000,000
      Proceeds from issuance of convertible debentures                       --             --       5,908,000
      Proceeds from issuance of preferred stock -
         Series A                                                            --             --       1,200,000
         Series B                                                            --      2,000,000       3,070,000
         Series C                                                            --      5,690,000       5,690,000




      Advances received                                                      --        130,000         130,000
      Repayment of capital lease obligations                           (154,079)      (165,718)       (518,729)
      Repayment of loan payable                                        (173,943)      (155,578)     (1,035,699)
      Repayment of obligation under revenue interest assignment              --           (265)        (11,414)
      Repayment of notes payable                                             --             --        (515,500)
      Repayment of promissory notes                                    (637,686)            --        (637,686)
                                                                   ------------   ------------   -------------
   Net cash provided by financing activities                          6,852,662      9,819,668      84,249,195
                                                                   ------------   ------------   -------------
   Net Increase/(Decrease) in Cash And Cash Equivalents              (1,101,017)       502,160         227,370
CASH AND CASH EQUIVALENTS:
   Beginning of period                                                1,328,387        826,227              --
                                                                   ------------   ------------   -------------
   End of period                                                   $    227,370   $  1,328,387   $     227,370
                                                                   ============   ============   =============



                                       F8






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



                                                                                                  Cumulative
                                                                                                     From
                                                                                                March 12, 1991
                                                                      Year ended December 31,   (inception) to
                                                                      -----------------------    December 31,
                                                                         2004         2003           2004
                                                                      ----------   ----------   --------------
                                                                                         
Supplemental disclosures of cash flow information:
   Non-cash financing and investing activities
      Capital lease obligations                                       $   52,462   $       --     $  620,806
      Deferred offering costs included in accrued professional fees           --           --        314,697
      Financings costs - other long-term obligations                          --           --         59,500
      Forgiveness of rent payable                                             --           --         40,740
      Share issuance expenses - warrants                                      --           --        255,000
      Dividends on preferred stock paid in common shares -
         Series B                                                         50,000      923,077      2,099,011
         Series C                                                        593,904           --        593,904
      Accretion of discount on preferred stock and warrants            1,123,000    4,269,000      5,392,000
      Share issuance expenses for preferred stock
         incurred through issuance of warrants -
         Series B                                                             --       86,692        391,307
         Series C                                                             --      272,386        272,386
      Share issuance of series D preferred stock in
         exchange from series B preferred stock                               --    2,628,602      2,628,602
      Promissory notes forgiven for warrant participation                100,000           --        100,000
      Warrant issued in connection with lease                             18,500           --         18,500
      Conversion of series C preferred stock into common stock           137,645           --        137,645
      Contribution of capital of amount due to founder                   398,967           --        398,967
   Equipment transferred in satisfaction of deposit                       25,000       75,000        100,000
   Discount on promissory notes                                          746,202      287,000      1,033,202
   Accounts payable converted to promissory notes                        837,468           --        837,468
   Advances converted to promissory notes                                130,000           --        130,000

   Cash paid for interest                                             $   68,975   $  104,023     $  717,856
                                                                      ==========   ==========     ==========
   Cash paid for income taxes                                         $    2,835   $    1,000     $  203,411
                                                                      ==========   ==========     ==========


The accompanying notes are an integral part of these statements.


                                       F9






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 - 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 us a
license for a term of ten years, with automatic renewals by us 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 us.

The Skin Group, Ltd. (the "Skin Group") also was formed as a Delaware
corporation in March 1991, to raise funds for the development of the Technology.
On July 27, 1992, the Skin Group was merged with and into Ortec. Owners of Skin
Group shares were given .83672 of an Ortec share for each Skin Group share. The
merger was accounted for as if it were a pooling of interests and, accordingly,
the accompanying financial statements include the accounts of the Skin Group for
all periods presented.

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 (FDA)
approval for the use of the fresh form of OrCel'r' (ORCEL) for the treatment of
patients with recessive dystrophic epidermolysis bullosa and for donor sites in
burn patients. We then began marketing and selling our product for use on
patients with these indications. Revenues were not significant. We terminated
our selling efforts and elected to focus our efforts on developing a
cryopreserved form of our product and on medical indications that had broader
marketability. After identifying an indication that had broad market appeal,
venous stasis ulcers, we completed a clinical trial during 2003 for the use of
cryopreserved form of ORCEL to treat venous stasis ulcers and filed an
application for pre-market approval (PMA) with the FDA in February 2004. We are
currently awaiting a determination from the FDA.

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 $17.1 million during the year ended December 31, 2004, and, as
of that date, our current liabilities exceeded our current assets by $14.6
million, our total liabilities exceeded our total assets by $36.4 million and we
have a deficit accumulated in the development stage of $120.5 million. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern.

During 2004 we financed our operations with $6.5 million of promissory notes
payable and a special warrant offer which provided $1.3 million in gross
proceeds. In the first quarter of 2005, we raised an additional $5.6 million
through private placements of our common stock. Additionally we converted $9.6
million of promissory notes and exchanged all of the outstanding shares of our
Series B and C preferred stock into common stock. (see Note 21).

We continue to explore and, as appropriate, enter into discussions with other
companies regarding the potential for equity investment, collaborative
arrangements, license agreements or other funding programs with us, in exchange
for marketing, distribution or other rights to our products. However, we can
give no assurances that discussions with other companies will result in any
additional investments, collaborative arrangements, agreements or other funding,
or that the necessary additional financing through debt or equity will be
available to us on acceptable terms, if at all.

We require substantial funding to continue our research and development
activities, clinical trials, manufacturing, sales, distribution and
administrative activities, and commercialization processes. Such funding will
enable us to execute our production plan with our third party manufacturer and
prepare for sales in 2005, pay a portion of our past due obligations, initiate
the pivotal clinical trial for the use of ORCEL in its cryopreserved form for
the treatment of diabetic foot ulcers, and provide for our general and corporate
working capital requirements for 2005. We believe that our cash and cash
equivalents on hand at December 31, 2004, (approximately $.2 million) and the
$5.6 million financing we received in the first quarter of 2005, respectively,
as well as the additional funds we hope to raise in 2005, may enable us


                                      F10






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to continue our operations for the next twelve months. Additionally, we are
continuing our equity financing efforts with an investment banking firm. 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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All intercompany balances and transactions have
been eliminated.

Common Stock Reserve Split

On June 24, 2003, we effected a reverse stock split of our common shares
outstanding, whereby every stockholder, warrant and option holder, was granted
one new common share or warrant or option to purchase common shares, for every
ten outstanding common shares (or its equivalent). The par value of the common
shares remained unchanged at $.001 per share. The exercise prices of all
warrants and options outstanding were adjusted as a result of this reverse
split. The conversion rates of the preferred stock outstanding were also
adjusted.

2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Product revenue is recognized upon shipment of ORCEL when title and risk of loss
pass to the customer, which occurs when the end user customer receives the
product. Royalties from licensees will be based on third-party sales of licensed
products and will be recorded in accordance with contract terms when third-party
results are reliably measurable and collectibility is reasonable assured. Fees
paid to us upon entering a license agreement are recognized when earned as
defined by the terms of the agreement.

In accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, we review each contract to determine if there are multiple
revenue-generating activities that constitute more than one unit of accounting.
Revenue is recognized for each unit of accounting based on revenue recognition
criteria relevant to that unit. Up-front payments are deferred, if appropriate,
and recognized into revenues over the obligation period.

Research and Development Costs

We are in the business of research and development and therefore, all research
and development costs, including payments relating to products under
development, research, consulting agreements and personnel costs, are expensed
when incurred. Research and Development costs aggregated $7,139,733 and
$7,474,067, for the years ending 2004 and 2003, respectively. Research and
Development costs are comprised of production and laboratory costs, rent,
consulting, personnel, and depreciation and amortization expenses.

Depreciation and Amortization

Property and equipment are carried at cost, less any grants received for
construction. In 1996, we received a $400,000 grant toward the construction of
our new laboratory and office facilities and we received an additional grant of
$130,000 in 1998.


                                      F11






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Office furniture and equipment and laboratory equipment are depreciated on the
straight-line basis over the estimated lives of the assets (5 years). Leasehold
improvements are amortized over the shorter of the term of the related lease or
the life of the asset.

Intangible Assets

Our intangible assets consist of patent application costs. We amortize these
separately identifiable assets over their estimated useful lives. Patent
application costs relate to our U.S. patent application and application fees in
foreign jurisdictions and consist of legal and other direct fees. The
recoverability of the patent application costs is dependent upon, among other
matters, obtaining further FDA approvals for the use of the underlying
technology.

Impairment of Long-Lived Assets

We review long-lived assets, which consist of fixed assets and patent
application costs, for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We have determined, based on estimated future cash flows, that no
provision is necessary for the impairment of long-lived assets at December 31,
2004.

Foreign Currency Translation

We conducted some of our research and development at our laboratory in Sidney,
Australia. However, because all Australian expenditures were funded from the
United States, we determined that the functional currency of our Australian
office was the U.S. dollar. Accordingly, current assets and current liabilities
are remeasured into the functional currency using current exchange rates and
non-current assets and liabilities are remeasured using historical exchange
rates. Expense accounts are measured using the average rate in effect for the
year. Gains and losses arising from the remeasurement of foreign currency are
included in the results of operations for all periods presented. As of December
31, 2002, we terminated all of our research and development activities at our
laboratory in Sidney.

Use of Estimates

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for as it is more likely than
not that the deferred tax assets will not be realized.

Cash and Cash Equivalents

For purposes of the statement of cash flows, we consider all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents. Cash equivalents consist principally of money market funds.
The fair value of cash and cash equivalents approximates the recorded amount
because of the short-term maturity of such instruments.


                                      F12






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Share

Net loss per common share is based on the weighted-average number of common
shares outstanding during the periods.

Basic net loss per share is computed by dividing the net loss by the
weighted-average common shares outstanding for the period. Diluted net loss per
share reflects the weighted-average common shares outstanding plus the potential
dilutive effect of securities or contracts which are convertible to common
shares, such as options, warrants and convertible preferred stock.

Options and warrants to purchase shares of common stock were not included in the
computation of diluted net loss per share in each of the years presented because
to do so would have been antidilutive for the periods presented.

The amount of options and warrants excluded are as follows:



                                  Year ended December 31,
                                  -----------------------
                                      2004        2003
                                   ---------   ---------
                                         
Warrants                             988,603   3,085,173
                                   =========   =========
Stock Options - in plan              428,324     348,199
                                   =========   =========
Stock Options - outside of plan    1,374,400   1,274,400
                                   =========   =========


Additionally, the effects of conversion of the preferred stock were excluded
from the weighted average share calculation, as the effect would be
antidilutive. An aggregate of 5,804,977 shares of common stock would be issuable
upon conversion of the preferred stock outstanding at December 31, 2004.

Employee Stock Option Plan

We account for our employee stock options under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of FASB Statement
No.123, "Accounting for Stock-Based Compensation".



                                                                 Year ended December 31,
                                                               ---------------------------
                                                                   2004           2003
                                                               ------------   ------------
                                                                        
Net loss applicable to common shareholders, as reported        $(17,144,804)  $(21,449,131)
Deduct: Total stock-based employee compensation
   income (expense) determined under fair value based method         425,801    (1,723,343)
                                                               ------------   ------------
Pro forma net loss                                             $(16,719,003)  $(23,172,474)
                                                               ============   ============
Net loss applicable to common shareholders per share:
   Basic and Diluted - as reported                             $      (3.03)  $      (5.11)
   Basic and Diluted - pro forma                               $      (2.96)  $      (5.52)


We utilized the Black-Scholes option-pricing model to quantify the expense of
options and warrants granted to non-employees and the pro forma effects on net
loss and net loss per share of the fair value of the options and warrants


                                      F13






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

granted to employees during the years ended December 31, 2004 and 2003. The
following weighted average assumptions were made in estimating fair value.



                          Year ended December 31,
                          -----------------------
                               2004      2003
                             -------   -------
                                 
Risk-free interest rate         3.1%      3.3%
Expected option life         5 years   5 years
Expected volatility            80.9%     84.9%


The weighted average fair value at the date of grant for options granted during
the year ended December 31, 2004 and 2003 was $1.92 and $1.64, respectively.

Effect of New Accounting Standards

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" which
establishes accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. This statement is a
revision to SFAS 123, "Accounting for Stock-Based Compensation", supersedes APB
25, "Accounting for Stock Issued to Employees," and amends FASB Statement No.
95, "Statement of Cash Flows." SFAS 123(R) eliminates the ability to account for
share-based compensation using the intrinsic value method allowed under APB 25
and will require us to recognize share-based compensation as compensation
expense in the statement of operations based on the fair values of such equity
on the date of the grant, with the compensation expense recognized over the
period in which the recipient is required to provide service in exchange for the
equity award. This statement will also require us to adopt a fair value-based
method for measuring the compensation expense related to share-based
compensation. SFAS 123(R) must be adopted no later than periods beginning after
December 15, 2005 and we expect to adopt SFAS 123(R) on the effective date. We
believe the adoption of SFAS 123(R) will have a material impact on our results
of operations and earnings per share.

3 - CONCENTRATION OF CREDIT RISK

We maintain cash and money market accounts at four financial institutions
located in New York City. The FDIC insures cash accounts for amounts up to
$100,000. At times, our balances exceed such FDIC limits.

We have not experienced any losses in such accounts.

4 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2004:

                              
Laboratory equipment             $1,717,637
Office furniture and equipment    1,118,481
Leasehold improvements            1,350,176
                                 ----------
                                  4,186,294
Accumulated depreciation          3,859,348
                                 ----------
                                 $  326,946
                                 ==========



Depreciation and amortization expense for the years ended December 31, 2004 and
2003, was approximately $385,000 and $556,000, respectively.


                                      F14






                           ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5 - PATENTS

Patent application costs are stated at cost less amortization computed by the
straight-line method over the useful life of the patent. As of December 31,
2004, patents, net of accumulated amortization, were as follows:



                                                         Expiration
Patents subject to Amortization                             Date
- -------------------------------                          ----------
                                                                
Composite Culture Skin (CCS)                               2/1/2011   $  910,690
Manufacturing of Bi-layered Collagen Sponge              12/28/2020       33,037
Cryopreservation Process                                 12/26/2021       78,759
                                                                      ----------
                                                                       1,022,486
Accumulated amortization                                                 435,210
                                                                      ----------
                                                                      $  587,276
                                                                      ==========


Amortization expense for the years ended December 31, 2004 and 2003, was
approximately $82,212 and $129,825, respectively. The estimated annual
amortization expense expected, based on current intangible balances, for the
years 2005 through 2009 is $84,645 per year.

Our U.S. patent for CCS was issued in 1994. During 2002 and 2003 we were issued
two patents by the United States Patent Office. The first patent covers unique
manufacturing processes for our tissue-engineered product, ORCEL. These
processes specifically relate to the manufacturing of our bi-layered collagen
sponge structure and when implemented, can reduce the current manufacturing
costs of ORCEL. This patent was issued on December 31, 2002. The second patent
covers the freezing process for ORCEL. This process, referred to as
cryopreservation, gives our product a minimum shelf life of seven months, as
opposed to only a few days when our product is not cryopreserved. This second
patent was issued on October 28, 2003.

There can be no assurance that any patent will provide commercial benefits to
us. We have determined that no provision for impairment is necessary at December
31, 2004.

We have granted a security interest in our United States and Canadian patents
and trademarks relating to ORCEL to collateralize payments we will be required
to make to satisfy our obligation under a Revenue Interest Assignment Agreement
(see Note 11).

6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following at December 31,
2004:

                                                                  
Accounts payable                                                     $3,202,905
Accrued interest                                                        660,918
Accrued compensation                                                    579,975
Accrued expenses                                                        266,003
Accrued professional fees                                                82,500
Bank overdraft                                                           69,894
Deferred income                                                          50,000
                                                                     ----------
                                                                     $4,912,195
                                                                     ==========




                                      F15






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 - LEASES

In March 1996, we entered into a five-year lease with Columbia University for
our laboratory and offices in Columbia's new Audubon Biomedical Science and
Technology Park in New York City. Construction of the laboratory and office
facility was completed in July 1996 and became fully operational in November
1996. We utilize our laboratory facilities to produce ORCEL for research and
development activities including cell expansion and biomaterial research. On
December 18, 2003, we amended the lease agreement with Columbia University,
extending the lease term to December 2005. With this amendment, we agreed to pay
Columbia $25,588 a month for past due rent commencing on February 1, 2004 and
ending on December 31, 2005.

Total rent expense for the years ended December 31, 2004 and 2003 was
approximately $461,000 and $432,000, respectively.

On August 5, 2002, we reached an agreement with the New Jersey Economic
Development Authority (NJEDA) to terminate a 2001 lease and to enter into a new
lease covering production and office space. Monthly payments under such lease
began on January 1, 2003. On June 9, 2003 NJEDA and we executed an agreement to
terminate this lease. Based on the terms of this settlement, a termination cost
of $978,000 was agreed upon. This termination costs was settled by applying the
$623,000 security deposit, plus accrued interest thereon, with the balance of
$340,000 paid on June 11, 2003. In 2003, we recorded a lease termination cost of
$1,119,166 consisting of the aforementioned $978,000 together with $141,166 of
other costs that we incurred in connection with the build-out of the leasehold.
We continued to rent space in North Brunswick, New Jersey pursuant to a lease
until its expiration on July 31, 2004, at a rent of $2,300 per month.

As of December 31, 2004 and 2003, we recorded $535,000 and $503,000 in equipment
purchased under capital leases and $460,000 and $335,000 in accumulated
amortization, respectively.

Future minimum lease payments under noncancellable operating leases primarily
for office and laboratory space and the present value of future minimum lease
payments under capital leases as of December 31, 2004 are as follows:



                                                                   Leases
                                                            --------------------
Year ending December 31,                                    Operating    Capital
                                                            ---------   --------
                                                                  
   2005                                                      $377,000   $ 84,918
   2006                                                            --     20,505
   2007                                                            --      5,673
   2008                                                            --        678
                                                             --------   --------
   Total                                                     $377,000    111,774
                                                             ========
   Less amounts representing interest                                     36,239
                                                                        --------
   Present value of net minimum capital lease payments                    75,535
   Less: current portion                                                  51,584
                                                                        --------
   Long-term portion                                                    $ 23,951
                                                                        ========


In connection with a lease agreement dated February 27, 2004, we were obligated
to issue a two-year warrant to purchase 14,052 shares of our common stock at
$3.25 per share. We have valued the warrant utilizing a Black-Scholes valuation
model at $18,500. On November 2, 2004 the Board of Directors approved the
issuance of the aforementioned warrant.


                                      F16






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8 - LOAN PAYABLE

We have two loans outstanding with our landlord totaling $203,462.These loans
are due in monthly installments including interest through December 2005 of
$10,103 and $7,605, respectively, at effective rates of 7.98% and 8.6%,
respectively.

Minimum payments to be made under the terms of these loans are as follows:

                                                                     
Year ending December 31, 2005                                           $212,518
Less amount representing interest                                          9,056
                                                                        --------
Net present value of future loan payments - current portion             $203,462
                                                                        ========



9 - LICENSE AND OTHER ARRANGEMENTS

In October 2003, we entered into an exclusive License Agreement with Teva
Medical Limited, a subsidiary of Teva Pharmaceutical Industries Ltd. (Teva) for
the sales and marketing of our ORCEL product in Israel. This ten-year agreement,
beginning on the date the product is launched for marketing in Israel, requires
Teva to seek regulatory and reimbursement approval for ORCEL in Israel. We
received an upfront payment of $50,000 in 2003 which we recorded as deferred
income, see Note 6. We will receive an additional $50,000 within thirty days of
grant of reimbursement approval in Israel, and another $100,000 within 30 days
of attainment of aggregate net sales of $3,000,000 in Israel within any period
of twelve consecutive calendar months. The agreement also provides for ORCEL
pricing and terms of payment. Additionally Teva will pay us royalties of 10% of
net sales in Israel up to $5,000,000 per annum. If sales are in excess of
$5,000,000 annually Teva will pay us 10% on the first $5,000,000 of sales in
Israel and a 20% royalty on sales above $5,000,000 in Israel.

In April 2004, we entered into a Material Supply Agreement with ES Cell
International Pte Ltd.(ESI). Under the terms of the agreement, we provided ESI
with human skin cells generated from cell lines developed and manufactured by us
for use in our ORCEL product. We received a $50,000 up-front fee upon the
signing of the agreement and we received an additional $150,000 upon first
delivery of certain specified cell lines. We have recorded these amounts in
interest and other income. We will receive milestone payments of $150,000 with
30 days of an investigational new drug filing for the ESI Focus Cell Therapy
line and an additional $150,000 upon ESI's receiving regulatory approval for
marketing of the ESI Focus Cell Therapy product. We will additionally receive
royalties equivalent to .5% of product sales revenue or license or distribution
fees or other payments. The payment of these additional amounts are wholly
dependent on ESI achieving their milestones.

10 - PROMISSORY NOTES PAYABLE

Promissory notes at December 31, 2004 consists of:

                                                                   
Promissory notes - investors, 8% and 12%, due December 31, 2004       $9,626,626
Promissory notes - Amarex, due through February 2005                     118,060
Promissory notes - CUH2A, 4%, due through February 2008                  131,722
                                                                      ----------
                                                                       9,876,408
Current portion                                                        9,784,691
                                                                      ----------
Noncurrent portion                                                    $   91,717
                                                                      ==========



During 2003, we received non-interest bearing advances of $130,000 from certain
investors. In 2004, this amount was converted to an 8% investor promissory note
due December 31, 2004.

In connection with the promissory notes to investors we paid our placement agent
a fee equivalent to 50 shares for every $1,000 of the promissory notes and
recorded this as deferred debt issuance cost which was then amortized over the
life of


                                      F17






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the note to interest expense. 488,831 shares were issued in 2004 consisting of
157,000 shares valued at $287,000 (in 2003) relating to notes placed in 2003 and
331,831 shares valued at $746,202 relating to notes placed in 2004.

On October 27, 2004 holders of $9,206,000 of investor promissory notes agreed to
extend the maturity date of their notes from November 5, 2004 to December 31,
2004. In consideration of this extension we increased the interest rate for the
fourth quarter of the calendar year to 12% and issued 45,000 common shares for
each $1,000,000 of principal amount held, or 414,270 common shares. The
modification was not considered significant and thus these shares were valued at
$2.00 per share, or $828,540 in the aggregate, and was charged to interest
expense in the fourth quarter. These shares were issued in 2005 upon our
confirmation of each noteholders' accredited investor status. In connection
therewith, we issued 277,020 shares of common shares and 34.31 shares of our
Series D preferred stock (equivalent to 137,250 common shares).

As defined in the promissory notes, if we received $5,000,000 of gross proceeds
from a qualified financing, we may elect to prepay the notes and any accrued and
unpaid interest in cash or in our stock. On January 5, 2005, concurrent with the
closing of our private placement in excess of $5,000,000 of gross proceeds (see
Note 21), all the promissory notes and accrued interest held by investors, or an
aggregate of $10,301,213 was surrendered in exchange for our common stock and
warrants. The fair value of the common stock and warrants was approximately
$20,600,000 and thus we will record a loss on extinguishment of approximately
$10,300,000 in 2005.

In December 2002, Amarex LLC commenced an action against us in the Circuit Court
for Montgomery County, Maryland. Amarex provided statistical programming and
data management services for us for the data generated in our clinical trials.
In March 2004 we settled the litigation by agreeing to pay Amarex $673,060. We
are required to pay $60,000 each month thereafter until the obligation is paid
in full. The settlement also provides that Amarex will release to us the work
they previously performed for us in connection with our diabetic foot ulcer
clinical trial. This note was paid in full in February 2005.

The CUH2A promissory note was a structured payout of a previous vendor
obligation. We pay them $3,712 monthly.

Minimum payments to be made under the terms of the promissory notes are as
follows:



Year ending December 31,
                                                                  
   2005                                                              $10,448,008
   2006                                                                   44,546
   2007                                                                   44,546
   2008                                                                    6,783
                                                                     -----------
                                                                      10,543,883
   Less amount representing interest                                     667,475
                                                                     -----------
   Net present value of future loan payments                         $ 9,876,408
                                                                     ===========


11 - OBLIGATION UNDER REVENUE INTEREST ASSIGNMENTS

On August 29, 2001, as amended February 2003, we entered into a Revenue Interest
Assignment Agreement with Paul Royalty Fund L.P. (PRF), which terminates on
December 31, 2011. Under such agreement we were eligible to receive $10,000,000
during 2001. We received $6,000,000 during 2001 and the remaining $4,000,000 in
January 2002.

In February 2003, PRF and the Company signed an amendment to the agreement,
restating and updating certain provisions of the original agreement, including
removing additional funding requirements by PRF. In connection therewith, PRF
purchased 50 shares of our Series B convertible preferred stock investing
$500,000, and for which we issued to PRF 73,077 shares of our common stock and
granted PRF warrants to purchase an aggregate of 50,000 shares of our common
stock, at exercise prices of $15.00 per share for 25,000 shares and at $20.00
per share for the other 25,000 shares. The February 2003 amendments to our
agreements with PRF provided, among other things, for (a) the election of one
director designated by PRF, (b) the right of one observer (other than such
director) selected by PRF to attend and


                                      F18






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

observe all meetings of our Board of Directors and (c) for us to use our best
efforts to have independent directors who are acceptable to both us and PRF,
including a director designated by PRF, as a majority of our Board of Directors.

In consideration for the $10,000,000, PRF will receive a minimum of 3.33% of the
first $100,000,000 of annual sales plus 1.99% of annual sales in excess of
$100,000,000 of ORCEL in the United States, Canada and Mexico. Such percentage
may be further adjusted upward or downward, based on the volume of net sales to
end users of our products in those three countries. Beginning on January 1,
2003, PRF was entitled to receive each year the first proceeds to us from end
user sales of our products in North America. The annual amounts that PRF will be
able to draw in advance against the end user sales of our products are: $600,000
in 2003, $1,000,000 in 2004, and $7,500,000 in 2005 through 2011. The agreement
provides for quarterly and annual accountings between PRF and us for those
advance payments. The purpose of these accountings is to reconcile the advances
paid against the actual amount we are required to pay computed on the basis of
the aforementioned percentages of sales volume. Based on this reconciliation of
the actual calculated amounts versus the advances paid, we will either be
required to pay additional amounts or receive a refund of all or a portion of
the advances we paid to PRF. We have not paid PRF any advances, as there were no
sales during 2003 and 2004. The amounts received from PRF have been classified
as debt in accordance with our interpretation of Emerging Issues Task Force
(EITF) Issues No. 88-18, "Sales of Future Revenue". PRF bears the risk of
revenue interest paid being significantly less than the current revenue interest
obligation, as well as the reward of revenue interest paid to it being
significantly greater than the current revenue interest obligation. Therefore we
are under no obligation to make any other payments to PRF in the scenario when
no repurchase right (as defined) is triggered and no significant interest
payments are made. Conversely, we will be obligated to continue to make revenue
interest payments in the scenario where sales are sufficiently high to result in
amounts due under the Revenue Interest Assignment Agreement being in excess of
the current revenue interest obligation.

We granted PRF a security interest in our United States and Canadian patents and
trademarks relating to our technology for our ORCEL product (collectively, the
"Pledged Assets"), to secure payments required to be made by us to PRF under
this agreement. Pursuant to the default provisions under the agreement PRF may
require us to repurchase their revenue interest at the put option exercise price
which is defined as a price which would yield an internal rate of return to PRF
of 30%.

The events that could require us to repurchase our revenue interest include:

     o    any change of control of our company;

     o    a transfer of substantially all of our assets;

     o    a transfer of our interests in our products;

     o    a judicial decision that has a material adverse effect on our
          business, operations, assets, or financial condition;

     o    the occurrence of any event that has a material adverse effect on our
          ability to perform our obligations to repurchase the revenue interest
          obligation;

     o    the acceleration of our obligations or the exercise of default
          remedies by a secured lender under certain debt instruments; a funding
          termination event (as defined) such as a bankruptcy event (as
          defined);

     o    our insolvency (as defined);

     o    the breach of representation, warranty or certification made by us in
          the agreements with PRF that, individually or in the aggregate, would
          reasonably be expected to have a material adverse effect on our
          business, operations, assets or financial condition, and such breach
          is not cured within 30 days after notice thereof from PRF.

Additionally we agreed not to issue any new debt or equity securities that
contain mandatory cash dividend or redemption provisions through the revenue
interest period, or December 31, 2011.

On December 13, 2004 PRF entered into a forbearance agreement with us agreeing
that they cannot exercise their right to compel us to repurchase their interest
in our revenues because of our insolvency prior to July 1, 2006 (which is
defined as (a) our liabilities, excluding our revenue interest assignment
obligation, exceeding the fair market value of our assets or (b) our inability
to pay our debts as they become due). In accordance with EITF No. 86-30,
"Classification of Obligations When a Violation is Waived by the Creditor", we
have classified our revenue interest assignment obligation as a noncurrent
liability as a result of the forbearance.




                                      F19






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $22,738,110, the amount PRF could compel us to repurchase their interest in
our revenues at December 31, 2004, had they not entered into a forbearance
agreement with us. This amount represents the amount that would give PRF a 30%
internal rate of return on their $10,000,000 from the dates of their original
investments. Should we continue to be insolvent we will need to continue to
incur non-cash interest charges for this obligation. At such time when the
default provisions are no longer applicable, the effective interest rate imputed
on the obligation will be determined using the interest method and payments to
PRF will be recorded as a reduction of our obligation under the revenue interest
assignment.

In accordance with accounting promulgated by Statements of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings" (SFAS 15) even if we are no longer insolvent as long as our
future cash payments relating to the revenue interest assignment obligation are
indeterminate, the revenue interest assignment obligation would remain at the
value that achieves the 30% internal rate of return for PRF through the last
date of our insolvency. However, we would no longer have to accrue any
additional interest to achieve a 30% internal rate of return related to
insolvency. That is, we would not reverse the accrual for the insolvency
repurchase event even when we are no longer insolvent. At December 31, 2004 the
amount attributed to the insolvency is $12,738,110. Our revenue stream is
considered indeterminate since we cannot predict with certainty the payments we
will be required to make on this obligation since theoretically our sales are
not limited in amount and payments under our agreement with PRF are determined
based on future sales. We estimate that we would need to achieve a North
American sales level of approximately $750,000,000 during the approximate
remaining six years under the agreement to offset the principal balance of the
$22,738,110 revenue interest obligation.

SFAS 15 allows debtors that can predict with certainty the absolute amounts of
future cash flow payments to record an immediate gain if the maximum future cash
payments are less than the carrying amount of the obligation. In the case where
the future cash payments are indeterminate, as ours are considered, the gain is
not recognized until the end of the term of the outstanding debt, December 31,
2011, or upon termination. As such, we believe we will likely record a gain on
the revenue interest assignment obligation to PRF in 2011 or upon termination,
if sooner.

If we were unable to repurchase the revenue interest upon a repurchase event,
PRF could foreclose on the Pledged Assets, and we could be forced into
bankruptcy. PRF can also foreclose on the Pledged Assets if we remain insolvent
(waived until July 1, 2006) or are involved in a voluntary or involuntary
bankruptcy proceeding. No repurchase events or foreclosures have occurred as of
December 31, 2004.

We also have the option to repurchase PRF's interest upon the occurrence of a
change in control of the Company or a complete divestiture by us of our
interests in our products, for an amount of cash flows that will generate a 35%
internal rate of return to PRF.

On December 16, 2004, pursuant to a Special Warrant Offer which reduced the
exercise prices of a portion of the 50,000 warrants that PRF received in
February 2003 to $1.00 in exchange for the surrender of the balance, warrants to
purchase 27,778 shares of our common stock were exercised for which we received
$27,889, and warrants to purchase 22,222 shares of our common stock were
surrendered to us. As a result of the Special Warrant Offer PRF was considered
to have received a deemed dividend of approximately $2,500 based on a Black
Scholes calculation considering the valuation of the warrants prior to the
December 16, 2004 offering and subsequent to the offering (see Note 12).

12 - EQUITY TRANSACTIONS

Each share of our common stock is entitled to one vote.

In September 2001, we, with shareholder approval, increased the authorized
amount of our common stock to 35,000,000 shares and authorized the issuance of
up to 1,000,000 shares of preferred stock.

In February 2003, we, with shareholder approval, increased the authorized amount
of our common stock to 200,000,000 shares.



                                      F20






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On June 24, 2003, we effected a one for ten reverse stock split for each
outstanding share of common stock. This reverse stock split was retroactively
reflected in the accompanying financial statements and all references to shares
are to the new shares with per share amounts appropriately adjusted.

Founders: Pursuant to an agreement between Dr. Eisenberg and the other founders
(the "Other Founders"), a business relationship was formed by the founders for
the manufacture and sale of products derived from the Technology (the "Business
Agreement"). Under the terms of the Business Agreement, Dr. Eisenberg, who was
the owner of all the capital stock of Ortec (60,000 shares) agreed to license
the Technology to Ortec and sell 70% of Ortec's shares for a purchase price of
$1,000,000 to the Skin Group. Dr. Eisenberg was paid $85,000 in connection with
this agreement as reimbursement for his expenses ($35,000 during the period from
inception (March 12, 1991) to December 31, 1991 and $50,000 during the year
ended December 31, 1992). The Other Founders initially owned all of the stock of
the Skin Group (95,382 shares). On July 27, 1992, the Skin Group was merged with
and into Ortec.

First private placement: In March 1991, the Skin Group issued, in a private
placement, 21,744 shares for $65,000. In June and October 1991, the Skin Group
issued an aggregate 14,902 shares, to a then director of ours (the "Director")
for an aggregate gross proceeds of $250,000.

Second private placement: Commencing in November 1991, the Skin Group issued
7,948 shares under a second private placement for $750,006. The 7,948 shares
consisted of 5,302 shares issued during 1991 and 2,646 issued shares during 1992
for $500,000 and $250,006, respectively. Under the second private placement an
additional 2,286 of our shares were issued for $215,467. In addition, the
Director was granted warrants to purchase 736 of our shares at $94.25 per share.

Stock purchase agreement entered into with the Director: In June 1992, 5,304 of
our shares were sold to the Director for a total purchase price of $499,998. The
purchase price was payable in installments and shares and warrants were issued
in installments pro rata with the payment of the purchase price. During the
years ended December 31, 1992 and 1993, the Director paid $299,998 and $200,000,
respectively, and was issued 3,182 and 2,122 shares, respectively. In addition,
the Director was granted warrants to purchase 7,957 shares (4,774 and 3,183 of
which were granted in 1992 and 1993, respectively) at an exercise price of
$94.25 per share; such warrants were exercised on December 29, 1998.

Further, in connection with the Director's purchase of the 5,304 shares, in
1993, the Other Founders granted to the Director options to purchase from them
an aggregate of 7,400 of our shares, at a price of $50 per share. In 1993, the
Director exercised such option in part, and purchased 4,900 shares from the
Other Founders at the option price of $50 per share. The remaining balance of
such options expired April 15, 1994.

Third private placement: Pursuant to a third private placement that commenced on
January 13, 1993, and concluded on March 31, 1993, we sold an aggregate of
10,965 shares at $100 per share for $1,096,500. Subsequent to such offering, in
1993, we sold an additional 2,250 shares at $100 per share for $225,000. In
connection with such purchases, all purchasers received certain registration
rights.

Stock Purchase Agreement with Home Insurance Company dated July 19, 1993:
Pursuant to a Stock Purchase Agreement dated July 19, 1993, by and between us
and the Home Insurance Company (Home Insurance), we sold to Home Insurance
11,112 shares of common stock for an aggregate purchase price of $999,999, or
$90 per share. In connection with such purchase, Home Insurance received certain
registration rights.

Shares issued in exchange for commission: In 1993, we issued 60 shares to an
individual as compensation for commissions in connection with the sale of our
shares. Such commissions are included in share issuance expenses. The stock
issued was valued at $100 per share.

In August 1993, the Director entered into a stock option agreement with Dr.
Eisenberg and the Other Founders, pursuant to which he received the right to
purchase an aggregate of 10,000 shares owned by such persons in various amounts
and at various times, at a purchase price of $100 per share. As of December 31,
1993, the Director had exercised options and purchased 500 shares under such
agreement at $100 per share. The remaining balance of such options has expired.



                                      F21






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fourth private placement: Pursuant to a fourth private placement consummated in
July 1994, we sold an aggregate of 3,946 shares at between $100 and $125 per
share for aggregate proceeds of $397,712.

Stock Purchase Agreement with Home Insurance dated July 22, 1994: Pursuant to a
Stock Purchase Agreement dated July 22, 1994, between Ortec and Home Insurance,
we sold to Home Insurance 5,000 shares of common stock for an aggregate purchase
price of $500,000, or $100 per share. In connection with such purchase, Home
Insurance received certain registration rights and warrants to purchase 1,000
shares of common stock at $120 per share, which expired on July 21, 1997.

Rent Forgiveness: During the year ended December 31, 1995, Dr. Eisenberg's
father waived the rights to $40,740 of unpaid rent which was accounted for as
additional paid-in capital.

Initial Public Offering: On January 19, 1996, we completed an initial public
offering of 120,000 units for aggregate proceeds of $6,000,000. Each unit
consisted of one share of our common stock, one Class A warrant to purchase one
share of common stock at $100 and one Class B warrant to purchase one share of
common stock at $150. As of December 31, 1998, 108,378 Class A warrants were
exercised and the balance expired unexercised. The Class B warrants were
originally set to expire in January 1999. We extended the expiration date to
March 31, 2000. The Class B warrants were subject to redemption by us at $.10
per warrant. We received gross proceeds of approximately $1,282,000 and
$10,823,000 and net proceeds of approximately $1,262,000 and $10,165,000 as a
result of the exercise of warrants in 1998 and 1997, respectively.

Fifth private placement: In November 1996, we completed a private placement of
our securities from which we received gross proceeds of $6,220,797 and net
proceeds of approximately $5,733,000 (after deducting approximately $487,000 in
placement fees and other expenses of such private placement). We sold 95,911
shares of common stock in such private placement at average prices of $64.90 per
share. In addition, we granted five-year warrants to placement agents to
purchase such number of shares equal to 10% of the number of shares of common
stock sold by such placement agents, exercisable at prices equal to 120% of the
prices paid for such shares. Pursuant to the purchasers' request, we registered
all 95,911 shares.

Options and warrants issued for services: During 1992 and 1993, we issued
warrants to purchase 666 shares at $94.25 per share, and during 1995 we issued
warrants to purchase 2,000 shares at $100 per share to members of our Scientific
Advisory Board. During 1996 and 1997, we issued warrants to purchase 24,210
shares at $60 to $120 per share to the Director and certain others. These
warrants expired at various dates through November 2001.

On January 20, 1996, we granted "lock-up warrants" entitling shareholders to
purchase an aggregate of 38,905 shares of our common stock at a price of $10 per
share. All unexercised warrants expired on January 18, 2000. At different times
during 1996, seven persons exercised such warrants and purchased 3,389 shares of
common stock at the $10 per share exercise price. The issuance of such lock-up
warrants was in consideration for such shareholders signing lock-up agreements
agreeing not to sell or transfer shares of our common stock purchased at prices
of $90 or more per share until January 20, 1997. At different times during the
third quarter of 1997, eight persons exercised such warrants and purchased an
aggregate of 2,121 shares of common stock at the $10 per share exercise price.
During 1998, nine persons exercised such warrants and purchased an aggregate of
9,608 shares of common stock at the $10 per share exercise price. During 1999,
five persons exercised such warrants and purchased an aggregate of 1,410 shares
of common stock at the $10 per share exercise price. There were no underwriting
discounts or commissions given or paid in connection with any of the foregoing
warrant exercises.

During the third quarter of 1997, we granted to one person and its seven
designees four-year warrants to purchase an aggregate of 3,750 shares of common
stock, at an exercise price of $120 per share. Such warrants were not
exercisable until July 18, 1998 and were granted in consideration for consulting
services rendered to us.

During the fourth quarter of 1997, we granted to one person and its six
designees four-year warrants to purchase an aggregate of 3,750 shares of common
stock, at an exercise price of $120 per share. Such warrants were not
exercisable until July 18, 1998 and were granted in consideration for consulting
services rendered to us.



                                      F22






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 1998, warrants for 1,870 shares, mentioned in the two previous
paragraphs, were exercised utilizing the cashless exercise option of the warrant
agreement. We issued 620 shares upon this exercise.

During the third quarter of 1997, we granted to one person a one-year warrant to
purchase an aggregate of 63 shares of common stock, at an exercise price of $120
per share. Such warrants were granted in consideration for consulting services
rendered to us. The warrant was exercised during 1998.

We recorded consulting expense of approximately $65,000 as a result of these
grants during the year ended December 31, 1998.

During the fourth quarter of 1997, we granted five-year warrants to our three
executive officers to purchase an aggregate of 24,000 shares of common stock, at
an exercise price of $120 per share. Such warrants were granted in consideration
for services rendered to us. The exercise of such warrants was contingent upon
the occurrence of certain events, which were considered probable at December 31,
1997. As of December 31, 1998, five of the six events had occurred so that
18,500 of those warrants became vested. As a result, we recorded compensation
expense of approximately $80,000 in December 1997 and $1,185,000 for the year
ended December 31, 1998. The balance of the warrants became vested upon the
exercise of warrants owned by a director in December 1998 in accordance with the
terms of certain compensation provisions as approved by our Board of Directors.

In consideration for services rendered by him as our director in the five-year
period from 1992 to 1996 for which he never received compensation, we extended
by one year to December 31, 1998 the expiration date of warrants owned by a
director to purchase an aggregate of 8,693 shares, exercisable at $94.25 per
share. As a result, we recorded compensation expense of approximately $420,000,
during the fourth quarter of 1997. All of these warrants were exercised on
December 29, 1998.

During the fourth quarter of 1998, we granted five-year options to our three
executive officers to purchase an aggregate of 52,075 shares of common stock, at
exercise prices ranging from $121.30 to $124.40 per share. The exercise of such
options was contingent upon the occurrence of certain events. All of these
options became vested upon the exercise of warrants owned by a director in
December 1998 in accordance with the terms of certain compensation provisions as
approved by our Board of Directors. As a result, we recorded compensation
expense of approximately $495,000 in December 1998.

Sixth private placement: In December 1998, we completed a private placement of
our securities from which we received proceeds of $2,000,000. In addition, we
granted three-year warrants to the purchaser to purchase 5,000 shares at $120
per share. We sold 20,000 shares of common stock in such private placement. We
allocated the $2,000,000 proceeds amongst the common stock and warrants based
upon the relative fair market value of the stock at the date of issuance and the
estimated fair value of the warrants using the Black-Scholes option pricing
model. We assigned values to the common stock and warrants issued of $1,788,698
and $211,302, respectively.

Seventh private placement: In March 1999, we completed a private placement of
38,916 shares of our common stock to twenty investors from which we received
proceeds of $3,405,076. In addition, each investor also received a three-year
warrant to purchase 20% of the number of shares of our common stock such
investor purchased in such private placement. The prices at which such warrants
were exercisable was $125 per share for one half, and $145 per share for the
other half, of the number of shares issuable upon exercise of such warrants. We
allocated the $3,405,076 proceeds amongst the common stock and warrants based
upon the relative fair market value of the stock at the date of issuance and the
estimated fair market value of the warrants using the Black-Scholes option
pricing model. We assigned values to the common stock and warrants issued to the
investors of $3,168,785 and $236,291, respectively. Oscar Gruss & Son,
Incorporated (Gruss) acted as placement agent in such private placement. For its
services as placement agent, we paid Gruss $272,406 and granted Gruss a
five-year warrant to purchase an aggregate of 3,892 shares of our common stock
at an exercise price of $105 per share. The value assigned to the Gruss warrants
was $232,000. Other share issuance costs amounted to $106,002.



                                      F23






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Eighth private placement: In December 1999, we completed a private placement of
163,637 shares of our common stock to two institutional funds from which we
received proceeds of approximately $9,000,000. Share issuance costs amounted to
approximately $9,500.

Ninth private placement: In March 2000, we completed a private placement of
6,667 shares of our common stock to one fund from which we received proceeds of
approximately $1,000,000. In addition, we paid a placement agent who introduced
us to the fund a fee of approximately $43,400 and granted such placement agent a
five year warrant to purchase 267 shares of our common stock at an exercise
price of $150 per share. The value assigned to the warrant was $23,000, which
was reflected as share issuance costs. Other share issuance costs amounted to
$3,200.

Tenth private placement: In September 2000, we completed a private placement of
124,757 shares of our common stock to ten investors from which we received
approximately $8,421,000. In addition, we paid the placement agent who
introduced us to the investors a fee of approximately $525,400. Other share
issuance costs amounted to approximately $46,500.

Options issued for services: In April 2001, we issued options to purchase 6,000
shares of our common stock, at $69.50 per share, to certain professionals. The
estimated fair value of $188,080 for such options was charged to general and
administrative expenses.

During 2002, we completed a private placement with several investors, in which
we raised cash proceeds of $8,200,000, issued convertible preferred shares,
issued warrants to purchase common shares and granted common stock as dividends.
(See Note 13).

During July 2003, we granted a warrant to purchase 150,000 shares at an exercise
price of $2.00 per share to a vendor in consideration for twelve months of
consulting services. In accordance with the agreement, 50% of the shares, or
75,000 shares, vested immediately, with the balance vesting upon the six-month
anniversary in January 2004. As a result, we recorded expense of $87,000 in 2003
and $94,393 during 2004 representing the value of the additional 75,000 shares
which had vested.

Restricted Share Grant: During 2003 an allocation of 1,800,000 restricted shares
of common stock were granted to officers and certain employees. The issuance of
these shares is contingent on our achieving certain milestones and if issued
will contain delayed vesting provisions (see Note 21).

Special Warrant Offer: On November 16, 2004, we made a Special Warrant Offer
(SWO) to all holders of our Series B-1, B-2 and C warrants. Such warrants were
originally issued in connection with our Series B and Series C preferred stock
financings in November and December 2002 and in February, May and July 2003 (See
Note 13). At the time of the SWO there were outstanding and eligible for the
SWO: 667,989 and 25,000 Series B-1 warrants exercisable to purchase our common
stock at $4.00 and $15.00 per common share, respectively; 544,138 and 25,000
Series B-2 warrants exercisable to purchase our common stock at $5.00 and $20.00
per common share, respectively, and 1,707,000 Series C warrants to purchase our
common stock at $3.60 per common share. Under the terms of the SWO, the holders
were entitled to purchase 1/3 of such shares they could otherwise purchase at a
reduced exercise price of $1.67 per common share. Concurrently with such
exercise they would receive 2/9 of such shares they could otherwise purchase at
the reduced exercise price of $0.01 per common share, and they would surrender
the right to purchase their remaining 4/9 of such shares they could otherwise
purchase. Each warrant holder participating in the SWO received a new warrant to
purchase 30% of the common shares acquired by such purchaser in the SWO.

The SWO was concluded December 3, 2004. Holders of 491,791 of our Series B-1
warrants, 431,341 of our Series B-2 warrants, and 1,605,000 of our Series C
warrants participated in the SWO.

Participation in the offering resulted in aggregate gross proceeds of $1,438,019
consisting of cash proceeds of $1,338,019 and $100,000 relating to the
settlement of an existing promissory note obligation. There were no fees paid to
our placement agent in connection with the SWO. We issued 496,981 shares of our
common stock and 233.8274 shares of Series D convertible preferred stock, which
are equivalent to 935,310 shares of common stock. We also issued five-


                                      F24






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

year Series E warrants to the investors to purchase an additional 429,689 shares
of our common stock for $1.80 per share.

As a result of the SWO, the warrant holders who participated in the offering
were considered to have received a deemed dividend aggregating $1,120,500 based
upon a Black Scholes calculation considering the valuation of the warrants prior
to the November 16, 2004 offering and subsequent to the offering. We recorded an
aggregate deemed dividend of $1,123,000 inclusive of Paul Royalty Fund's SWO
described in Note 11.


                                      F25






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes warrant activity during the period from March 12,
1991 (inception) through December 31, 2004 (excluding the Class A and B warrants
which were issued during the IPO):



                             Price Range ($)    Warrants
                             ---------------   ----------
                                         
March 12, 1991 (inception)
   Granted                             94.25          736
                                               ----------
Balance, December 31, 1991             94.25          736
   Granted                             94.25        5,508
                                               ----------
Balance, December 31, 1992             94.25        6,244
   Granted                    94.25 - 120.00        4,823
                                               ----------
Balance, December 31, 1993    94.25 - 120.00       11,067
   Granted                            120.00        1,000
                                               ----------
Balance, December 31, 1994    94.25 - 120.00       12,067
   Granted                            100.00          400
   Expired                             94.25         (268)
                                               ----------
Balance, December 31, 1995    94.25 - 120.00       12,199
   Granted                    10.00 - 100.00       51,161
   Exercised                          100.00       (3,389)
   Expired                            120.00         (245)
                                               ----------
Balance, December 31, 1996    10.00 - 120.00       59,726
   Granted                   120.00 - 142.50       33,063
   Expired                            120.00       (1,000)
                                               ----------
Balance, December 31, 1997    10.00   142.50       91,789
   Granted                   120.00   140.00        7,500
   Exercised                  10.00   120.00      (20,585)
   Expired                            120.00      (10,843)
                                               ----------
Balance, December 31, 1998    10.00 - 142.50       67,861
   Granted                   125.00 - 145.00       11,674
   Exercised                           10.00       (1,410)
   Expired                    60.00 -  94.25       (1,716)
                                               ----------
Balance, December 31, 1999    10.00 - 142.50       76,409
   Granted                            150.00          267
   Exercised                          120.00         (200)
   Expired                    10.00 - 100.00      (15,499)
                                               ----------
Balance, December 31, 2000    77.00 - 150.00       60,977
   Expired                    77.00 - 120.00      (21,436)
                                               ----------
Balance, December 31, 2001    77.00 - 150.00       39,541
   Granted                      .01 -  62.48    2,221,015
   Exercised                             .01     (973,997)
   Expired                      .01 - 145.00     (169,348)
                                               ----------
Balance, December 31, 2002      .01 - 150.00    1,117,211
   Granted                      .01 -  15.00    2,369,212
   Exercised                    .01 -   4.00     (398,750)
   Expired                            140.00       (2,500)
                                               ----------
Balance, December 31, 2003      .01 - 120.00    3,085,173
   Granted                      .01 -  15.00      518,741
   Exercised                    .01 -  20.00   (1,464,759)
   Surrendered                 3.60 -  20.00   (1,145,836)
   Expired                            140.00       (4,716)
                                               ----------
Balance, December 31, 2004     2.00 - 120.00      988,603
                                               ==========



                                      F26






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes warrant data as of December 31, 2004:



                                     Weighted
                                      Average     Weighted
                                     Remaining     Average
     Range of           Number      contractual   Exercise     Number
  exercise prices    outstanding   Life (years)     Price    exercisable
- ------------------------------------------------------------------------
                                                   
    $1.80 to $5.00     984,736         4.20        $  2.80     984,736
            $45.00       3,600         0.42        $ 45.00       3,600
$105.00 to $120.00         267         0.19        $120.00         267
                       -------                                 -------
                       988,603                                 988,603
                       =======                                 =======


13 - SERIES A, B, C, & D PREFERRED STOCK, 12% CONVERTIBLE DEBENTURES

Series A Convertible Preferred Stock: On June 25, 2002, our board of directors
unanimously adopted an amendment to our certificate of incorporation designating
2,000 shares out of the 1,000,000 shares of preferred stock that we are
authorized to issue, as Series A convertible preferred stock, and designating
the relative rights and preferences of the Series A convertible preferred stock.
The stated value, which is also the liquidation preference of the Series A
convertible preferred stock, is $10,000 per share. We were required to pay
dividends on the Series A preferred shares, at the rate of 6% per annum of the
$10,000 liquidation preference per share, through June 30, 2003; at the rate of
9% per annum thereafter until June 30, 2004; and thereafter at the rate of 12%
per annum. At our option such dividends may be paid in our common stock at the
"conversion price" for the conversion of such dividends if such shares of common
stock have been registered under the Securities Act of 1933 for sale in the
public securities markets. The conversion price is fixed initially at $15.00 per
share of our common stock. There are no shares of Series A convertible preferred
stock outstanding. In November 2004, the designation establishing the rights and
preferences of the Series A convertible preferred stock was eliminated from our
certificate of incorporation so that we are no longer authorized to issue any
more Series A convertible preferred stock.

Series B Convertible Preferred Stock: On November 7, 2002, our board of
directors adopted an amendment to our certificate of incorporation designating
1,200 shares out of the 1,000,000 shares of preferred stock that we are
authorized to issue, as Series B convertible preferred stock at a stated value
of $10,000 per share. Dividends on the Series B preferred shares are payable at
the rate of 12% per annum, in cash or shares of common stock, at our option,
except that in the first year, dividends are payable, in advance, in shares of
common stock.

The Series B preferred stock is convertible into common shares at any time at
the option of the investor, based on a fixed conversion rate of not less than
$3.00, or commencing after February 1, 2003, based on an alternative conversion
rate equal to 90% of the average of the five lowest volume weighted average
prices for the common stock for the twenty trading days immediately prior to
conversion, subject to a floor price of $2.50.


                                      F27






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Series C Convertible Preferred Stock: On May 23, 2003, our board of directors
adopted an amendment to our certificate of incorporation designating 2,000
shares out of the 1,000,000 shares of preferred stock that we are authorized to
issue, as Series C convertible preferred stock at a stated value of $6,000 per
share. Dividends on the Series C preferred shares are payable at the rate of
10% per annum, in cash or shares of common stock, at our option.

The Series C preferred stock is convertible into common shares at any time at
the option of the investor, based on a fixed conversion rate of $2.00 per share.

Holders Redemption Rights: Both the Series B and Series C convertible preferred
stock have redemption provisions entitling the holders to require us to redeem
such preferred shares, including upon the occurrence of the following events:

     o    the consolidation, merger or other business combination of the Company
          with or into another entity, except (a) for a migratory merger
          effected solely for the purpose of changing jurisdiction of
          incorporation, or (b) if the holders of our voting power prior to such
          transaction have the ability after the transaction is completed to
          elect a majority of members of the board of directors of the surviving
          entity or entities;

     o    in the case of the Series B preferred stock the sale or transfer of
          more than 20%, and in the case of the Series C preferred stock more
          than 50%, of our assets other than inventory in the ordinary course of
          business;

     o    in the case of the Series B preferred stock acquisition by a third
          party of more than 30% of our outstanding shares of common stock
          through a purchase, tender or exchange offer, and in the case of the
          Series C preferred stock acquisition by a third party of more than 50%
          of our outstanding shares of common stock.

The redemption price is payable, at our option in cash or common stock. The
preferred stock has been presented in shareholders' deficit as it is our
intention to repay any redemption in common stock. All of our outstanding
Series B and C preferred stock were exchanged for common stock on January 5,
2005 (see Note 21).

Series D Convertible Preferred Stock: On August 19, 2003, our board of directors
adopted an amendment to our certificate of incorporation designating 2,000
shares out of the 1,000,000 shares of preferred stock that we are authorized to
issue, as Series D convertible preferred stock at a stated value of $10,000 per
share. In the event we declare a cash dividend on our common stock we will be
required to pay a dividend on each share of our Series D preferred stock in an
amount equal to the cash dividend paid on one share of our common stock
multiplied by the number of shares of our common stock into which such one share
of our Series D preferred stock can be converted.

Each holder of Series D preferred stock may, at such holder's option, subject to
certain limitations, elect to convert all or any portion of the shares of Series
D preferred stock held by such holder into a number of fully paid and
nonassessable shares of our common stock equal to the quotient of (i) the Series
D liquidation preference ($10,000 per Series D preferred share) divided by (ii)
the Series D conversion price of $2.50 per share. The conversion price is
subject to customary adjustments to the Series D conversion price in the event
of stock splits, stock combinations, stock dividends, distributions and
reclassifications and other corporate events.

Issuance of 12% Convertible Debentures: In March 2002, we engaged an
investment-banking firm to act as our advisor and to assist in raising capital
for us in the form of either debt or equity financing.

On May 13, 2002, we issued $2,333,000 of 12% convertible debentures, which were
convertible into common shares at the lesser of $3.36 or the price per share of
the equity securities to be issued in a subsequent financing. These debentures,
payable April 10, 2003, bore interest at the rate of 12% per annum, up to
October 10, 2002 and 18% thereafter. We also issued 291,000 stock purchase
warrants as part of this May 13, 2002 financing, exercisable at $4.50 per share
for up to five years from the date of grant. The warrants had price protection
features whereby the price of the warrants can be reduced to the prices at which
common stock or common stock equivalents are thereafter sold by us.

On June 28, 2002, $600,000 of these debentures sold on May 13, 2002 were
converted into Series A preferred stock at 110% of face value. Additionally, on
June 28, 2002, we issued an additional $250,000 of 12% convertible debentures
and $1,200,000 in Series A convertible preferred stock. The total face value of
the preferred stock issued was $1,870,000 which consisted of the $1,200,000 of
cash proceeds received, the $600,000 face value of converted debentures and the
$70,000 of additional conversion face value. Additionally, the Series A
preferred stock was convertible into common shares at a rate of $1.50 per share.
The Series A preferred stock had provisions whereby redemption was out of our
control; therefore, the preferred stock was classified as temporary equity.

On June 28, 2002, we also issued 654,624 common stock purchase warrants, at an
exercise price of $1.875 per common share for a five-year period. Of the
654,624, an aggregate of 31,250 warrants were issued with the convertible
debentures, with the remainder issued with the Series A preferred stock. The
warrants also had similar price protection features, whereby the price of the
warrants can be reduced to the prices at which common stock or common stock
equivalents are thereafter sold by us.


                                      F28






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the third quarter 2002, we issued $1,425,000 in convertible debentures,
with terms comparable to those issued in the second quarter. Additionally,
178,127 warrants were issued with similar terms to warrants issued on May 13,
2002. In October and November 2002, prior to our Series B preferred stock
financing, we issued an additional $1,900,000 in convertible debentures and
237,503 warrants, with terms comparable to those issued earlier in 2002.

We deferred the payment of interest due on June 30 and September 30, 2002,
pending the completion of our Series B preferred stock financing. These
debentures along with the accrued interest were convertible into equity
securities if we completed the sale of at least $5,000,000 in equity securities
by July 12, 2002, which date was extended through November 13, 2002. On November
13, 2002, these debentures and accrued interest were converted into Series B
preferred stock with the closing of the Series B preferred stock financing.
These were converted at the rate of 110% of the debentures plus accrued interest
into $10,000 par value Series B convertible preferred shares.

The relative estimated fair value of the warrants issued in connection with the
debentures of $440,523 was recorded as debt discount, as well as the estimated
fair value of the beneficial conversion features of $1,042,663. Both of these
values were being amortized over the remaining life of the convertible
debentures, or through April 10, 2003. Upon conversion, the remaining
unamortized beneficial conversion features were charged to interest expense.

The relative estimated fair value of the warrants issued in connection with the
Series A preferred stock of $797,919 was recorded as a discount to the preferred
stock and was reflected as interest expense, on the date of issuance.
Additionally, the estimated fair value of the beneficial conversion feature of
$859,256 has been recorded as an additional discount and reflected as interest
expense. The Series A preferred stock had no redemption date, and therefore the
charge to interest expense was reflected immediately as the conversion privilege
was exercisable immediately.

First Sale of Series B Convertible Preferred Stock: In November and December
2002, we issued 938.2742 shares of Series B convertible preferred stock to
several investors in a private placement, which was funded by an aggregate of
$8,178,000 of financing received, which included $1,070,000 of new Series B
preferred stock and the conversion of the aforementioned convertible debentures
and convertible Series A preferred stock. We recorded a loss on extinguishment
of debentures and preferred shares of $1,004,027, principally due to the
additional buying power granted to the investors resulting from the difference
between the present value of the original debt and the revised present value.
The convertible debentures and convertible Series A preferred stock were
converted at 110% of face value plus accrued interest. In addition, these
investors were granted Series A warrants to purchase 938,275 shares of our
common stock at an exercise price of $.01.These Series A warrants vested
immediately and were exercised immediately, upon grant. The investors were also
granted Series B-1 and B-2 warrants, which could be used to purchase 542,989 and
469,138 shares of common stock at an exercise price of $15.00 and $20.00 per
share, respectively. These B-1 warrants were exercisable beginning August 13,
2003 and expire seven years from the date of grant and the B-2 warrants were
exercisable beginning November 13, 2003 and expire seven years from date of
grant. We assigned values to the Series B preferred stock of $9,382,742 and the
Series A, B-1 and B-2 warrants issued to the investors of $2,245,206, $694,447
and $539,390, or $3,479,043 in the aggregate, based upon the relative fair
market value of the stock at the date of issuance and the estimated fair market
value of the warrants, using the Black-Scholes option pricing model.

The warrants issued with the second quarter and third quarter 2003 financings
were exchanged for B-1 warrants, issued in the fourth quarter of 2003.

The first year's dividends on the Series B preferred stock were paid in advance
in common shares at the rate of 12% upon issue of the preferred shares and were
to be paid semiannually in subsequent years, in either cash or common shares, at
our election, until the preferred stock is converted to common shares. For the
first year' dividends totaling $1,125,559, paid in common stock, the investors
were issued 375,315 shares of common stock, of which 293,489 shares were issued
in November 2002 and 81,826 shares in January 2003.

In addition, certain of the investors were given options to purchase, for one
year and for amounts ranging from 100% to 200% of their investments, additional
shares of the Series B convertible preferred stock at the price paid for such
stock by investors on November 13, 2002.


                                      F29






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

H.C. Wainwright & Company, Inc. (Wainwright) acted as placement agent in this
private placement. For its services as placement agent, we paid Wainwright
$601,490. Legal and other professional fees totaled $155,997. All but $136,046
of the $755,487 aggregate costs was amortized to interest expense when the
$5,908,000 convertible debentures and $1,200,000 of Series A preferred stock
were converted to Series B preferred stock. In connection with the Series B
conversion, we granted Wainwright and its agents warrants to purchase 800,000
and 500,000 shares of common stock, at an exercise price of $.01 and $15.00,
respectively, vesting immediately upon issue and August 13, 2003, respectively.
These warrants expired on January 31, 2003 and will expire seven years from
issue, respectively. In December 2002, we issued 35,273 shares of common stock
upon exercise of the $.01 warrants granted to Wainwright. The fair market value
assigned to the Wainwright warrants was $280,000 and $24,615, or $304,615 in the
aggregate, for the $.01 warrants and the $15.00 warrants, respectively. Total
share issuance costs were $866,612 inclusive of professional fees, the $136,046
above fees paid to Wainwright, and the fair value of the aforementioned
warrants. Issuance costs for the Series B preferred stock are reflected as a
reduction of the proceeds from the sale of the preferred stock.

Second Sale of Series B Convertible Preferred Stock: In February 2003, we
received gross proceeds of $2,000,000 from the sale of our Series B convertible
preferred stock. We issued to such investors 200 shares of Series B convertible
preferred stock, 292,308 shares of common stock (including 92,308 shares of
common stock constituting the first year's dividends on such 200 shares of
Series B convertible preferred stock, which dividends were paid in advance, and
200,000 shares of common stock, which were issued upon exercise of Series A
warrants, exercised at $.10 per share) and warrants to purchase an additional
200,000 shares of common stock, of which warrants to purchase 100,000 (the B-1
warrants) shares were exercisable at $15.00 per share and warrants to purchase
the other 100,000 (the B-2 warrants) shares were exercisable at $20.00 per
share. In May and June 2003, in conjunction with the conversion of virtually all
of the Series B preferred stock and our reverse stock split, these B-1 and B-2
warrants were amended and restated to provide for exercise prices of $4.00 and
$5.00, respectively. PRF did not convert its 50 shares of Series B preferred
stock on May 23, 2003 and, accordingly, the exercise price of its B-1 and B-2
Warrants were not amended and remained at their original exercise price of
$15.00 and $20.00, respectively.

Wainwright acted as placement agent in this private placement and in addition to
cash compensation, we granted warrants to purchase an aggregate of 37,692 shares
of common stock, exercisable at $0.01 per share, to employees of the placement
agent firm. The fair value of these warrants was $86,692. Total share issuance
costs were $393,488 inclusive of professional and investment banking fees and
the fair value of the aforementioned warrants. Issuance costs for the Series B
preferred stock are reflected as a reduction of the proceeds from the sale of
the preferred stock. During 2004 certain of these warrants to purchase 32,460
shares of our common stock were exercised. We received $325.00.

Dividends are payable in cash or common shares at our option, at the rate of 12%
per annum. An accrued dividend of $50,000 at December 31, 2004 has been provided
for within stockholders' equity (deficit), as it is our intent to issue common
shares in payment of the dividend.

Sale of Series C Convertible Preferred Stock: In May and July 2003, we received
gross proceeds of $5,690,000 from the sale of 948 shares of Series C convertible
preferred stock, issuing warrants to purchase 1,707,000 shares of our common
stock exercisable at $3.60 per share. Our Series C preferred stock has a stated
value of $6,000 per share and is convertible into 2,844,999 shares of common
stock at $2.00 per share. In addition, in connection with the Series C
financing, investors, other than Paul Royalty Fund, agreed to convert their
Series B preferred shares into common shares or their equivalent. As a result,
605.389 shares of Series B preferred stock were converted into 2,421,556 shares
of common stock and 482.885 shares of Series B preferred stock were converted
into an equal number of shares of Series D preferred stock (with a common stock
equivalent of 1,931,540 shares). The Series D convertible preferred stock is
non-redeemable and has a stated value of $10,000 per share. As part of the May
2003 Series C financing, employees of the investment-banking firm which arranged
the Series C financing were granted warrants to purchase 149,520 shares of our
common stock at an exercise price of $.01 as part of their compensation.
Accordingly, we recorded $269,000 in Series C preferred share issuance costs
related to the warrants issued. Total share issuance costs were $797,327
inclusive of professional and investment banking fees and the fair value of the
aforementioned warrants. Issuance costs for the Series C preferred stock are
reflected as a reduction of the proceeds from the sale of the preferred stock.


                                      F30






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dividends were payable in cash or common shares at our option, at the rate of
10% per annum. An accrued dividend of $563,805 and $336,550 at December 31, 2004
and 2003, respectively, has been provided for within stockholders' deficit since
it was our intent to issue common shares in payment of the dividend.

Deemed Dividend: In conjunction with these conversions, all Series B-1 and B-2
warrants were amended to provide for revised exercise prices of $4.00 and $5.00,
respectively. Paul Royalty Fund did not exercise its right to convert its 50
shares of Series B preferred stock into common stock or its equivalent and as
such, its B-1 and B-2 warrants were not amended and remained at their original
exercise prices of $15.00 and $20.00, respectively. As a result of the change in
the B-1 and B-2 warrants at May 23, 2003, we recognized a deemed dividend to
investors of $519,000.

Based on the relative fair market value of the preferred stock at the dates of
issuance and the estimated fair market value of the warrants, using the
Black-Scholes option pricing model, at December 31, 2003, we assigned values to
the Series C preferred stock and the Series C warrants of $4,464,368 and
$1,225,632, respectively. Similarly, we assigned values to the Series D
preferred stock, based on values previously assigned to the Series B preferred
stock.

Additionally, since the effective conversion price of the Series C preferred
stock on the date of issuance was lower than the market value of the common
shares on that date, we recognized $691,000 of additional discounts on the
preferred issuances. This conversion feature was charged to retained earnings as
accretion of discount.

In August 2003, holders of 483 shares of Series B convertible preferred stock
converted their shares into an equal number of shares of Series D convertible
preferred stock.

In June and October 2004, a holder of 35.624 shares of Series C preferred stock
with a value of $137,752, converted its shares into 106,872 shares of common
stock. Additionally we issued 13,743 shares of our common stock valued at
$30,099 as payment of dividends on the converted Series C preferred stock.

14 - STOCK OPTIONS

In April 1996, the Board of Directors and stockholders approved the adoption of
a stock option plan (the "Plan"). The Plan provides for the grant of options to
purchase up to 35,000 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 and Board of Directors 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 35,000 to
155,000 shares. In August 2000, the stockholders and Board of Directors 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 155,000 to 300,000 shares.

In February 2003, the stockholders and Board of Directors 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 300,000
to 450,000 shares. As of December 31, 2004, 21,676 options were available for
grant under the Plan.


                                      F31






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the stock option activity through December 31,
2004:



                                                     Weighted
                                                     average
                                                     exercise
                                           Number   price ($)
                                          -------   ---------
                                                
Granted - adoption of stock option plan    15,600      70.80
                                          -------
Balance, December 31, 1996                 15,600      70.80
Granted                                    12,300     119.40
Forfeited, expired                           (300)     66.30
                                          -------
Balance, December 31, 1997                 27,600      92.50
Granted                                    68,975     121.00
Exercised                                    (675)     74.20
Forfeited, expired                         (1,450)    111.90
                                          -------
Balance, December 31, 1998                 94,450     111.70
Granted                                    39,900     108.70
Forfeited, expired                        (22,100)    149.30
                                          -------
Balance, December 31, 1999                112,250     103.30
Granted                                    44,996      79.60
Exercised                                    (350)     70.00
Forfeited, expired                         (4,485)     82.70
                                          -------
Balance, December 31, 2000                152,411     123.00
Granted                                    75,650      59.30
Forfeited, expired                        (24,730)     74.10
                                          -------
Balance, December 31, 2001                203,331      85.40
Granted                                   115,511      12.90
Forfeited, expired                        (31,630)     76.80
                                          -------
Balance, December 31, 2002                287,212      57.30
Granted                                   160,861       2.20
Forfeited, expired                        (99,874)     84.02
                                          -------
Balance, December 31, 2003                348,199      24.16
Granted                                   129,500       1.92
Forfeited, expired                        (49,375)     20.32
                                          -------
Balance, December 31, 2004                428,324      15.40
                                          =======


The following data has been provided for exercisable options:



                                             Year ended December 31,
                                      ------------------------------------
                                         2004         2003         2002
                                      ----------   ----------   ----------
                                                       
Number of options                       258,574      250,508      223,554
Weighted average exercise price        $  23.04     $  29.98     $  65.70
Weighted remaining contractual life   4.18 years   4.79 years   4.26 years


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


                                      F32






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes option data as of December 31, 2004:



                                     Weighted
                                      Average     Weighted                 Weighted
                                     Remaining     Average                  Average
     Range of           Number      Contractual   Exercise      Number     Exercise
  exercise prices    outstanding   Life (years)     Price    Exercisable     Price
- ------------------   -----------   ------------   --------   -----------   --------
                                                             
    $0.98 to $8.75     336,519         5.09        $  2.64     171,994      $  3.24
  $10.00 to $35.30       3,950          .85        $ 35.03       3,725      $ 35.16
  $47.00 to $68.00      67,225         3.47        $ 53.69      62,725      $ 53.28
  $70.00 to $99.38       8,055         2.73        $ 87.06       7,555      $ 88.14
$100.00 to $127.50      12,575         2.82        $100.22      12,575      $100.22
                       -------                                 -------
                       428,324         4.68        $ 15.40     258,574      $ 23.04
                       =======                                 =======


We recognized approximately $1,696,000 of compensation expense for options and
warrants issued to officers and our directors in 1998. Such options and warrants
were accounted for as variable option grants. Such options and warrants had
vested prematurely in December 1998, upon the exercise of warrants owned by one
of our directors, in accordance with the terms of certain compensation
provisions provided for and approved by our Board of Directors.

During the years ended December 31, 2004 we issued 100,000 options to a director
which was not included in the Plan. During the years ended December 31, 2003 and
December 31, 2002, we issued 894,400 and 380,000 options, respectively, to
senior executives, which were not included in the Plan. These options vested
immediately. The following table provides the exercise price for options issued
to the director and senior management.



                           Remaining
   Number     Exercise    Contractual
Outstanding     Price    Life (years)
- -----------   --------   ------------
                       
   380,000      $3.50        4.89
   140,000      $2.00        4.96
   460,000      $1.80        5.15
   276,000      $3.60        5.15
    74,000      $2.10        5.42
    44,400      $3.60        5.39
 ---------
 1,374,400
 =========


In addition, we recognized approximately $94,393 and, $87,000 in consulting
expense in 2004 and 2003, respectively, for a warrant granted to an independent
consultant for services rendered to us.

15 - COMMITMENTS AND CONTINGENCIES

Cell Therapy Manufacturing Agreement

In October 29, 2003 we entered into an agreement commencing November 1, 2003
with Cambrex Bio Science Walkersville, Inc., a subsidiary of Cambrex Corporation
(Cambrex), for Cambrex to manufacture ORCEL in Cambrex's Walkerville, Maryland
facilities. The Cambrex manufacturing facility is required to meet FDA's good
manufacturing processes standards. Cambrex is experienced in the manufacture of
cell-based medical products such as our ORCEL.

Our agreement with Cambrex requires us to currently pay Cambrex $128,750 per
month, or $1,545,000 per year, for the use of a production suite in their
facility located in Walkersville, Maryland. The payments we will make to Cambrex
will increase to $175,000 monthly, or $2,100,000 per year, if we require Cambrex
to build us a larger production facility to meet our requirements for the
production of ORCEL. In 2004 and 2003 we paid $1,332,500 and $200,000,
respectively, for the use of Cambrex's production facility. These amounts are
included in product and laboratory costs. Such annual payments


                                      F33






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

include some services and overhead expenses provided and paid for by Cambrex.
These annual payments we are required to make increase 3% per annum on the
anniversary of the commencement date. We are required to pay 50% of the cost of
the construction of that larger production facility up to $1,000,000 (up to
$2,500,000 if we terminate our Sales Agency Agreement with Cambrex). However,
the amount we contribute to the construction of that larger facility will be
repaid to us by credits against a portion of the future annual payments of
$2,100,000 and of certain other payments we are required to make to Cambrex
after the larger facility is in use. We are also required to pay specified
hourly charges for the Cambrex employees engaged in the production of ORCEL as
well as certain other charges. After construction of the larger production
facility we are required to acquire from Cambrex virtually all of our
requirements for ORCEL that Cambrex can produce. Prior to our election to have
Cambrex construct the larger production facility for us, either we or Cambrex
may terminate the agreement on six months notice by us and twelve months notice
by Cambrex. If we elect to have Cambrex construct the larger production facility
for us the agreement will continue for six years after the larger production
facility is constructed. However, even after such construction we and Cambrex
may elect to scale down over the following three years the portion of our
requirements for ORCEL that Cambrex will produce for us. We may elect the scale
down period at any time after one year after the larger production facility is
constructed and in operation in which event there are additional payments we
must make to Cambrex. If we elect the scale down period after one year we must
pay Cambrex $2,625,000 and if we elect the scale down period after two years we
must pay Cambrex $1,050,000. If we elect the scale down periods in either of
those two years, we forfeit our right to receive any further credits (up to the
amount of our contribution to the cost of the larger production facility)
against payments we are thereafter required to make to Cambrex. Either Cambrex
or we may elect the scale down period later than three years after that facility
is in operation and neither of us will be required to make any additional
payments to the other because of that election. If after the construction of the
larger production facility we breach a material term of our agreement with
Cambrex, or elect to terminate the agreement, we will have to pay Cambrex the
following amounts:



If termination occurs after the following     Amount
anniversary of the construction of the          of
larger production facility                    Payment
- -----------------------------------------   ----------
                                         
6 years                                     $1,050,000
5 years, but less than 6 years               1,575,000
4 years, but less than 5 years               2,625,000
3 years, but less than 4 years               3,675,000
2 years, but less than 3 years               5,250,000
1 year, but less than 2 years                6,300,000


In addition, upon such termination we will forfeit our right to receive any
further credits (up to the amount of our contribution to the cost of the larger
production facility) against future payments we may have to make to Cambrex.

Sales Agency Agreement

On October 18, 2004 we entered into a Sales Agency Agreement with Cambrex,
providing for Cambrex to be the exclusive sales agent in the United States for
our ORCEL product or any other future bi-layered cellular matrix product of ours
for the treatment of venous stasis ulcers, diabetic foot ulcers or any other
therapeutic indication for dermatological chronic or acute wound healing. The
agreement is for a period of six years beginning sixty days after we receive
clearance from the FDA for the commercial sale of our ORCEL for the treatment of
venous stasis ulcer, but the agreement's six year term will not commence before
April 1, 2005. The agreement requires us to pay commissions to Cambrex ranging
from initially at 40% of net sales and decreasing to 27% of net sales as the
amount of sales increases. The agreement requires Cambrex to spend $4,000,000
for marketing efforts during the sixteen-month period after the FDA clears our
sale of ORCEL for the treatment of venous stasis ulcers.

Cambrex has the right to terminate the agreement if (a) we do not receive FDA
clearance for commercial sale of ORCEL for the treatment of venous stasis ulcers
by April 1, 2005 or (b) if for any period of six consecutive months beginning in
2007, sales are less than 9,000 units. We may terminate the agreement if sales
of ORCEL are less in any twelve month period than amounts targeted in the
agreement for that period (ranging from 10,000 units in the first twelve month
period to 100,000 units in the sixth twelve month period).


                                      F34






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concurrent with the Sales Agency Agreement we entered into a License Agreement
pursuant to which we licensed certain intellectual property rights to Cambrex.
We also entered into a Security Agreement with Cambrex to secure the performance
of our obligations under the Manufacturing, License, and Sales Agreement. The
secured collateral consists of all accounts, cash, contract rights, payment
intangibles, and general intangibles arising out of or in connection with the
sale of products pursuant to the sales agreement and/or license agreement, and
all supporting obligations, guarantees and other security therefore, whether
secured or unsecured, whether now existing or hereafter created. The lien and
security interest under this security agreement are subordinate and junior in
priority to the perfected lien and security interest granted to Paul Royalty
Fund as secured party under the Paul Royalty Security Agreement.

In connection with the Sales Agency Agreement, our manufacturing agreement with
Cambrex was modified so that if Cambrex builds us a larger production facility
the maximum amount we could be required to contribute to that construction was
reduced from $2,500,000 to $1,000,000.

Supply Agreement

We purchase bovine collagen sponges, a key component of ORCEL, from one supplier
who produces the sponges to our specifications. On December 30, 2004 we entered
into a two-year supply agreement with this supplier. Under such agreement we
agreed to minimum purchase commitments. We agreed to purchase a minimum of 3,500
units of finished collagen sponges within the first twelve-month period. The
value of such commitment is approximately $200,000. We also agreed that
subsequent to a written notification from the FDA allowing us to sell ORCEL
commercially for treatment of venous stasis ulcers we will provide such supplier
projections for one or more subsequent quarters and the parties will be
obligated to purchase and sell those projected amounts.

Government Regulation

We are subject to extensive government regulation. Products for human treatment
are subject to rigorous preclinical and clinical testing procedures as a
condition for clearance by the FDA and approval by similar authorities in
foreign countries prior to commercial sale. Presently, we are awaiting a
response from the FDA for clearance for sale of ORCEL to treat venous stasis
ulcers based on our recently concluded clinical trial. It is not possible for us
to determine whether the results achieved from that human clinical trial will be
sufficient to obtain FDA clearance.

16 - LEGAL PROCEEDINGS

In 2002, ClinTrials Networks, LLC (ClinTrials) claimed that we had breached our
agreement with them, which provided for ClinTrials to arrange and manage the FDA
mandated clinical trials for use of our ORCEL for the treatment of venous stasis
ulcers, and for other services. In October 2002, ClinTrials commenced an
arbitration proceeding against us, claiming that we owed ClinTrials $165,936 and
during the arbitration hearings ClinTrials increased its claim to approximately
$400,000, plus reimbursement of legal fees. In September 2003, the arbitrator
awarded ClinTrials $93,263 in full settlement of its claim plus interest of 6%
per annum from January 1, 2002 until the award is fully paid. Additionally, we
were ordered to pay $61,497 for claimant's attorney's fees and costs, and $1,438
for arbitration fees. We paid this award in the fourth quarter of 2003.

During the quarter ended September 30, 2002, PDI, Inc. commenced an action
against us in the Superior Court of New Jersey, Bergen County, claiming that we
owe $205,000 to PDI for services that they have performed for us. In the second
quarter of 2003 we paid PDI $150,000 in full settlement of its claim against us.

We have successfully defended challenges to our United States and European
patents in the past. Advanced Tissue Sciences (ATS) challenged, in the European
Patent Office, the grant of our European Patent upon the ground that the patent
lacks novelty and is not inventive over prior art. The agency hearing this case
is the European Patent Office. The original proceeding began November 5, 1998
and involved ATS as the opposer and Ortec, as the patentee. The first hearing
was resolved in our favor. That is, the European Patent Office Tribunal affirmed
the grant of the patent, ruling against ATS. ATS seeks cancellation of the
patent. ATS has appealed the decision on the patent and the appeal is pending.
We expect an oral hearing date for the appeal to be set in a year or later. We
cannot predict with any certainty the ultimate outcome of that appeal.


                                      F35






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17 - RELATED PARTY TRANSACTIONS

Due to Founder

Pursuant to an amended agreement, we had engaged the services of Dr. Mark
Eisenberg, one of our directors, who is also one of our founders, as a
consultant through August 31, 2005. During 2003, we terminated our agreement
with Dr. Eisenberg and discontinued research activities in Australia. For the
period ended December 31, 2003, production and laboratory costs include
compensation due to Dr. Eisenberg of $195,000, respectively, and approximately
$1,029,000 for the period from inception to December 31, 2003. In accordance
with the settlement agreement, we recorded consulting expense of $194,656 for
the remainder of the $304,478 of consulting fees due under the consulting
agreement with Dr. Eisenberg. Additionally, we recorded $28,881 in rent expense
that we owed Dr. Eisenberg for the space we occupied in the Australian
laboratory. The total amount due Dr. Eisenberg under the settlement agreement
aggregated $398,574 which represents unpaid consulting fees, the rent for the
Australian laboratory, and $65,215 of advances made by Dr. Eisenberg on our
behalf. We settled the balance due Dr. Eisenberg in 2004 by issuing 100,000
options to purchase our common stock at an exercise price of $2.00 per share. We
recorded the $398,574 settlement in 2004 as a contribution of capital given that
the settlement was with our director. These options will expire in five years.

Research Collaboration

On October 11, 2004 we entered into a collaboration with Hapto Biotech, Inc., a
company involved in the field of tissue engineering, for the purpose of further
developing promising product leads identified through a research collaboration
established in September 2002 between us and Hapto Biotech, utilizing each
company's proprietary technologies. The activities of the two entities will be
conducted in a new entity, Hapto / Ortec Collaboration, LLC. The collaboration
may require an approximate projected capital contribution of $300,000 from each
entity during its first twelve months of operation. The agreement provides for a
license agreement to us if the collaboration is successful in developing other
technology (as defined) which can be used to treat Hard to Heal Chronic Wounds
(as defined). At December 31, 2004 an amount payable to the collaboration of
$68,741 was included in accounts payable.

Change of Control

In December 1998, our Board of Directors authorized agreements between us and
two of our executive officers and another employee, which state that in the
event of a "change of control" certain "special compensation arrangements" will
occur. A "change of control" is defined as a change in the ownership or
effective control of Ortec or in the ownership of a substantial portion of our
assets, but in any event if certain members of our Board of Directors no longer
constitute a majority of the Board of Directors. In the event that such change
of control occurs, the agreements provide these individuals additional
compensation, interest-free loans to exercise their stock options and warrants,
and extensions of the expiration dates of all of their then outstanding options
and warrants so that none will expire in less than three years from such
termination of employment. In addition, for all of the individuals, in the event
of a change of control, all unvested options and warrants will vest immediately
upon such change of control.

18 - INCOME TAXES

We have deferred start-up costs for income tax purposes and intend to elect to
amortize such costs over a period of 60 months, under Section 195(b) of the
Internal Revenue Code, when we commence operations.

At December 31, 2004, we had net operating loss carry-forwards of approximately
$26,526,000 for Federal and New York State income tax purposes expiring through
2024. Due to the merger of Skin Group with and into Ortec in July 1992, the net
operating losses and other built-in deductions existing at that time were
subject to annual limitations pursuant to Internal Revenue Code Section 382. Our
ability to utilize net operating losses and other built-in deductions generated
after that date may be limited in the future due to additional issuances of our
common stock or other changes in control, as defined in the Internal Revenue
Code and related regulations.




                                      F36






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For financial statement purposes, a valuation allowance of approximately
$44,047,000 and $37,588,000 at December 31, 2004 and 2003, respectively, has
been recognized to offset entirely our deferred tax assets, which arose
primarily from our operating loss carry-forwards and the deferral of start-up
expenses for tax purposes, as the realization of such deferred tax assets is
uncertain. Components of our deferred tax asset are as follows:



                                            December 31,
                                    ---------------------------
                                        2004           2003
                                    ------------   ------------
                                             
Net operating loss carry-forwards   $ 11,141,000   $  8,846,000
Deferral of start-up costs            26,785,000     24,415,000
Interest                               5,512,000      3,755,000
Other                                    609,000        572,000
                                    ------------   ------------
                                      44,047,000     37,588,000
Valuation allowance                  (44,047,000)   (37,588,000)
                                    ------------   ------------
Net deferred tax asset              $         --   $         --
                                    ============   ============


The following reconciles the income taxes computed at the federal statutory rate
to the amounts recorded in our statement of operations:



                                                            Cumulative from
                                                             March 12, 1991
                                 Year ended December 31,     (inception) to
                                -------------------------     December 31,
                                    2004          2003            2004
                                -----------   -----------   ---------------
                                                     
Income tax benefit at the
   Statutory rate               $(5,233,000)  $(5,390,000)    $(38,073,000)
State and local income taxes,
   net of Federal benefit        (1,231,000)   (1,279,000)      (7,134,000)
Permanent difference                  5,000       (46,000)       1,160,000
Effect of valuation allowance     6,459,000     6,715,000       44,047,000
                                -----------   -----------     ------------
                                $        --   $        --     $         --
                                ===========   ===========     ============


Our net operating loss tax carry-forwards expire as follows:



Year ending December 31,
                        
          2006             $    76,000
          2007                 233,000
          2008                 511,000
          2009                 597,000
          2010                 440,000
          2011                 677,000
          2012                 839,000
          2018               1,189,000
          2019               2,602,000
          2020               3,535,000
          2021               4,014,000
          2022               3,311,000
          2023               3,054,000
          2024               5,448,000
                           -----------
                           $26,526,000
                           ===========



                                      F37






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments," requires disclosure of the estimated fair value of an entity's
financial instrument assets and liabilities. For us, financial instruments
consist principally of cash and cash equivalents, loans payable and other
long-term obligations.

The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value.

Cash and Cash Equivalents

The carrying value reasonably approximates fair value because of the short-term
maturity of those instruments.

Loans Payable and Other Long-term Obligations

Based on borrowing rates currently available to us for other financings with
similar terms and maturities, the carrying value of our loans payable, capital
lease obligations and other long-term obligations approximate the fair value.

20 - RETIREMENT PLAN

The Company maintains a defined contribution 401(k) savings plan (401(k) plan)
for the benefit of eligible employees. Under the 401(k) plan, a participant may
elect to defer a portion of annual compensation. Contributions to the 401(k)
plan are immediately vested in plan participants' accounts. Plan expenses were
$3,255 and $4,000 for the years ended December 31, 2004 and 2003, respectively.

21 - SUBSEQUENT EVENTS

On January 5, 2005 we entered into a number of agreements with institutional and
accredited investors (collectively, the "purchasers") that provided us with:

     o    Gross aggregate cash proceeds of $5,403,302 from the sale of our
          common stock (the "private placement") to former holders of our Series
          C preferred shares and other purchasers at $0.833 per share (the
          "purchase price") with each receiving a five year warrant to purchase
          one share of common stock at $1.80 per share for every two shares
          purchased;

     o    The exchange of all our outstanding Series C preferred shares at
          December 31, 2004, or approximately 913 Series C preferred shares,
          with a liquidation preference of $5,476,256 plus accrued and unpaid
          dividends, an aggregate value of $6,357,104, for shares of our common
          stock at the $0.833 per share purchase price and five-year warrants to
          purchase our common stock at $1.80 per share. Upon the exchange, the
          holders of the Series C preferred shares received a warrant to
          purchase one share of common stock for each two shares of our common
          stock they received in the exchange. This exchange was offered to
          Series C preferred shareholders if they participated in the private
          placement sale of our common stock for an amount equal to 30% of the
          liquidation preference amounts of their Series C preferred shares
          exchanged for our common stock. The Series C holders provided gross
          cash proceeds of $1,642,877 (30% of $5,476,256) of the $5,403,302
          aggregate gross proceeds received by us in the private placement.
          We expect to record a deemed dividend of approximately $2,126,000
          related to the exchange of the Series C preferred shares for common
          shares.

     o    As a result of our receipt of over $5,000,000 in the private placement
          we elected to repay $9,626,626 (principal balance outstanding at
          December 31, 2004) of our outstanding promissory notes, accrued
          interest of $674,587 ($658,776 at December 31, 2004) and an added 20%
          premium, in all $12,361,456, by issuing to each noteholder so many
          shares of common stock equal to the principal, accrued interest and
          premium of his note divided by the $0.833 purchase price. Each
          noteholder also received our five-year warrant to purchase one share
          of our common stock at $1.80 per share for each common share received,
          or approximately 15,000,000 warrants. We expect to record a loss on
          extinguishment of approximately $10,300,000 in connection with this


                                      F38






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          transaction representing the excess of the fair value of the common
          stock and warrants issued over the outstanding balance of the
          promissory notes and accrued interest.

     o    Purchasers, Series C Holders and holders of the Notes whose
          participation in these transactions would result in ownership of
          common stock in excess of 9.99% of our issued and outstanding shares
          of common stock could elect to receive instead of our common stock,
          shares of our Series D convertible preferred stock convertible into
          the same number of shares of our common stock.

We issued an aggregate 17,720,767 shares of common stock, 2,806.37 shares of
Series D preferred stock (convertible into 11,225,466 shares of common stock),
and five-year Series E warrants to purchase 21,889,989 shares of our common
stock at an exercise price of $1.80 per share, as a result of these
transactions.

We have undertaken to register all shares of our common stock referred to above
as well as all shares of our common stock issuable upon exercise of all the
warrants described above, within 10 days after filing of our Annual Report on
Form 10-KSB with the Securities and Exchange Commission, which we are required
to file by March 31, 2005. Failure to have the registration statement declared
effective within 60 days of filing will subject us to liquidated damages.

We granted each of the purchasers in the $5,403,302 private placement the right
to purchase, within 45 days after the closing date, additional shares of our
common stock and our Series E warrants on the same terms as in the private
placement in an amount not to exceed 25% of their original cash investment in
the private placement. Four investors exercised this right and we received gross
proceeds of $127,719. We issued 153,263 shares and five year warrants to
purchase 76,632 shares of our common stock at an exercise price of $1.80 per
share for such additional investments by these four investors. We paid our
placement agent 10% of the gross proceeds and will issue a warrant to purchase
22,989 shares of our common stock exercisable at $0.95 per share.

The Series E Warrants provide that if we sell shares of our common stock at
prices below the exercise prices of those warrants, or issue other securities
convertible into, or which entitle the holder to purchase, shares of our common
stock, which could result in the sale of our common stock at a price which in
effect (taking into consideration the price paid for the convertible security or
the warrant or the option) is less than the exercise price of the Series E
Warrants, then the exercise price of the Series E Warrants is reduced by a
portion of the difference between the exercise price and the lower price at
which the common stock was, or effectively could be, acquired. That percentage
by which the exercise price of the Series E Warrants could be reduced depends
not only on the lower price at which our common stock was, or could be,
acquired, but also by the ratio that the number of shares of our common stock
that were, or could be, so acquired bears to the total number of shares of our
common stock that would be outstanding after such sale of our common stock, or
the conversion of securities convertible into, or the exercise of such warrants
or options to purchase, our common stock.

Commencing 24 months after the Closing Date, subject to a registration statement
then being effective with respect to the common stock underlying the warrants,
the warrants may be redeemed by us if our common stock closes above $3.60 for
ten consecutive trading days. The warrants contain limited cashless exercise as
well as customary anti-dilution provisions.

In connection with these transactions, we paid our placement agent in the
transactions commissions consisting of cash equaling 10% of the $5,403,302 of
gross cash proceeds we received from the private placement. The placement agent
will receive a warrant to purchase 2,705,387 shares of our common stock
exercisable at $0.95 per share. We paid $50,000 in legal expenses in connection
with the private placement. We will also pay the placement agent cash equal to
6% of the gross proceeds received by us from the exercise, at any time in the
next three years, of the warrants issued to the investors who purchased shares
of common stock for cash in the private placement. We also entered into an
agreement under which the placement agent will provide financial advisory
services to us until September 30, 2005, for a fee of $250,000. The fee will be
amortized over the period of service. Payment of such fee, which for a limited
time may be payable in common stock at the option of the placement agent, will
be deferred until our cash balance exceeds $10,000,000.


                                      F39






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with an agreement dated May 23, 2003 amongst the holders of Series
B preferred stock which provided for conversion of our outstanding Series B
preferred stock should all of the holders of Series C preferred stock convert
their preferred shares to common stock (which occurred at the January 5, 2005
closing as described above), Paul Royalty Fund, the sole remaining holder of
Series B preferred stock converted their 50 shares of Series B preferred stock
into 220,647 shares of common stock, which included common shares for $51,616 in
accrued dividends.

During 2003 an allocation of 1,800,000 restricted shares of common stock were
granted to officers and certain employees. The issuance of these shares was
contingent on our achieving certain milestones and if issued will contain
certain vesting and payout provisions. On January 5, 2005 we issued 1,000,000
and 350,000 of these shares to our chief executive officer and chairman,
respectively, for having achieved a milestone of raising in excess of
$15,000,000 over a specified period. Pursuant to our agreements with these
individuals these shares will be forfeited if at any time prior to January 1,
2007 we no longer employ them. These shares cannot be sold prior to January 1,
2007, and after January 2007 we have restricted the number of shares that may be
sold monthly to 20,000 shares per month by each of them. We expect to record as
compensation expense a charge of approximately $1,284,000 related to this
issuance.

On February 2, 2005 we entered into a commercial premium finance agreement with
First Insurance Funding Corp. of New York in the amount of $220,000. The
financing agreement bears interest at 7.23% and requires nine monthly payments
of $25,187 beginning March 2005. The financing was utilized to fund the premium
payments for our directors and officers insurance policy.

On February 9, 2005 we completed a private placement with one investor from
which we received aggregate gross proceeds of $100,000. We issued to the
investor 120,000 shares of our common stock and a five-year warrant to purchase
60,000 shares of our common stock at $1.80 per share. We paid our placement
agent 10% of the gross proceeds and a five-year warrant to purchase 18,000
shares of our common stock exercisable at $0.95 per share.


                                      F40






                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma effect of the aforementioned financings on our December
31, 2004 balance sheet; encompassing the January 5, 2005 placement including the
rights exercised to purchase additional shares, the common stock awards issued
to our chief executive officer and chairman for meeting their milestones, and
the February placement, displayed in a condensed format, is as follows:



                                                                               December 31,
                                               December 31,                       2004
                                                   2004       First Quarter    (Unaudited)
                                              -------------        2005        -----------
                                                (Audited)       Financings      Pro Forma
                                              -------------   -------------   -------------
                                                                 dr (cr)
                                                                     
Cash and cash equivalents                     $     227,370      5,017,919    $   5,245,289
Other current assets                                128,938             --          128,938
                                              -------------    -----------    -------------
Total current assets                                356,308      5,017,919        5,374,227
Other assets                                      1,093,048             --        1,093,048
                                              -------------    -----------    -------------
Total assets                                  $   1,449,356      5,017,919    $   6,467,275
                                              =============    ===========    =============

Promissory notes - investors                  $   9,626,626     (9,626,626)   $          --
Other current liabilities                         5,325,306       (658,776)       4,666,530
                                              -------------    -----------    -------------
Total current liabilities                        14,951,932    (10,285,402)       4,666,530
Long term liabilities                            22,853,778             --       22,853,778
                                              -------------    -----------    -------------
Total liabilities                                37,805,710    (10,285,402)      27,520,308

Preferred stock

   Series B                                         270,859       (270,859)              --
   Series C                                       3,529,289     (3,529,289)              --
   Series D                                       3,567,652      9,354,555       12,922,207
Common stock                                          6,372         19,565           25,937
Additional paid-in capital                       76,899,663     23,484,700      100,384,363
Deficit                                        (120,452,544)   (13,755,351)(1) (134,207,895)
Treasury stock                                     (177,645)            --         (177,645)
                                              -------------    -----------    -------------
Total shareholders' equity (deficit)            (36,356,354)    15,303,321      (21,053,033)
                                              -------------    -----------    -------------
Total liabilities and shareholders' deficit   $   1,449,356      5,017,919    $   6,467,275
                                              =============    ===========    =============



(1) Consists of the following:

      Loss on extinguishment of promissory
       notes                                  $  10,344,009
      Deemed dividend on Series C warrants        2,125,974
      Non-cash stock compensation                 1,283,850
      Series B preferred dividends                    1,518
                                              -------------
                                              $  13,755,351
                                              =============



                                       F41



                         STATEMENT OF DIFFERENCES
                         ------------------------
The trademark symbol shall be expressed as.............................. 'TM'
The registered trademark symbol shall be expressed as................... 'r'
The section symbol shall be expressed as................................ 'SS'

EX-10

                                                                    Exhibit 10.6






                       LIMITED LIABILITY COMPANY AGREEMENT



                                       OF



                          HAPTO/ORTEC COLLABORATION LLC
                     (a Delaware Limited Liability Company)


















                                TABLE OF CONTENTS



                                                                              Page



                                    ARTICLE I

                                   DEFINITIONS
                                                                        
1.1      Definitions............................................................2


                                   ARTICLE II

                                  ORGANIZATION

2.1      Formation..............................................................7
2.2      Name...................................................................7
2.3      Principal Place of Business and Registered Agent.......................7
2.4      Qualification in Other Jurisdictions...................................8
2.5      Term...................................................................8
2.6      Purposes...............................................................8


                                   ARTICLE III

                                     MEMBERS

3.1      Names and Addresses....................................................8
3.2      Additional Members.....................................................8
3.3      Limitation of Liability................................................8
3.4      Priority and Return of Capital.........................................8
3.5      Meetings of Members....................................................9


                                   ARTICLE IV

                               BOARD OF DIRECTORS

4.1      Number, Appointment, Removal, Qualifications, Etc......................9
4.2      Assumption and Acceptance of Powers and Duties.........................9
4.3      Meetings..............................................................10
4.4      Quorum; Action........................................................10
4.5      Apparent Impasse......................................................10
4.6      Telephonic Meetings...................................................10
4.7      Action by Written Consent.............................................10









                                    ARTICLE V

                                SCIENCE COMMITTEE
                                                                         
5.1      Purpose and Actions of Science Committee..............................10
5.2      Assumption and Acceptance of Powers and Duties........................11
5.3      Meetings..............................................................11
5.4      Quorum; Action........................................................11
5.5      Telephonic Meetings...................................................12
5.6      Action by Written Consent.............................................12


                                   ARTICLE VI

                        DEVELOPMENT OF CERTAIN TECHNOLOGY

6.1      Obligation to License Certain Technology to Ortec.....................12
6.2      Duration of the License...............................................12
6.3      License Fees..........................................................13
6.4      Other Terms...........................................................13
6.5      Arbitration...........................................................13
6.6      Ortec's Exercise of Option............................................13


                                   ARTICLE VII



                                   MANAGEMENT

7.1      Management............................................................13
7.2      Officers and Employees................................................13
7.3      Internal Controls.....................................................14
7.4      Milestones............................................................14
7.5      Limitations on Liability..............................................14
7.6      Indemnification.......................................................14


                                  ARTICLE VIII

                              CAPITAL CONTRIBUTIONS

8.1      Initial Capital Contributions.........................................16
8.2      Required Capital Contributions to Capital Accounts....................16
8.3      Capital Accounts......................................................16
8.4      Transfers.............................................................16
8.5      Modifications.........................................................17
8.6      Deficit Capital Account...............................................17
8.7      Return of Capital Contributions.......................................17



                                      -ii-









                                   ARTICLE IX

                           PROFIT AND LOSS ALLOCATIONS
                                                                         
9.1      Membership Interests..................................................17
9.2      Allocations of Net Profits and Net Losses.............................17
9.3      General Provisions....................................................17
9.4      Special Allocations...................................................18
9.5      Code Section 704(c) Allocations.......................................19


                                    ARTICLE X

                                  DISTRIBUTIONS

10.1     Distributions.........................................................19
10.2     Interest on and Return of Capital Contributions.......................19


                                   ARTICLE XI

                                      TAXES

11.1     Tax Returns...........................................................20
11.2     Tax Matters Member....................................................20


                                   ARTICLE XII

                                 TRANSFERABILITY

12.1     Rights of Transfer....................................................20
12.2     Effect of Void Transfer...............................................20


                                  ARTICLE XIII

                         REPRESENTATIONS AND WARRANTIES

13.1     Representations and Warranties of the Members.........................20
13.2     Additional Representations and Warranties of Hapto....................21
13.3     Additional Representations and Warranties of Ortec....................22
13.4     Warranty of Statements................................................22


                                   ARTICLE XIV

                                   DISSOLUTION

14.1     Dissolution...........................................................22
14.2     Winding Up............................................................22



                                     -iii-






                                                                         
14.3     Distribution of Company Technology and Other Technology...............23
14.4     Nonrecourse to Other Members..........................................23
14.5     Dissolution Licensing.................................................23
14.6     Termination...........................................................24


                                   ARTICLE XV

                               GENERAL PROVISIONS

15.1     Notices and Consents..................................................24
15.2     Covenants.............................................................24
15.3     Merger and Amendments.................................................26
15.4     Headings..............................................................26
15.5     Waiver................................................................26
15.6     Severability..........................................................26
15.7     Binding...............................................................26
15.8     Counterparts..........................................................26
15.9     Exclusivity of Schedules..............................................26
15.10    Jurisdiction..........................................................26
15.11    Governing Law.........................................................27
15.12    Permitted Disclosures.................................................27
15.13    Press Releases........................................................27
15.14    Licensing of Other Technology.........................................28
15.15    Transactions with Interested Parties..................................28




                                      -iv-







                       LIMITED LIABILITY COMPANY AGREEMENT

                                       OF

                          HAPTO/ORTEC COLLABORATION LLC
                     (a Delaware Limited Liability Company)

         This LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement") is made as
of August [ ], 2004, by and among HAPTO BIOTECH, INC., a Delaware corporation
("Hapto"), and ORTEC INTERNATIONAL, INC., a Delaware corporation ("Ortec" and,
together with Hapto, the "Members"). Certain capitalized terms used herein have
the respective meanings assigned thereto in Section 1.1 hereof.


                                    RECITALS

         WHEREAS, Hapto is engaged in the research and development of patented
and proprietary technologies for cell manipulation aimed at tissue repair and
regeneration;

         WHEREAS, Hapto has been licensed and further developed the Haptide(TM)
technology, which consists of small synthetic peptides homologous to the
C-terminal of the fibrinogen molecule chains, which mimic the mechanism of cell
attachment to fibrin to be used to bind to implanted matrices to enhance their
cell proliferation and tissue regeneration effects or to bind to implanted
devices to enhance their integration with a patient's tissue;

         WHEREAS, Ortec is engaged in the research and development of
proprietary and patented technologies to stimulate the repair and regeneration
of human tissue;

         WHEREAS, Ortec has developed a proprietary collagen sponge;

         WHEREAS, Hapto and Ortec have formed the Company for the purpose of
conducting a Research Program that combines Hapto Technology and Ortec
Technology to develop Company Technology and determine the efficacy and the
likelihood of commercialization of products or devices that arise from such
Company Technology;

         WHEREAS, Hapto will license to the Company Hapto Technology, pursuant
to a license agreement which will incorporate the material, relevant elements of
this Agreement and such other provisions as are customary for license agreements
of this type, for use consistent with and in furtherance of the Plan, as is
hereinafter defined;

         WHEREAS, Ortec will license to the Company Ortec Technology, pursuant
to a license agreement which will incorporate the material, relevant elements of
this Agreement and such other provisions as are customary for license agreements
of this type, for use consistent with and in furtherance of the Plan, as is
hereinafter defined; and

         WHEREAS, the mutually agreed objective and measurement of success is
establishing a product concept which in the opinion of both Members, likely will
generate a licensing or partnering opportunity for the Company,







         WHEREAS, in connection with and in furtherance of the Plan, Hapto and
Ortec also desire to enter into this Agreement, which shall constitute the
limited liability company agreement of the Members under the Delaware Act, for
the purpose of setting forth the agreements of the Members as to the affairs of
the Company, the conduct of its business and fulfillment of the Plan;

         NOW THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties executing this
Agreement hereby agree as follows:

                                   ARTICLE I

                                   Definitions

         1.1 Definitions. In this Agreement, the following terms have the
meanings set forth below:

         "Affiliate" means, with respect to any Person, any other person that
controls, is controlled by or is under common control with, such Person. A
Person shall be regarded as in control of another Person if it owns, or
controls, at least fifty percent (50%) of the voting stock or other ownership
interests of the other Person, or if it possesses the power to direct or cause
the direction of the management and policies of the other Person by any means
whatsoever.

         "Agreement" means this Limited Liability Company Agreement, including
all exhibits and schedules attached hereto, as originally executed and amended
from time to time.

         "Apparent Impasse" has the meaning set forth in Section 4.5 hereof.

         "Bankrupt" means, with respect to a Person, (i) that such Person has
(A) made an assignment for the benefit of creditors; (B) filed a voluntary
petition in bankruptcy; (C) been adjudged bankrupt or insolvent, or had entered
against such Person an order of relief in any bankruptcy or insolvency
proceeding; (D) filed a petition or an answer seeking for such Person any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation or filed an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against such Person in any proceeding of such nature; or (E)
sought, consented to, or acquiesced in the appointment of a trustee, receiver or
liquidator of such Person or of all or any substantial part of such Person's
properties; (ii) forty-five (45) days have elapsed after the commencement of any
proceeding against such Person seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any statute, law
or regulation and such proceeding has not been dismissed; or (iii) forty-five
(45) days have elapsed since the appointment without such Person's consent or
acquiescence of a trustee, receiver or liquidator of such Person or of all or
any substantial part of such Person's properties and such appointment has not
been vacated or stayed or the appointment is not vacated within 60 days after
the expiration of such stay.

         "Board of Directors" has the meaning set forth in Section 2.1 hereof.


                                      -2-







         "Book Value" means, with respect to any asset of the Company, that
asset's adjusted basis for U.S. federal income tax purposes, except as follows:

         (a) Any asset contributed by a Member to the Company shall be treated
as having been purchased and the initial Book Value of such asset shall be the
fair market value of such asset as of the date of contribution;

         (b) A revaluation of the Company shall be treated as a purchase of all
the Company's assets and the Book Value of such assets shall be adjusted to
equal their respective fair market values as of the date of such revaluation;


         (c) If the Book Value of an asset has been determined pursuant to (a)
or (b), above, appropriate correlative adjustments shall be made to such Book
Value to account for disparities between book and tax depreciation, amortization
or other cost recovery deductions attributable to the determination of Book
Value pursuant to (a) or (b) above; and

         (d) The Book Value of each asset shall be adjusted immediately prior to
the liquidation of the Company to equal that asset's fair market value as of
such date.

         "Budget" has the meaning set forth in Section 8.2(b) hereof.

         "Capital Account" means, with respect to any Member, an amount
determined from time to time equal to the aggregate of all Capital Contributions
made by such Member (net of any liabilities secured by such contributed property
that the partnership is considered to assume or take subject to under Code
Section 752), (a) increased by the sum of (i) any Net Profits and gross income
allocated to such Member pursuant to Section 9.2(a) hereof, (ii) any special
allocations of income allocated to such Member pursuant to Section 9.4 hereof,
and (iii) any other items required to be included therein under Treasury
Regulation Section 1.704-l(b)(2)(iv) and (b) decreased by the sum of (i) the
amount of all cash distributed by the Company to such Member, (ii) the fair
market value of any property distributed by the Company to such Member (net of
any liabilities secured by such distributed property that such Member is
considered to assume or take subject to under Code Section 752) after adjusting
the Capital Accounts as if such property had first been sold for an amount equal
to its fair market value, (iii) any Net Losses and gross deductions allocated to
such Member pursuant to Section 9.2(b) hereof, (iv) any special allocations of
deductions allocated to such Member pursuant to Section 9.4 hereof, and (v) any
other items required to be subtracted therefrom under Treasury Regulation
Section 1.704-l(b)(2)(iv).

         "Capital Contribution" means all contributions by a Member to the
capital of the Company.

         "Certificate of Formation" means the Certificate of Formation of the
Company filed with the Secretary of State of the State of Delaware.

         "Code" means the U.S. Internal Revenue Code of 1986, as amended, or any
superseding U.S. federal revenue statute.


                                      -3-







         "Company" means Hapto/Ortec Collaboration LLC, a limited liability
company formed under the laws of Delaware.

         "Company Confidential Information" has the meaning set forth in Section
15.2(c) hereof.

         "Company Employees" means any person engaged by the Company in the
Research Program, including any person so engaged who is at such time also an
employee of Hapto or Ortec, and shall include all the persons whose compensation
is paid in whole or in part by the Company in Accordance with Exhibit A, but
shall only be such person when such person is engaged in Company business.

         "Company Technology" means the combined use of the peptides used in the
Hapto Technology and the collagen sponge which is the Ortec Technology, to
create a combined biomaterial that can be applied to tissue deficits or
augmenting tissue structures in any differentiated tissue within the patient's
body by attracting and holding healthy cells recruited from the patient's own
tissue in order to generate new healthy tissue.

         "Delaware Act" means the Limited Liability Company Act of the State of
Delaware, Title 6, Chapter 18, 101 et seq. of the Delaware Code, as the same may
be amended from time to time.

         "Directors" has the meaning set forth in Section 4.1(a) hereof.

         "Distribution" means any cash and other property paid to a Member from
the Company in respect of such Member's interest in the Company.

         "Donor Site Wounds" means wounds created as a result of removing a
piece of healthy skin from an uninjured part of the body to cover an open wound
at another location on the body.

         "Effective Date" has the meaning set forth in Section 2.5 hereof.

         "Fiscal Year" means the taxable year of the Company, which is the year
ending December 31, unless otherwise required by law, except for the final year
of the Company, which will end on the termination of the Company.

         "Hapto" means Hapto Biotech, Inc., a corporation formed under the laws
of Delaware, and shall also include all Affiliates of Hapto Biotech, Inc.,
unless the context requires otherwise.

         "Hapto Directors" has the meaning set forth in Section 4.1(a) hereof.

         "Hapto Science Manager" has the meaning set forth in Section 5.1(a)
hereof.

         "Hapto Technology" means (i) the use of Haptides'TM' to modify collagen
(i.e. to prepare haptized collagen) and thereby augment the ability of the
haptized collagen to promote the attachment of healthy cells from the patient's
body to regenerate new tissue or repair skin


                                      -4-







wound defects, developed, created, conceived or reduced to practice solely by
Hapto employees (who are not Company Employees at the time of such development,
creation, conception or reduction to practice) or Third Parties acting on behalf
of Hapto or any of its Affiliates, either prior to the Effective Date or during
the Research Program and (ii) all information and data in the possession of
Hapto that is not generally known existing as of the Effective Date or created
by Hapto during the Research Program, whether or not secret, patentable or
patent relating to materials, methods, processes, procedures, protocols,
techniques and formula reasonably useful for the development, regulatory
approval, manufacture, sale or use of products using the Hapto Technology
described in clause (i) of this definition.

         "Hard to Heal Chronic Wounds" means a tissue deficiency in the
patient's skin which does not respond in a reasonable time, currently considered
to be 3 months, to the current standard of care or is not cured after treatment
with a future Standard of Care Medication or Device in a period considered
reasonable at that time.

         "Initial Term" has the meaning set forth in Section 2.5 hereof.

         "Member" means each Person executing this Agreement as a Member and
each Person who or which may hereafter become a party to this Agreement as
provided herein.

         "Membership Interests" means with respect to each Member the percentage
interest of such Member in the Net Profits and Net Losses of, and Distributions
(except to the extent required by Section 14.2) by, the Company.

         "Milestones" means specific points in time at which specific
qualitative evaluations will be made of the developmental, scientific and
business progress of the Research Program in accordance with those milestones
and timelines listed in Exhibit B.

                  "Net Profits" and "Net Losses" means, with respect to a Fiscal
Year, the income or loss, as the case may be, of the Company for Federal income
tax purposes (without taking into account any items of income, gain, loss or
deduction attributable to gross income or gross deduction specially allocated
for such Fiscal Year), adjusted (i) in accordance with the principles of Section
1.704-l(b)(2)(iv)(m) of the Treasury Regulations (ii) by including in the
calculation any income or gain exempt from Federal income tax and any
expenditures of the Company described in Section 705(a)(2)(B) of the Code or
treated as Code Section 705(a)(2)(B) expenditures as provided in Treasury
Regulation Section 1.704-l(b)(2)(iv)(i), (iii) by determining items of income,
gain, loss or deduction attributable to any of the Company's assets as if the
adjusted basis for federal income tax purposes of such assets as of the time of
determination were equal to the Company's Book Value for such assets as of such
time, and (iv) in the event that the Book Value of any Company asset is adjusted
due to a revaluation of the Company described in subsection (b) or (d) of the
definition of "Book Value," the amount of such adjustment shall be taken into
account as gain or loss from the disposition of such asset.

         "Nonrecourse Deductions" has the meaning set forth in Section 9.4(d)
hereof.

         "Ortec" means Ortec International, Inc., a corporation formed under the
laws of Delaware, and shall also include all Affiliates of Ortec International,
Inc., unless the context requires otherwise.


                                      -5-







         "Ortec Directors" has the meaning set forth in Section 4.1(a) hereof.

         "Ortec Science Manager" has the meaning set forth in Section 5.1(a)
hereof.

         "Ortec's OrCel Technology" means the culture of donor cells in the
collagen sponge scaffold for implantation or grafting onto skin wounds for the
purposes of accelerating generation of healthy skin or of healing otherwise
non-healing or very slow healing skin wounds.

         "Ortec Technology" means the collagen sponge first developed, created,
conceived or reduced to practice solely by Ortec employees (who are not Company
Employees at the time of such development, creation, conception or reduction to
practice) or Third Parties acting on behalf of Ortec or any of its Affiliates,
prior to the Effective Date the use of which has been consented to by the United
States Food and Drug Administration as a component of Ortec's OrCel'r' product
samples of which have been provided to Hapto's employees to determine the
efficacy of its use to act as a scaffold for the patient's healthy cells to
attach to and migrate and proliferate within and which can also serve as the
matrix for chemical modification by the Hapto Technology.

         "Other Technology" means (i) all inventions, results, discoveries,
improvements, know-how, techniques, materials, compounds, products, designs,
processes or other technology, whether or not patentable, and all intellectual
property rights that are developed, created, conceived or reduced to practice by
the Company and Company Employees (who are Company Employees at the time of such
development, creation, conception or reduction to practice) and not relating to
the Research Program, and (ii) all information and data created by the Company
not relating to the Research Program, whether or not secret, patentable or
patent relating to materials, methods, processes, procedures, protocols,
techniques and formula reasonably useful for the development, regulatory
approval, manufacture, sale or use of products. Notwithstanding anything to the
contrary, Other Technology excludes Hapto Technology and Ortec Technology, as
such.

         "Person" means any natural person or any corporation, company,
governmental authority, limited liability company, partnership, trust, estate,
association, unincorporated association, custodian, nominee, or any other
individual entity or organization in its own or any representative capacity, or
other entity.

         "Plan" means the activities, and timetable relating thereto, with
respect to the Research Program and the potential pilot clinical trial as
described in Exhibit B and attached to this agreement, as it may be amended or
extended from time to time upon the action of the Science Committee and approved
by the Board of Directors.

         "Recipient" has the meaning set forth in Section 15.12 hereof.

         "Research Program" means the collaborative research program between
Hapto and Ortec pursued by the Company pursuant to this Agreement, and that is
further described in the Plan included as Exhibit B.

         "Regulatory Allocations" has the meaning set forth in Section 9.4(f)
hereof.


                                      -6-







         "Science Committee" has the meaning set forth in Section 5.1 hereof.

         "Science Managers" has the meaning set forth in Section 5.1(a) hereof.

         "Section 704(c) Property" has the meaning set forth in Section 9.5(b)
hereof.

         "Standard of Care Medication or Device" means the therapy then
generally being used to heal tissue deficiency in any part of the patient's
body. Specifically, at the present time with respect to the treatment of venous
stasis ulcers Standard of Care Medication or Device currently means compression
therapy and with respect to the treatment of diabetic foot ulcers Standard of
Care Medication or Device means moist saline dressing.

         "Third Party" means any Person other than Hapto and Ortec and their
respective Affiliates.

         "Treasury Regulations" means all proposed, temporary or final
regulations promulgated under the Code as from time to time in effect.

                                   ARTICLE II

                                  Organization

         2.1 Formation. The parties hereby organize a limited liability company
pursuant to the Delaware Act and the provisions of this Agreement and, for that
purpose, the board of directors of the Company (the "Board of Directors")
authorize Ron Lipstein to cause a certificate of formation to be executed and
filed with the Office of the Secretary of State of the State of Delaware.

         2.2 Name. The name of the Company is "Hapto/Ortec Collaboration LLC" or
such other name as the Members may determine in accordance with the Delaware
Act. The Company may cause appropriate trade name and similar statements to be
filed and published under the name set forth in this Section 2.2, or such other
names as the Company may have or use in any jurisdiction from time to time.

         2.3 Principal Place of Business and Registered Agent. The address of
the principal place of business of the Company in the United States shall be
3960 Broadway, New York, NY 10022 and the name and address of the Company's
registered agent in the State of Delaware shall be the Corporation Service
Company, 1013 Centre Road, County of New Castle, City of Wilmington, DE 19805.
The Company may change its principal place of business and may establish any
other places of business as the Members may from time to time designate.

         2.4 Qualification in Other Jurisdictions. The Board of Directors shall
cause the Company to be qualified to do business or registered under assumed or
fictitious name statutes or similar laws in any jurisdiction in which such
qualification or registration is required or desirable, and shall execute,
deliver and file any certificates (and any amendments and/or restatements
thereof) necessary to effect such qualification or registration.


                                      -7-







         2.5 Term. The term of the Company shall commence upon the date of
filing of the Certificate of Formation pursuant to Section 18-206 of the
Delaware Act (the "Effective Date"), and shall continue in full force and effect
for a period of two (2) months beyond the fourteenth (14th) month anniversary of
the Effective Date (the "Initial Term") or (ii) the twentieth (20th) month
anniversary of the Effective Date if at the end of the Initial Term, although
the Company did not achieve its' mutually agreed on objective as described in
the recitals herein, all the Members agree that such objective is highly likely
to be met if the Initial Term were extended six (6) months (which period shall
be automatically extended for a length of time as determined upon the unanimous
vote or consent of the Members, which consent may be given or withheld in the
Members' sole discretion) or until dissolution prior thereto pursuant to Section
14.1 hereof.

         2.6 Purposes. The Company is organized for the purpose of, and the
nature of the business to be conducted and promoted by the Company is, engaging
in any lawful act or activity for which limited liability companies may be
formed under the Delaware Act and engaging in any and all activities necessary,
convenient, desirable or incidental to the foregoing.

                                   ARTICLE III

         Members 3.1 Names and Addresses The names and addresses of the Members
are as set forth in Schedule 1 to this Agreement.

         3.2 Additional Members. Any Person may be admitted as a Member after
the date of this Agreement only upon the unanimous vote or consent of all of the
Members, which consent may be given or withheld in the Members' sole discretion.

         3.3 Limitation of Liability. Each Member's liability shall be limited
as set forth in this Agreement, the Delaware Act and other applicable law. A
Member shall not be personally liable for any indebtedness, liability or
obligation of the Company, except that each Member shall remain personally
liable for the payment of its Capital Contribution and as otherwise specifically
set forth in this Agreement, the sole remedy of which shall be the adjustment of
the Membership Interests as specified in Section 8.2(d).

         3.4 Priority and Return of Capital. No Member shall have priority over
any other Member, whether for the return of a Capital Contribution or for Net
Profits, Net Losses or a Distribution, except as herein provided. This Section
3.4 shall not apply to repayment of any loan or other indebtedness made by a
Member to the Company.


         3.5 Meetings of Members. Meetings of Members shall be held at the
request of a Member on such date and at such time and place, either within or
without the State of Delaware, as agreed upon from time to time by the Members.
Written notice stating the place, date, and time of, and the general nature of
the business to be transacted at, a meeting of Members, shall be given to each
Member in the manner prescribed by Section 15.1, not less than 5 days nor more
than 15 days before the date of such meeting. In lieu of holding a meeting,
Members may vote or otherwise take action by a written instrument indicating the
consent of


                                      -8-







Members holding not less than the percentage of Membership Interests that would
be necessary to authorize or take such action at a meeting.


                                   ARTICLE IV

                               Board of Directors

         4.1 Number, Appointment, Removal, Qualifications, Etc.


         (a) Board of Directors. The Board of Directors shall have four (4)
members of the Board of Directors ("Directors"), two (2) of whom shall be
designated by Hapto (the "Hapto Directors") and two (2) of whom shall be
designated by Ortec (the "Ortec Directors"). Hapto may remove any Hapto
Directors or fill any vacancy created by the removal, resignation, death or
disability of an Hapto Directors and determine the effective date of such
replacement. Ortec may remove any Ortec Director or fill any vacancy created by
the removal, resignation, death or disability of an Ortec Director and determine
the effective date of such replacement. The number of the Board of Directors
shall not be decreased or increased without the unanimous written consent of the
Members. The Board of Directors shall appoint one Director to serve as Chair,
who shall serve in such capacity for a term of six (6) months. The Board of
Directors shall attempt to alternate between appointing an Ortec Director and a
Hapto Director as chairman in each succeeding term; provided, however, a
Director may serve consecutive terms if so appointed by the Board of Directors.
The initial Board of Directors shall consist of the persons identified on
Schedule 2 hereto.

         (b) Removal and Resignation. A Director may be removed with or without
cause by the Member who appointed such Director. If, as a result of the removal,
resignation or death of any member of the Board of Directors, a vacancy occurs
in the Board of Directors, such vacancy shall be filled by the Member who
appointed such Director.

         4.2 Assumption and Acceptance of Powers and Duties Any Director
designated pursuant to this Article IV shall assume the powers, duties and
obligations of a Director as provided under this Agreement and shall be subject
to the terms hereof. Any person designated as a Director shall be deemed to have
agreed to accept such Director's rights and authority hereunder and to perform
and discharge such Director's duties and obligations hereunder by performing any
act in the capacity of Director hereunder (including but not limited to
participating in any meeting of the Board of Directors or executing any written
consent of the Board of Directors), and such rights, authority, duties and
obligations hereunder shall continue until such Director's successor is
designated or until such Director's earlier resignation or removal in accordance
with this Agreement.

         4.3 Meetings. Regular meetings of the Board of Directors may be held
without notice at such times and places as may be mutually agreed. Special
meetings of the Board of Directors may be called by or at the request of any
Director on notice given the same day or earlier to each Director, either
personally, by telephone, by mail, by electronic mail or by facsimile.


                                      -9-







         4.4 Quorum; Action. Attendance by at least one member of each set of
Directors shall constitute a quorum for the transaction of business. Except as
otherwise provided by law or this Agreement, all action by the Board of
Directors requires the unanimous approval of the Directors present at a meeting
at which a quorum is present. The foregoing to the contrary notwithstanding, if
any Member's Membership Interest shall exceed seventy (70%) percent of all
Membership Interests then outstanding, then, so long as such condition shall
persist, attendance by at least one member of the set of Directors designated by
such Member shall constitute a quorum for the transaction of business and action
by the Board of Directors shall require the approval of only one member of the
set of Directors designated by such Member, unless there there is a disagreement
among such set of Directors, in which case the action must be approved by a
majority of the Directors present at the meeting.

         4.5 Apparent Impasse. In the event that any member of the Board of
Directors determines in good faith that it appears that the Board of Directors
is unable to approve any material action necessary to manage the Company as
contemplated in this Agreement, in accordance with the methods described in
Section 4.4, such Director may, upon written notice to each Member and each
Director, declare an Apparent Impasse (the "Apparent Impasse"). In the event
that forty-five (45) calendar days passes and the Board of Directors is unable
to resolve the Apparent Impasse, the Company shall automatically be dissolved
and its affairs wound up in accordance with Article XIV.

         4.6 Telephonic Meetings. The Directors may participate in and act at
any meeting of such Directors through the use of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.

         4.7 Action by Written Consent. Unless otherwise restricted by this
Agreement or the Delaware Act, any action required or permitted to be taken at
any meeting of the Board of Directors may be taken without a meeting if all the
Directors consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board of Directors.

                                   ARTICLE V

                                Science Committee

         5.1 Purpose and Actions of Science Committee There shall be a Science
Committee the purpose of which shall be to manage and oversee the conduct of the
research and daily operations of the Company subject to the terms of this
Agreement (the "Science Committee"). The Science Committee shall implement the
Plan and in that respect shall (i) exercise its powers and duties with respect
to product research and development and of the scientific and technology
pursuits through its Science Managers, and (ii) recommend, and evaluate progress
against, Milestones to the Board of Directors. Activities by the Science
Committee shall be evidenced by resolutions which shall be recommended to, and
to be effective shall be approved by the Board of Directors.

         (a) Appointment. Each Member shall designate two Science Managers (the
"Science Managers"), the Science Managers designated by Hapto being the Hapto
Science


                                      -10-







Manager ("Hapto Science Manager"), and the Science Managers designated by Ortec
being the Ortec Science Manager (the "Ortec Science Managers"). The initial
Science Committee shall consist of the persons identified on Schedule 2 hereto.

         (b) Removal and Resignation. A Science Manager may be removed with or
without cause by the Member who appointed such Science Manager. If, as a result
of the removal, resignation or death of any member of the Science Committee, a
vacancy occurs in the Science Committee, such vacancy shall be filled by the
Member who appointed such Science Manager.

         (c) Number. The Science Committee shall initially be comprised of four
(4) Science Managers. The number of the Science Committee shall not be decreased
or increased without the unanimous written consent of the Members.

         5.2 Assumption and Acceptance of Powers and Duties Any Science Manager
designated pursuant to this Article V shall assume the powers, duties and
obligations of a Science Manager as provided under this Agreement and shall be
subject to the terms hereof. Any person designated as a Science Manager shall be
deemed to have agreed to accept such Science Manager's rights and authority
hereunder and to perform and discharge such Science Manager's duties and
obligations hereunder by performing any act in the capacity of Science Manager
hereunder (including but not limited to participating in any meeting of the
Science Committee or executing any written consent of the Science Committee),
and such rights, authority, duties and obligations hereunder shall continue
until such Science Manager's successor is designated or until such Science
Manager's earlier resignation or removal in accordance with this Agreement.

         5.3 Meetings. Regular meetings of the Science Committee may be held
without notice at such times and places as may be mutually agreed. Special
meetings of the Science Committee may be called by or at the request of any
Science Manager on notice given the same day or earlier to each Science Manager,
either personally, by telephone, by mail, by electronic mail or by facsimile.
Such committee shall designate one member in attendance as secretary, and such
secretary shall prepare written minutes in customary form and shall promptly
furnish such minutes to all Directors.

         5.4 Quorum; Action. Attendance by the Hapto Science Managers and the
Ortec Science Managers shall constitute a quorum for the transaction of
business. Except as otherwise provided by law or this Agreement, all action by
the Science Committee requires the unanimous approval of all the Ortec and Hapto
Science Managers. The foregoing to the contrary notwithstanding, if any Member's
Membership Interest shall exceed seventy (70%) percent of all Membership
Interests, then, so long as such condition shall persist, attendance by the
Science Managers designated by such Member shall constitute a quorum for the
transaction of business and action by the Science Committee shall require the
approval of the Science Managers designated by such Member.

         5.5 Telephonic Meetings. The members of the Science Committee may
participate in and act at any meeting thereof through the use of a conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear


                                      -11-






each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.

         5.6 Action by Written Consent. Unless otherwise restricted by this
Agreement or the Delaware Act, any action required or permitted to be taken at
any meeting of the Science Committee, may be taken without a meeting if the
Science Managers consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Science Committee.

                                   ARTICLE VI


                        Development of Certain Technology

         6.1 Obligation to License Certain Technology to Ortec. If the Company

         (a) develops Other Technology which can be used with Ortec's OrCel
Technology to successfully treat Hard to Heal Chronic Wounds, or

         (b) develops Other Technology which can successfully treat Hard to Heal
Chronic Wounds, or

         (c) further develops the Company Technology so that it can successfully
treat Hard to Heal Chronic Wounds,

the Company may not produce or sell products based on, or otherwise exploit,
such Other Technology or further developed Company Technology, or license or
otherwise permit any Person other than Ortec to produce or sell products based
on, or otherwise exploit, such Other Technology or further developed Company
Technology. The Company shall at Ortec's option grant an exclusive license for
such Other Technology and/or such further developed Company Technology to Ortec.
All of the above shall apply only to the extent such products and licenses are
used to treat Hard to Heal Chronic Wounds

For the avoidance of doubt, it is clarified that the Company shall be entitled
to continue to develop and exploit the Company Technology and Other Technology,
to produce and sell products based on Company Technology and Other Technology,
and to license to other Person that right to produce or sell such products, so
long as such products are not used to treat Hard to Heal Chronic Wounds.

         6.2 Duration of the License. The duration of the license to be granted
by the Company to Ortec pursuant to the provisions of Section 6.1 shall, if a
patent or patents have issued for such licensed technology, be the latest
expiration date of any patent issued for such licensed technology. If no patent
has issued for such licensed technology the duration of the license to be
granted by the Company to Ortec pursuant to the provisions of Section 6.1 shall
be fifty (50) years.

         6.3 License Fees. The license or royalty fees to be paid by Ortec to
the Company for the license to be granted by the Company to Ortec pursuant to
Section 6.1, shall be a percentage of sales received by Ortec from the sale of
the products based on such licensed


                                      -12-







technology. The percentage of sales constituting such license or royalty fees
shall be an amount which is commercially reasonable at the time such license
agreement is entered into.

         6.4 Other Terms. All of the other terms of the license granted by the
Company to Ortec pursuant to the provisions of Section 6.1 shall be those which
are commercially reasonable at the time such license agreement is entered into.

         6.5 Arbitration. In the event of the failure of Hapto and Ortec to
agree on the percentage of sales received by Ortec from the sale of the product
or products based on the licensed technology which Ortec is required to pay to
the Company as provided in Section 6.3, or on what are commercially reasonable
other terms of the license to be granted by the Company to Ortec pursuant to
Section 6.1, such dispute shall be submitted to arbitration in New York City,
New York, pursuant to the rules and regulations of the American Arbitration
Association for determination by an arbitrator familiar with commercially
reasonable terms for the licensing of the production and sale of medical
products and devices for which a patent or patents have issued or based on
proprietary intellectual property for which no patent has issued.

         6.6 Ortec's Exercise of Option. Ortec's exercise of its option to have
a license granted to it by the Company pursuant to the provisions of Section 6.1
shall be in writing and delivered to Hapto (or any other then Member) in the
manner for notices and consents provided in Section 15.1.


                                   ARTICLE VII

                                   Management

         7.1 Management Except as specifically set forth in this Agreement, the
Members hereby delegate all power and authority to manage the business and
affairs of the Company to the Board of Directors, who shall act as the Company's
"managers" (within the meaning of the Delaware Act) subject to, and in
accordance with the terms of this Agreement. The Members, in their capacity as
such, shall have no authority or right to act on behalf of or bind the Company
in connection with any matter.

         7.2 Officers and Employees. The initial officers of the Company are as
set forth on Schedule 3 hereto. Subject to the powers and authority of the
Committee, such officers shall have such full power and authority to carry on
the day-to-day business of the Company. Such officers shall have the full power
and authority to carry out the directions of the Board of Directors and to
execute all agreements, instruments and documents as are authorized by the Board
of Directors. The Board of Directors shall be authorized to hire employees of
the Company or to retain agents and consultants to the Company. Officers,
employees and consultants shall receive compensation from the Company for acting
in such capacity as may be reasonably determined by the Board of Directors.

         7.3 Internal Controls. The Board of Directors shall conduct the
business of the Company at all times in accordance with high standards of
business ethics and devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (a) business and research
spending is executed in accordance with management's general or


                                      -13-







specific authorization; (b) revenues and costs are recorded as necessary to
permit preparation by the Company, Hapto and Ortec of financial statements in
conformity with U.S. generally accepted accounting principles, to permit
preparation of all tax returns and to maintain accountability for the assets of
the Company; and (c) access to assets is permitted only in accordance with
management's general or specific authorization. At all times, all Members shall
have the right to access and review the books and records of the Company and
discuss such review with Company management (subject to Section 15.2(c)).

         7.4 Milestones. The projected milestones and respective timetable are
listed in Exhibit B and attached to this Agreement. The Board of Directors and
the Science Committee shall from time to time review, and if necessary modify
or, in the case of the Science Committee, recommend modification(s) of the
Milestones in light of developments concerning the Plan and the Company. Within
30 days of the Company meeting a Milestone, the Board of Directors shall convene
to determine whether the Research Program is on schedule, whether the Research
Program should be modified and whether the Research Program should continue
beyond such Milestone.

         7.5 Limitations on Liability. None of the Members of the Board of
Directors, any Member, officer, director or employee of the Company, shall be
liable to the Company or the Members for damages for any breach of duty to the
Company or the Members unless (A) a judgment or other final adjudication adverse
to him or her establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of the law or that he or
she personally gained in fact a financial profit or other advantage to which he
or she was not legally entitled or (B) required by the Delaware Act.

         7.6 Indemnification.

         (a) Third Party Actions, Suits and Proceedings. Each person who was or
is made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a Director or officer, of the Company or is or was
serving at the request of the Company as a manager, director, officer, employee,
fiduciary, or agent of another limited liability company or of a corporation,
partnership, joint venture, trust or other enterprise (hereinafter a
"proceeding"), shall be indemnified and held harmless by the Company to the
fullest extent permitted under the laws of Delaware, against all expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.


                                      -14-







         (b) Actions by the Company. The Company shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Company to procure a
judgment in its favor by reason of the fact that such person, or a person of
whom he or she is the legal representative, is or was a Director or officer of
the Company, or is or was serving at the request of the Company as a manager or
director, officer, employee, fiduciary or agent of another limited liability
company or of a corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Company unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.

         (c) Settlements. Anything provided in this Section 7.6 or elsewhere in
this Agreement to the contrary notwithstanding, the Company's obligation in this
Section 7.6 set forth of indemnification in connection with a settlement shall
only be for a settlement approved in writing by either the (i) the Board of
Directors or (ii) all of the Members.

         (d) Procedure for Indemnification. Any indemnification of a Director or
officer of the Company under Section 7.6(a) or 7.6(b) shall be made promptly,
and in any event within 30 days, upon the written request of the Director or
officer. The costs and expenses incurred by the prevailing party in connection
with such claim for indemnification, shall be paid to the prevailing party by
the losing party It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any, has
been tendered to the Company) that the claimant has not met the standards of
conduct which would make it permissible under the Delaware General Corporate Law
if the Company were a corporation for the Company to indemnify the claimant for
the amount claimed. Neither the failure of the Company (including its Directors,
independent legal counsel or Members) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the standard of conduct set forth
for a director or officer of a corporation in the Delaware General Corporate
Law, nor an actual determination by the Company (including its Directors,
independent legal counsel or Members) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.

         7.7 The books and records will be maintained at the principal place of
business in accordance with generally accepted accounting principles in the
United States. The Members shall have, at reasonable times and upon reasonable
notice, full access to all books and records of the Company and shall be
entitled to consult with management of the Company regarding the same.


                                      -15-







                                  ARTICLE VIII

                              Capital Contributions

         8.1 Initial Capital Contributions.

         (a) Simultaneously with the execution of this Agreement, Hapto shall
make a Capital Contribution to the Company of the amount indicated on Schedule
1.

         (b) Simultaneously with the execution of this Agreement, Ortec shall
make a Capital Contribution to the Company of the amount indicated on Schedule
1.

         8.2 Required Capital Contributions to Capital Accounts

         (a) All costs and expenses of the Company determined in accordance with
the Budget shall be equally shared by the Members and shall be paid from the
Capital Accounts.

         (b) In connection with the Plan, a projected Budget (the "Budget") has
been developed and is attached to this Agreement as Exhibit A, covering the
anticipated timing and amounts of the Company's anticipated cash needs and
internal and external expenditures consistent with the Plan (including, without
limitation, the amount of allocated salary and other personnel expenses
associated with the Company, and the allocated expenses, if any, of equipment
related to the business of the Company, of each Member who and which are
contributed to the Company pursuant to Section 8.2(c)) as then in effect, and
the required timing and amounts of the Members' additional Capital
Contributions. The Board of Directors and Science Committee shall review, and if
necessary modify, or recommend modification in the case of the Science
Committee, the Budget from time to time in light of developments concerning the
Plan and the Company.

         The Capital contributions required to be made by each Member shall be
made for expenses and expenditures approved by the Board of Directors and when
such expenses and expenditures are payable.

         (c) Each Member shall contribute personnel to the Company, as described
in Exhibit A, which contribution shall be revised and modified as necessary, on
each date as contemplated by the Budget, and the cost of which will be
reimbursed by the Company to the Member.

         (d) In the event a Member fails to make a Capital Contribution required
by the Board of Directors, the Membership Interests of the Member shall be
adjusted to reflect the differing Capital Contributions made by each Member.

         8.3 Capital Accounts A Capital Account shall be maintained for each
Member in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv).

         8.4 Transfers. Upon the admission of an additional Member pursuant to
Section 3.2 hereof, the Capital Account of any Member transferring its
Membership Interest


                                      -16-







shall become the Capital Account of the Person to which such Membership Interest
is sold or transferred in accordance with Section 1.704-l(b)(2)(iv) of the
Treasury Regulations.

         8.5 Modifications. The manner in which Capital Accounts are to be
maintained pursuant to this Agreement is intended to comply with the
requirements of Section 704(b) of the Code. If in the opinion of the Board of
Directors the manner in which Capital Accounts are to be maintained pursuant to
this Agreement should be modified to comply with Section 704(b) of the Code,
then the method in which Capital Accounts are maintained shall be modified;
provided, however, that any change in the manner of maintaining Capital Accounts
shall not materially alter the economic agreement between or among the Members.

         8.6 Deficit Capital Account. Except as otherwise required by the
Delaware Act or this Agreement, no Member shall have any liability to restore
all or any portion of a deficit balance in its Capital Account.

         8.7 Return of Capital Contributions. Except as otherwise expressly
provided in this Agreement, no Member shall (a) be entitled to any interest or
other fixed return with respect to its capital contribution or (b) have any
right to demand a return of its capital contribution.


                                   ARTICLE IX

                           Profit and Loss Allocations

         9.1 Membership Interests. The Membership Interest of each of the
Members shall be as set forth on Schedule 1 hereto, and may be revised from time
to time by the Board of Directors, in connection with the admission or
withdrawal of a Member, the transfer of an interest in the Company or similar
event, or any adjustments required by Section 8.2(d).

         9.2 Allocations of Net Profits and Net Losses.

         (a) Net Profits. Except as otherwise provided in this Article, for each
Fiscal Year or portion thereof Net Profits shall be allocated between the
Members in proportion to their Membership Interests. Allocations of Net Profits
hereunder shall consist of a pro rata portion of each item of Company income,
gain, loss or deduction that is included in computing Net Profits for such
Fiscal Year.

         (b) Net Losses. Except as otherwise provided in this Article, for each
Fiscal Year or portion thereof Net Losses shall be allocated between the Members
in proportion to their Membership Interests. Allocation of Net Losses hereunder
shall consist of a pro rata portion of each item for Company income, gain, loss
or deduction that is included in computing Net Losses for such Fiscal Year.

         9.3 General Provisions.

         (a) Except as otherwise provided in this Agreement, the Members'
distributive shares of all items of Company income, gain, loss, and deduction
are the same as their distributive shares of Net Profits and Net Losses.


                                      -17-







         (b) If there is a change in any Member's Membership Interest during a
Fiscal Year, each Member's distributive share of Net Profits or Net Losses or
any item thereof for such Fiscal Year shall be determined using a method
prescribed by Code Section 706(d) or the Treasury Regulations thereunder.

         (c) The Members agree to report their shares of income and loss for
federal, state and local income and franchise tax purposes in accordance with
the provisions of this Article IX (except where otherwise prohibited by law).

         9.4 Special Allocations.

         (a) Minimum Gain Chargeback. Notwithstanding any other provision of
this Article IX, the Company shall allocate items of Company income and gain
among the Members at such times and in such amounts as necessary to satisfy the
minimum gain chargeback requirements of Treasury Regulation Sections l.704-2(f)
and 1.704-2(i)(4).

         (b) Qualified Income Offset. The Company shall specially allocate items
of Company income and gain when and to the extent required to satisfy the
"qualified income offset" requirements within the meaning of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) .

         (c) Code Section 754 Adjustment. To the extent that an adjustment to
the tax basis of any asset pursuant to Code Section 734(b) or Code Section
743(b) is required to be taken into account in determining Capital Accounts as
provided in Treasury Regulation Section 1.704-l(b)(2)(iv)(m), the adjustment
shall be treated (if an increase) as an item of gain or (if a decrease) as an
item of loss, and such gain or loss shall be allocated to the Members consistent
with the allocation of the adjustment pursuant to such Treasury Regulation.

         (d) Nonrecourse Deductions. Nonrecourse Deductions (as determined under
Treasury Regulation Section 1.704-2(c)) (the "Nonrecourse Deductions") for any
Tax Year shall be allocated in proportion to Membership Interests consistent
with the requirements of Treasury Regulation Sections 1.704-2(c), 1.704-2(e)(2)
and 1.704-2(j)(l).

         (e) Member Nonrecourse Deductions. Any Member Nonrecourse Deduction (as
defined in Treasury Regulation Section l.704-2(i)(2)) shall be allocated
pursuant to Treasury Regulation Section 1.704-2(i) to the Member who bears the
economic risk of loss with respect to the Member nonrecourse liability to which
such deductions are attributable.

         (f) Curative Allocations. The allocations under Sections 9.4(a) through
(e) hereof (the "Regulatory Allocations") are intended to comply with certain
requirements of Treasury Regulations under Code Section 704. Notwithstanding any
other provision of this Article IX (other than the Regulatory Allocations), the
Regulatory Allocations shall be taken into account in allocating other items of
income, gain, loss, deduction and expense among the Members so that, to the
extent possible, the net amount of such allocations of other items and the
Regulatory Allocations shall be equal to the net amount that would have been
allocated to the Members pursuant to Sections 9.2 and 9.3 hereof if the
Regulatory Allocations had not been made.

         (g) Year of Liquidation. Net Profits or Net Losses for the Fiscal Year
of the liquidation of the Company shall be allocated (i) to the Members so as to
cause, as nearly as


                                      -18-







practicable, the Capital Account balances of the Members to be in proportion to
their respective Membership Interests, and then (ii) to the Members in
proportion to their respective Membership Interests.

         9.5 Code Section 704(c) Allocations.

         (a) Solely for federal, state, and local income tax purposes and not
with respect to determining any Member's Capital Account or distributive shares
of Net Profits, Net Losses, other items or Distributions, a Member's
distributive share of income, gain, loss, or deduction with respect to any
Section 704(c) Property (as defined below) contributed to the Company shall be
allotted among the Members so as to take into account any variation between the
adjusted tax basis of each property to the Company for U.S. federal income tax
purposes and its Book Value in accordance with the principles set forth in
Treasury Regulation Section l.704-3(b)(1).

         (b) "Section 704(c) Property" means any Company property if the fair
market value of such property differs from its adjusted tax basis as of the date
it is contributed to the Company or revalued by the Company pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(f).


                                    ARTICLE X

                                  Distributions

         10.1 Distributions The Board of Directors shall be solely responsible
for making all determinations of amounts and timing of all distributions to
Members. The Board of Directors shall have sole discretion to determine amounts
available for distribution. Distributions shall be made at such times and
intervals as the Board of Directors shall determine. All distributions shall be
made to the Members pro rata in proportion to their Membership Interests. In the
sole discretion of the Board of Directors, securities, assets or other property
in kind may be distributed to the Members. Each distribution in kind of
securities, assets or other property shall be distributed in accordance with
this paragraph as if there had been a sale of such property for an amount of
cash equal to the fair market value of such property followed by an immediate
distribution of such cash proceeds. Distributions consisting of cash,
securities, assets and/or other property shall be made, to the extent
practicable, in pro rata portions as to each Member receiving such
distributions. For purposes of the preceding sentence, securities, assets or
other property having a different tax basis than like securities, assets or
other property shall be considered to be securities, assets or other property of
a different type.

         10.2 Interest on and Return of Capital Contributions. No Member shall
be entitled to interest on its Capital Contributions or to a return of its
Capital Contributions, except as specifically set forth in this Agreement.


                                      -19-







                                   ARTICLE XI

                                      Taxes

         11.1 Tax Returns The Board of Directors shall cause to be prepared and
filed, at the expense of the Company, all necessary federal and state income tax
returns for the Company and all tax reports to Members required to be prepared
under the Code. Each Member shall furnish to the Company all pertinent
information in its possession relating to the Company that is necessary to
enable the Company's income tax returns to be properly prepared and filed.

         11.2 Tax Matters Member. The Members hereby designate Ron Lipstein to
be the "tax matters partner" of the Company pursuant to Section 6231(a)(7) of
the Code. The tax matters partner shall have full discretion to make any
elections under the Code.


                                   ARTICLE XII

                                 Transferability

         12.1 Rights of Transfer. No Member shall sell, assign, transfer, convey
or dispose of all or any portion of its Membership Interest or any rights or
benefits with respect thereto, except with the advance written approval of all
other Members, which consent may be given or withheld in at each such Member's
sole discretion.

         12.2 Effect of Void Transfer. In the event of any purported transfer of
Membership Interests in violation of the provisions of this Agreement, such
purported transfer shall be void and of no effect.


                                  ARTICLE XIII

                         Representations and Warranties

         13.1 Representations and Warranties of the Members. Each Member hereby
represents and warrants to the other Member and to the Company as of the date
hereof the following:

         (a) Organization and Existence. Such Member is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was incorporated. Such Member is duly licensed or
qualified to do business and in good standing in each of the jurisdictions in
which the failure to be so licensed or qualified would have a material adverse
effect on its financial condition, operations or prospects or its ability to
perform its obligations hereunder.

         (b) Power and Authority. Such Member has the full power and authority
to execute, deliver and perform this Agreement, and to own and lease its
properties and assets and to carry on its business as now conducted and as
contemplated hereby.


                                      -20-







         (c) Authorization and Enforceability. The execution and delivery of
this Agreement by such Member and the carrying out by such Member of the
transactions contemplated hereby have been duly authorized by all requisite
corporate actions, and this Agreement has been duly executed and delivered by
such Member and constitutes the legal, valid and binding obligation of such
Member, enforceable against it in accordance with the terms hereof, subject, as
to enforceability of remedies, to limitations imposed by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
enforcement of creditors' rights generally and general principles of equity.

         (d) No Governmental Consents. No authorization, consent or approval of,
or notice to or filing with, any governmental authority is required for the
execution, delivery and performance by such Member of this Agreement.

         (e) Conflict or Breach. None of the execution, delivery and performance
by such Member of this Agreement, the compliance with the terms and provisions
hereof, and the carrying out of the transactions contemplated hereby conflicts
or will conflict with or will result in a breach or violation of any of the
terms, conditions or provisions of any law, governmental rule or regulation or
the charter documents, as amended, or bylaws, as amended, of such Member or any
order, writ, injunction, judgment or decree of any court or governmental
authority against such Member or by which it or any of its proprieties is bound,
or any loan agreement, indenture, mortgage, note, resolution, bond, or contract
or other agreement or instrument to which such Member is a party or by which it
or any of its properties is bound, or constitutes or will constitute a default
thereunder or will result in the imposition of any lien upon any of its
properties.

         (f) No Proceedings. Except as set forth and described on Schedule 4,
there are no suits or proceedings pending, or to the knowledge of such Member or
its four most senior officers, threatened in any court or before any regulatory
commission, board or other governmental administrative agency against or
affecting such Member that could have a material adverse effect on the business,
operations or property of such Member, financial or otherwise, or on its ability
to fulfill its obligations hereunder.

         13.2 Additional Representations and Warranties of Hapto. Hapto hereby
represents and warrants to Ortec as of the date hereof, that (a) it owns all
right, title and interest in and to, or controls with the power unconditionally
to license or assign without the further consent of any other Person, all of the
Hapto Technology, (b) the Hapto Technology is free and clear of any liens,
claims or encumbrances, (c) to its knowledge, there is no material and
unauthorized use, infringement or misappropriation of any of its rights in the
Hapto Technology, (d) to its knowledge, use of the Hapto Technology will not
infringe upon the rights of any Third Party, (e) Exhibit C contains a complete
and accurate list of all the licenses and patents that are owned or controlled
by Hapto and that are related to Hapto Technology and the Research Program, and
(f) to the best of Hapto's knowledge, the Ortec Technology and the Hapto
Technology, when combined and subjected to the Company's operations contemplated
under the Plan, will be adequate to permit the Company to achieve its stated
purposes relative to the Plan and is all the technology known to Hapto that is
owned or controlled by it and Ortec that is or may be used or useful with
respect to the development of the Company Technology.


                                      -21-







         13.3 Additional Representations and Warranties of Ortec. Ortec hereby
represents and warrants to Hapto as of the date hereof, that (a) it owns all
right, title and interest in and to, or controls with the power unconditionally
to license or assign without the further consent of any other Person, all of the
Ortec Technology, (b) the Ortec Technology is free and clear of any liens,
claims or encumbrances, (c) to its knowledge, there is no material and
unauthorized use, infringement or misappropriation of any of its rights in the
Ortec Technology, (d) to its knowledge, use of the Ortec Technology will not
infringe upon the rights of any Third Party, (e) Exhibit D contains a complete
and accurate list of all the licenses and patents that are owned or controlled
by Ortec and that are related to Ortec Technology and the Research Program, and
(f) to the best of Ortec's knowledge, the Hapto Technology and the Ortec
Technology, when combined and subjected to the Company's operations contemplated
under the Plan, will be adequate to permit the Company to achieve its stated
purposes relative to the Plan and is all the technology known to Hapto that is
owned or controlled by it and Ortec that is or may be used or useful with
respect to the development of the Company Technology.

         13.4 Warranty of Statements. No representation or warranty of either
Member, or any exhibit, document, statement, certificate or schedule pursuant
hereto or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make statements or facts contained therein
not misleading. The representations and warranties of the Members set forth in
this Agreement and in any exhibit, document, statement, certificate or schedule
furnished or to be furnished pursuant hereto shall be true on and as of the
Effective Date as though such representations and warranties were made on and as
of Effective Date.


                                   ARTICLE XIV

                                   Dissolution

         14.1 Dissolution. The Company shall be dissolved and its affairs shall
be wound up upon the first to occur of the following:

         (a) The expiration of the term as set forth in Section 2.5;

         (b) The vote or written consent of all the Members;

         (c) In the event either Member becomes Bankrupt, the other Member's
election to dissolve the Company upon notice to the Bankrupt Member;

         (d) In the event that an Apparent Impasse has been declared and not
resolved as contemplated in Section 4.5 of this Agreement; and

         (e) The dissolution of the Company pursuant to the Delaware Act, by
operation of law or by judgment decree.

         14.2 Winding Up. Upon the dissolution of the Company, the Board of
Directors may, in the name of and for and on behalf of the Company, prosecute
and defend suits, whether civil, criminal or administrative, sell and close the
Company's business, dispose of and convey


                                      -22-







and distribute to the Members any remaining assets of the Company, all without
affecting the liability of Members. Except with regards to the distribution of
Company Technology and Other Technology described in Section 14.3, upon winding
up of the Company, the assets, shall be distributed as follows:

         (a) To creditors, including Members and members of the Board of
Directors who are creditors, to the extent permitted by law, in satisfaction of
liabilities of the Company, whether by payment or by making of reasonable
provision for payment thereof, other than liabilities for which reasonable
provision for payment has been made and liabilities to Members and former
Members for distributions under Sections 18-601 or 18-604 of the Delaware Act;

         (b) To Members and former Members in satisfaction of liabilities for
distributions under Sections 18-601 or 18-604 of the Delaware Act; and

         (c) To Members pro rata in proportion to their Membership Interests at
the time of such distribution.

         14.3 Distribution of Company Technology and Other Technology. At the
time of the dissolution of the Company subject to the provisions of Article VI
and Section 14.5, the ownership interests and all rights arising therefrom in
Company Technology and Other Technology shall be distributed and assigned to the
Members pro rata (non specific) in proportion to their Membership Interests at
the time of dissolution.

         14.4 Nonrecourse to Other Members. Except as provided by applicable law
or as expressly provided in this Agreement, upon dissolution, each Member shall
receive a return of its Capital Contribution solely from the assets of the
Company. If the assets of the Company remaining after the payment or discharge
of the debts and liabilities of the Company are insufficient to return any
Capital Contribution of any Member, such Member shall have no recourse against
any other Member.

         14.5 Dissolution Licensing.

         (a) In the event of dissolution, each Member hereby grants a
non-exclusive, worldwide, non-revocable, royalty-payable license of its
distribution of Company Technology or Other Technology to the other Member. For
the avoidance of doubt, the License granted by the Company to ORTEC pursuant to
Article VI shall survive the dissolution of the Company and shall be assigned to
HAPTO as the licensor of its pro-rata ownership in such Company Technology and
Other Technology. The royalty rates of such licenses shall be adjusted on a pro
rata basis in accordance with Membership Interests in which case the Member with
the larger Membership Interests paying the other Member ratably lower royalties
and the Member with the smaller Membership Interests paying the other Member
ratably higher royalties, all in accordance with the following formulation:

         (i) First, the Members shall agree upon a base royalty rate that
reflects the rate that an unaffiliated licensee would pay in royalties in an
arms' length transaction to a licensor of the technology in question on
commercially reasonable terms existing in the marketplace at such time; and


                                      -23-







         (ii) Such base rate shall be adjusted upwards, in the case of the
Member with the larger Membership Interest, or downwards in the case of the
Member with the smaller Membership Interest, by pro rata in accordance with the
Member's Membership Interest, as the case may be.

         (b) Notwithstanding anything to the contrary contained in this Section
14.5, no license granted in this Section 14.5 shall be construed to grant a
license of Hapto Technology or Ortec Technology or Ortec's OrCel technology.

         14.6 Termination. Upon completion of the dissolution, winding up,
liquidation and distribution of the assets of the Company, the Company shall be
deemed terminated.


                                   ARTICLE XV

                               General Provisions

         15.1 Notices and Consents. Any notice, demand or other communication
required or permitted to be given pursuant to this Agreement shall be in writing
and shall have been sufficiently given for all purposes if (a) delivered
personally to the Member (b) delivered to a recognized overnight courier service
for next day delivery to the Member at the address set forth in Schedule 1 to
this Agreement or (c) sent by registered or certified mail, postage prepaid,
addressed to the Member at its address set forth in Schedule 1 to this
Agreement. Except as otherwise provided in this Agreement, any such notice shall
be deemed to be given one business day after delivery to the courier service or
three business days after the date on which it was deposited in a regularly
maintained receptacle for the deposit of United States mail, addressed and sent
as set forth in this Section 15.1. All consents required or permitted hereunder
shall be in writing. Any Member may change its address set forth in Schedule 1
to this Agreement by notice to the other Members.

         15.2 Covenants.

         (a) Non-Compete.

                  (i) Hapto. Hapto and the Company covenant that neither they
         nor any of the Persons they control shall:

                  1) So long as Ortec is in the business of developing,
         manufacturing and/or selling OrCel or any other products used to treat
         Hard to Heal Chronic Wounds, but not longer than thirty-six (36) months
         after the term of the Company as set forth in Section 2.5, shall
         engage, directly or indirectly, whether as principal, agent,
         distributor, representative, consultant, employee, partner,
         stockholder, limited partner or other investor or otherwise, in any
         business which is engaged in the development, manufacture,
         commercialization, clinical trial and/or sale of any product used to
         treat Hard to Heal Chronic Wounds, and

                  (2) So long as Ortec is in the business of developing,
         manufacturing and/or selling products used to treat Donor Site Wounds,
         but not longer than thirty-six (36) months after the term of the
         Company as set forth in Section 2.5, engage, directly or indirectly,
         whether as principal, agent, distributor, representative, consultant,
         employee, partner, stockholder,


                                      -24-







         limited partner or other investor or otherwise, in any business which
         is engaged in the development, manufacture and/or sale of any product
         used to treat donor Site Wounds.

                  (ii) Ortec and Hapto. Ortec and Hapto covenant that neither
         they nor any Persons they control shall, during the term of the Company
         as set forth in Section 2.5 and for additional nine (9) months
         thereafter, engage, directly or indirectly, whether as principal,
         agent, distributor, representative, consultant, employee, partner,
         stockholder, limited partner or other investor or otherwise, in any
         business which is engaged in the development, manufacture and/or sale
         of any product which uses peptides to treat wounds which are not Hard
         to Heal Chronic Wounds.

                  However, for avoidance of doubt, nothing in this Agreement
         shall impose any obligation and/or restriction on Hapto use of its
         Fibrin Micro Bead technology for any purposes, except to the
         restriction set forth in section 15.2(a)(i)(1).

         (b) Non-Solicitation. Each of the Members agree not to, during the term
of the Company and one year after, solicit away from the Company any person who
is currently or has been an officer or employee of the Company, with the
exception of any officer or employee who is currently or has been an officer or
employee of such Member, either for such Member's own account or for any
individual, firm or corporation, whether or not such person would commit any
breach of his contract of employment by reason of leaving the service of the
Company, without the prior written approval of each other Member and the Board
of Directors.

         (c) Confidential Information. Each Member acknowledges that such Member
may have access to and the use of confidential materials and information,
know-how and trade secrets concerning the business of the other Members,
including ideas, concepts, techniques, inventions, designs, artwork, trademarks,
patents, trade secrets and other intellectual property rights of the other
Members (collectively, "Company Confidential Information"). Each Member agrees
to hold all such Company Confidential Information in strict confidence and shall
not communicate, divulge or disseminate such Company Confidential Information at
any time except with the prior written consent of the Member to which such
Company Confidential Information relates or as otherwise required by law or
regulation or by legal process. If a Member is requested pursuant to, or
required by, applicable law or regulation or by legal process to disclose any
Company Confidential Information, such Member will use its reasonable best
efforts to provide the Member to which such Company Confidential Information
relates, as promptly as the circumstances reasonably permit, with notice of such
request or requirement and, unless a protective order or other appropriate
relief is previously obtained, the Company Confidential Information subject to
such request may be disclosed pursuant to and in accordance with the terms of
such request or requirement, provided that such Member shall use its best
efforts to limit any such disclosure to the precise terms of such request or
requirement.

         (d) Duty to Update. Each of the Members shall notify the other Member
within seven (7) calendar days, in the event that the Member or any of its
directors or executive officers become aware of an event or action making the
representations and warranties found in Section 13.4 untrue as of such future
date (within the term specified in Section 2.5).


                                      -25-







         Each Member acknowledges that the restrictive covenants contained in
Section 15.2(a), (b), (c) and (d) are a condition of this Agreement and are
reasonable and valid in geographical and temporal scope and in all other
respects. If any court or arbitrator determines that any of the covenants in
Section 15.2(a), (b), (c) and (d), or any part of any of them, is invalid or
unenforceable, the remainder of such covenants and parts thereof shall not
thereby be affected and shall be given full effect, without regard to the
invalid portion. If any court or arbitrator determines that any of such
covenants, or any part thereof, is invalid or unenforceable because of the
geographic or temporal scope of such provision, such court or arbitrator shall
reduce such scope to the minimum extent necessary to make such covenants valid
and enforceable.

         15.3 Merger and Amendments. This Agreement together with the agreements
referred to herein contain the entire agreement among the Members with respect
to the subject matter hereof, and supersede all prior agreements and
understandings, written or oral, between the parties with respect thereto,
whether or not relied or acted upon. No course of conduct pursued or acquiesced
in, and no oral agreement or representation subsequently made, by the Members,
and no usage of trade, shall amend this Agreement or impair or otherwise affect
any Member's obligations, rights and remedies pursuant to this Agreement. No
information included in any public filing of any Member shall be deemed to be
included in or disclosed in this Agreement. No amendment to this Agreement shall
be effective unless made in a writing duly executed by all Members.

         15.4 Headings. The headings in this Agreement are for
convenience only and shall not be used to interpret or construe any provision of
this Agreement.

         15.5 Waiver. No failure of a Member to exercise, and no delay by
a Member in exercising, any right or remedy under this Agreement shall
constitute a waiver of such right or remedy. No waiver by a Member of any such
right or remedy under this Agreement shall be effective unless made in a writing
duly executed by all Members.

         15.6 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement shall be prohibited by
or invalid under such law, it shall be deemed modified to conform to the minimum
requirements of such law or, if for any reason it is not deemed so modified, it
shall be prohibited or invalid only to the extent of such prohibition or
invalidity without the remainder thereof or any other such provision being
prohibited or invalid.

         15.7 Binding. This Agreement shall be binding upon and inure to
the benefit of all Members, and each of the permitted successors and assignees
of the Members.

         15.8 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.

         15.9 Exclusivity of Schedules. Information scheduled on one schedule
shall not be deemed to be scheduled on any other schedule here attached to this
Agreement.

         15.10 Jurisdiction. Each of the parties hereto, acting for itself and
for its respective successors and assigns, without regard to domicile,
citizenship or residence, hereby expressly and irrevocably consents and subjects
itself to the jurisdiction of the United States


                                      -26-







District Court for the Southern District of New York or any New York State court
sitting in New York County, New York in respect of the enforcement of any
service or process, notices and demands of any such court and any other notices
or the communications required or permitted under this Agreement may be made
upon any of them by personal service at any place where they may be found or by
mailing copies of such process, notices, demands and communications by certified
or registered mail, postage prepaid and return receipt requested, to the
addresses referred to in Schedule 1 below.

         Each of the Members hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue in any such action or
proceeding for enforcement of an arbitral award arising out of or in connection
with this Agreement brought in the courts referred to above and hereby further
irrevocably waives and agrees not to plead or claim in any such court that any
such action or proceeding brought in any such court has been brought in an
inconvenient forum. Each of the Members hereby irrevocably waives any right to
demand a jury trial.

         15.11 Governing Law. This Agreement and any controversy or claim
arising out of or relating to this Agreement shall be governed by and construed
and interpreted in all respects in accordance with the laws of the State of New
York applicable to agreements made and to be performed entirely within such
state, including all matters of construction, validity and performance, without
regard to principles of conflict of laws.

         15.12 Permitted Disclosures. The non-disclosure and non-use obligations
contained in Section 15.2(d) do not apply only to the extent that (a) any
receiving Member ("Recipient") is required (i) to disclose information by
applicable law, order, or regulation of a government agency or a court of
competent jurisdiction, or (ii) to disclose information to any government agency
for purposes of obtaining approval to test or market a Company product; or (b)
the Recipient can demonstrate that (i) the disclosed information was public
knowledge at the time of such disclosure to the Recipient, or thereafter became
public knowledge, other than a result of action or omission of the Recipient in
violation hereof; (ii) the disclosed information was rightfully known by the
Recipient (as shown by its written records) prior to the date of disclosure to
the Recipient by the other Member hereunder; (iii) the disclosed information was
disclosed to the Recipient on an unrestricted basis from a source unrelated to
any Member and not under a duty of confidentiality to the other Member; (iv) the
disclosed information is required to be made public in compliance with any
legal, regulatory or stock exchange requirement; (v) the disclosed information,
was independently developed by the Recipient (as shown by its written records)
without use of Company Confidential Information disclosed by the other Member;
or (c) the Recipient desires to disclose summaries of such information solely,
to the extent such summaries relate to the Research Plan, as part of a
prospectus, private placement memorandum or similar disclosure document used in
soliciting funds from investors or lenders, provided that in such case Recipient
shall provide a copy to the other Member and seek its consent to such use, which
consent shall not unreasonably be withheld or delayed. If the Recipient must
disclose the Company Confidential Information as set forth in this Section
15.12, then the Recipient shall notify the other Member in writing prior to any
disclosure of the Company Confidential Information to provide the information
that is to be disclosed to the other Member seventy-two (72) hours in advance of
such disclosure.


                                      -27-







         15.13 Press Releases. Each Member agrees not to disclose any terms or
conditions of, this Agreement, or progress or results arising from the Research
Program, to any Third Party without consulting the other Members prior to such
disclosure. Notwithstanding the foregoing, the Members shall agree upon (i) the
exact text of a press release announcing the Research Program and the formation
of the Company, and (ii) the substance of information that can be used as a
routine reference in the usual course of business to describe the terms of this
transaction, and each Member may disclose such information, as modified by
mutual agreement from time to time, without consulting the other Member. Any
public announcement shall be subject to each Member's prior written approval.
Notwithstanding the foregoing, either Member may disclose the terms of this
Agreement to the extent required to comply with applicable laws, including
without limitation the rules and regulations promulgated by the Securities and
Exchange Commission and the Member intending to disclose the terms of this
Agreement shall provide the nondisclosing Member an opportunity to review and
comment on the intended disclosure. Notwithstanding the foregoing, in the event
of dissolution, upon advance notice to each other Member, any Member may, at its
sole discretion, use, disclose or publicize the results of the Research Program.

         15.14 Licensing of Other Technology. Without derogating from Section
6.1, the Members may at any time, during the term set forth in Section 2.5,
negotiate the terms by which Other Technology may be licensed from the Company
by either of the Members but only with the consent of Hapto and Ortec. Unless
otherwise agreed to, upon dissolution, such Other Technology will be
distributed, assigned and licensed in accordance with Sections 14.3 and 14.5,
respectively (which relates to how Other Technology and Company Technology will
be distributed, assigned and licensed in similar fashion upon dissolution of the
Company).

         15.15 Transactions with Interested Parties. No contract or transaction
between the Company and any Member or any Affiliate of any Member, or between
the Company and any other limited liability company, corporation, partnership,
association, or other organization in which one or more of its managers,
directors or officers, are Directors or officers of the Company, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the Director or officer is present at or participates in the meeting of
the Board or committee which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if:

         (i) The material facts as to such Member's, Affiliate's, Director's or
officer's relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee;

         (b) The material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the Members entitled to
vote thereon, and the contract or transaction is specifically approved in good
faith by vote of the Members; or

         (c) The contract or transaction is fair as to the Company as of the
time it is authorized, approved or ratified by the Board of Directors or the
Members.


                                      -28-






         IN WITNESS WHEREOF, the parties hereto have duly executed this Limited
Liability Company Agreement as of the date first written above.


                                                HAPTO BIOTECH, INC.,
                                                    a Delaware corporation



                                                By:   /s/ Raphael Gorodetsky
                                                    ----------------------------
                                                    Name: Raphael Gorodetsky
                                                    Title: Director


                                                ORTEC INTERNATIONAL, INC.,
                                                    a Delaware corporation



                                                By:     /s/ Ron Lipstein
                                                    ----------------------------
                                                    Name: Ron Lipstein
                                                    Title: CEO / Vice Chairman


                                      -29-







                                   Schedule 1


                                     Members




     Name and Address                      Capital Contribution          Membership Interest
     ----------------                      --------------------          -------------------
                                                                   
     Hapto Biotech Inc.                            $100                         50.00%
     666 Old Country Road,
     Ste. 302
     Garden City, New York  11530
     Attn: [              ]
     Telecopy:  [             ]

     Ortec International, Inc.                     $100                         50.00%
     3960 Broadway
     New York, New York  10032
     Attn: Ron Lipstein
     Telecopy: (212) 740-6999



                               Schedule 1 - Page 1








                                   Schedule 2


                               Board of Directors

                         Hapto Directors:
                                    Andreas Vogler
                                     Rafi Hofstein
                         Ortec Directors:
                                    Ron Lipstein
                           Costa Papastephanou, Ph.D.



                                Science Committee

                         Hapto Science Managers:
                                    Gerard Marx, Ph.D.
                            Raphael Gorodetsky, Ph.D.
                         Ortec Science Managers:
                            Melvin Silberklang, Ph.D.
                            Costa Papastephanou, Ph.D




                               Schedule 2 - Page 1








                                   Schedule 3


                                    Officers



                            Ira Weinstein, President
                         Costa Papastephanou, Secretary




                               Schedule 3 - Page 1








                                   Schedule 4

                                 No Proceedings.


                                      Hapto


                                      None.







                                      Ortec


         None, except proceedings set forth in Ortec's public documents.



                               Schedule 4 - Page 1








                                    EXHIBIT A

                                PROJECTED BUDGET



- -------------------------------------------------------------------------------------------------------------------
                             Quarter 1          Quarter 2          Quarter 3         Quarter 4          Quarter 5
                                                                                                      (two months)
- -------------------------------------------------------------------------------------------------------------------
                                                                                       
Hapto
- -------------------------------------------------------------------------------------------------------------------
Personnel                      48,150             23,825             23,700            20,350              9,930
- -------------------------------------------------------------------------------------------------------------------
Consultants                    14,400              7,600              7,800             5,400              2,800
- -------------------------------------------------------------------------------------------------------------------
Disposables, chemicals
& equipment
                               24,000             10,400              9,600             7,200              4,000
- -------------------------------------------------------------------------------------------------------------------
Travel & meetings
                                3,000                  0              6,000                 0                  0
- -------------------------------------------------------------------------------------------------------------------
Contract R&D - Hadasit
                               93,660             42,436             40,239            28,303             14,890
- -------------------------------------------------------------------------------------------------------------------
GMP Haptide                         0                  0                  0            45,000                  0
- -------------------------------------------------------------------------------------------------------------------
Haptization of sponges
                                    0                  0                  0            86,816                  0
- -------------------------------------------------------------------------------------------------------------------
Ortec
- -------------------------------------------------------------------------------------------------------------------
Personnel                       1,666              5,706             18,803            16,663             16,862
- -------------------------------------------------------------------------------------------------------------------
Disposables and
chemicals                           0                  0              3,750                 0
- -------------------------------------------------------------------------------------------------------------------
Sponges                           500              5,000             10,000                 0                  0
- -------------------------------------------------------------------------------------------------------------------
Biocompatability                    0                  0                  0            35,000             35,000
- -------------------------------------------------------------------------------------------------------------------
Toxicology                          0                  0                  0            45,000             50,000
                                    -                  -                  -            ------             ------
- -------------------------------------------------------------------------------------------------------------------
                              185,376             94,967            119,892           289,732            133,482
                              =======             ======            =======           =======            =======
- -------------------------------------------------------------------------------------------------------------------



                                    Exhibit A







                                    EXHIBIT B

                                 OPERATING PLAN



- ---------------------------------------------------------------------------------------------------------
     Months
                                               1   2   3   4   5   6   7   8   9   10   11   12   13   14

Milestones
- ---------------------------------------------------------------------------------------------------------
                                                       
       1          Optimize Haptide/Collagen                    Go - No Go
                  sponge process                               Decision Point
- ---------------------------------------------------------------------------------------------------------
       2          In vitro studies
- ---------------------------------------------------------------------------------------------------------
       3          Animal studies utilizing                                         Go - No Go
                  rat A and B models                                               Decision Point
- ---------------------------------------------------------------------------------------------------------
       4          Prepare GMP Haptide
                  including process
                  manufacturing and
                  scale-up production
                  development
- ---------------------------------------------------------------------------------------------------------
       5          Prepare GMP Haptized
                  collagen sponge
- ---------------------------------------------------------------------------------------------------------
       6          Conduct pilot safety/tox
                  studies
- ---------------------------------------------------------------------------------------------------------



                                    Exhibit B







                                    EXHIBIT C

                      Hapto Technology Licenses and Patents

         [A complete and accurate list of all the licenses and patents that are
owned or controlled by Hapto and that are related to Hapto Technology and the
Research Program.]
                    Haptide Patent Status as of 31 July 2003


Title of Patent:  NOVEL HAPTIDES / NOVEL HAPTOTACTIC PEPTIDES
Inventors:                                       Gerard Marx; Raphael Gorodetsky
Assignee:                                                                Hadasit



- -----------------------------------------------------------------------------------------------------------------------
Attorney File No        App No            Filing Date       Pub No          Issue Date          Status
- -----------------------------------------------------------------------------------------------------------------------
                                                                                
                          Patent Title: NOVEL HAPTIDES
- -----------------------------------------------------------------------------------------------------------------------
HAP/002           Australia 42031/99        26.May.99                                          Examination
- -----------------------------------------------------------------------------------------------------------------------
                  Canada 2343317            26.May.99                                          Filed
- -----------------------------------------------------------------------------------------------------------------------
                  EPO 99925818.9            26.May.99       1082126                            Examination
- -----------------------------------------------------------------------------------------------------------------------
                  Israel 139604             26.May.99                                          Filed
- -----------------------------------------------------------------------------------------------------------------------
                  Japan 2000-550501         26.May.99       2003-517809        3.Jun.03        Published
- -----------------------------------------------------------------------------------------------------------------------
                  PCT US 99/11517           26.May.99       WO 99/6104         2.Dec.99        Expired
- -----------------------------------------------------------------------------------------------------------------------
                    Patent Title: NOVEL HAPTOTACTIC PEPTIDES
- -----------------------------------------------------------------------------------------------------------------------
                  USA 09/487790             20.Jan.00                                          Official Communication
- -----------------------------------------------------------------------------------------------------------------------
HAP/003           Australia 27024/01        21.Jan.01                                          Examination Requested
- -----------------------------------------------------------------------------------------------------------------------
                  Canada 2397833            21.Jan.01                                          Filed
- -----------------------------------------------------------------------------------------------------------------------
                  EPO 01901357.2            21.Jan.01       1253928            06.Nov.02       Published
- -----------------------------------------------------------------------------------------------------------------------
                  Israel 150458             21.Jan.01                                          Filed
- -----------------------------------------------------------------------------------------------------------------------
                  Japan 2001-553796         21.Jan.01                                          Filed
- -----------------------------------------------------------------------------------------------------------------------
                  PCT IL01/00057            21.Jan.01       WO 01/53324        26.Jul.01       Expired
- -----------------------------------------------------------------------------------------------------------------------
                  USA 10/181187             21.Jan.01                                          Filed
- -----------------------------------------------------------------------------------------------------------------------



                                    Exhibit C









Title of Patent:           LIPOSOMAL COMPOSITIONS COMPRISING HAPTOTACTIC
                           PEPTIDES AND USES THEREOF

Inventors:                                       Gerard Marx; Raphael Gorodetsky
Assignee:                                            HAPTO Biotech Inc. Delaware




- ----------------------------------------------------------------------------------------------------------------------------
 Attorney File No        App No              Filing Date            Pub No            Issue Date           Status
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                          
HAP/005IL            Israel 152609             03.Nov.02                                                 Filed
- ----------------------------------------------------------------------------------------------------------------------------



                                    Exhibit C







                                    EXHIBIT D

                      OrCel Technology Licenses and Patents

         [A complete and accurate list of all the licenses and patents that are
owned or controlled by Ortec and that are related to Ortec Technology and the
Research Program.]

                            Ortec International Inc.

                             Patent Status as 5/3/04



=============================================================================================================
US PATENT #            NAME                           EXPIRATION DATE     COMMENTS
- -------------------------------------------------------------------------------------------------------------
                                                                 
5,282,859              Composite Living Skin          02/01/2011          Granted in 22 countries: Austria,
                       Equivalent                                         Australia, Belgium, Brazil, Canada
                                                                          Denmark, France, Germany,
                                                                          Great-Britain, Greece, Israel,
                                                                          Italy, Japan, Luxembourg,
                                                                          New Zealand, China, Ireland,
                                                                          Russia, Russia, South Africa,
                                                                          Spain, Sweden Switzerland,
                                                                          Thailand, The Netherlands.
- ---------------------- ------------------------------ ------------------- -----------------------------------
6,039,760              Composite Living Skin          02/01/2011
                       Equivalent
- ---------------------- ------------------------------ ------------------- -----------------------------------
6,700,464              Bilayered Collagen Construct   12/28/20
- ---------------------- ------------------------------ ------------------- -----------------------------------
6,638,709              Processes for Making           12/28/20            Applications filed in Europe (EP
                       Cryopreserved Composite                            01 99 4340), Japan and Israel
                       Living Constructs and
                       Products resulting therefrom
=============================================================================================================



                                    Exhibit D

EX-10

                                                                    Exhibit 10.7

         SALES AGENCY AGREEMENT (this "Agreement"), dated as of October 18, 2004
(the "Effective Date"), between Ortec International, Inc., a Delaware
corporation ("Ortec"), and Cambrex Bio Science Walkersville, Inc., a Delaware
corporation ("Agent").

                                    RECITALS

         WHEREAS, Ortec has certain rights in the Territory (as defined below)
in and to Orcel'r', which enable Ortec to make, have made, use and, following
regulatory approval, sell Orcel'r' in the Territory;

         WHEREAS, Agent manufactures Orcel'r' for Ortec pursuant to the Cell
Therapy Manufacturing Agreement, dated as of October 29, 2003, between Agent and
Ortec (as amended, the "Manufacturing Agreement");

         WHEREAS, Agent has and will acquire certain expertise in the marketing
of cell therapy products to customers in the Territory;

         WHEREAS, Ortec desires to engage Agent as Ortec's exclusive agent to,
following regulatory approval, market and sell Orcel'r' on behalf of Ortec in
the Territory;

         NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants hereinafter set forth, Ortec and Agent, intending to be
legally bound, hereby agree as follows:

1. DEFINITIONS.

         "Affiliate" shall mean, with respect to either party, any other
corporation or business entity that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with such
party. For purposes of this definition, the term "control" means direct or
indirect ownership of more than fifty percent (50%) of the securities or other
ownership interests representing the equity voting stock or general partnership
or membership interest of such entity or the power to direct or cause the
direction of the management or policies of such entity, whether through the
ownership of voting securities, by contract, resolution or otherwise.

         "Adverse Event" shall mean any untoward medical occurrence in a patient
administered the Product and which does not necessarily have a causal
relationship with the Product. In the event that the definition of "adverse
event" is modified in the Territory by the FDA or any other applicable
governmental agency, the corresponding definition set forth in this Agreement
shall be modified accordingly.

         "Applicable Sales Tax" shall mean any sales or similar transactional
tax (i) that is (x) imposed by a state or local jurisdiction in the United
States or any other jurisdiction and (y) designated in a written notice by Ortec
to Agent from time to time or (ii) imposed by a jurisdiction not designated by
Ortec and for which Agent is aware that a sales tax applies.








         "Change in Control" of a party shall mean any of the following: (a) the
sale, lease conveyance or other disposition of all or substantially all of its
assets as an entity or substantially as an entity in one or more transactions;
(b) the consummation of any consolidation or merger (i) in which it is not the
continuing or surviving corporation or (ii) pursuant to which its shares would
be converted into cash, securities or other property, in each case other than a
consolidation or merger in which the holders of its shares immediately prior to
the consolidation or merger have, directly or indirectly, at least a majority of
the shares of the continuing or surviving corporation immediately after such
consolidation or merger; (c) any transaction or a series of transactions (as a
result of a tender offer, merger or consolidation) that results in the direct or
indirect acquisition of beneficial ownership of 50% or more of the aggregate
voting power of its capital stock entitled to vote generally in the election of
its directors; or (d) any transaction or a series of transactions that results
in the direct or indirect acquisition by any person, entity or "group" (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934 but excluding for this purpose such party or its subsidiaries or any
employee benefit plan of such party or its subsidiaries which acquires
beneficial ownership of voting securities of such party) of beneficial ownership
of 50% or more of the aggregate voting power of its capital stock entitled to
vote generally in the election of its directors.

         "Competitive Product" means, at the relevant time of determination, any
product used for the treatment of dermatological chronic or acute wound healing
(other than burn wounds).

         "Consent and Agreement" means the Consent and Agreement, dated as of
the date hereof, between Agent and Paul Royalty.

         "FDA" shall mean the United States Food and Drug Administration and any
successor agency thereto.

         "Fully Burdened Costs" shall mean the fully burdened costs of Agent
determined in accordance with Exhibit C hereto.

         "Launch Date" shall mean the later of (i) April 1, 2005 and (ii) the
first day of the calendar month immediately following the expiration of sixty
(60) days following the VLU Approval Date.

         "Lockbox Account" shall mean the lockbox account into which all
payments in respect of the sale of the Products are to be remitted pursuant to
the terms of the Consent and Agreement.

         "Marketing Plan" shall mean, with respect to each therapeutic
indication, the marketing plan developed and agreed to in writing by Agent and
Ortec for such indication in the Territory, as amended by the parties from time
to time, which plan shall include the following items: (i) market and situation
analysis, (ii) Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis,
(iii) promotional message, (iv) sales force requirements (e.g., number required
for adequate coverage, background requirements and required training), (v) core
promotional materials, (vi) symposium schedule, (vii) publication strategy, and
(viii) year-by-year budget for the various marketing activities.

                                       2








         "Net Sales" shall mean the invoice price billed by or on behalf of
Agent to customers in the Territory on sales of Product, less the following
items: (i) discounts or rebates actually allowed in accordance with Section
6(d), (ii) Applicable Sales Tax and (iii) the actual cost of freight, insurance,
handling and transportation charges invoiced to a customer.

         "New Custom Production Suite" shall mean a fully operational Custom
Production Suite (as defined in the Manufacturing Agreement) built at Agent's
facility after the Effective Date with a production capacity capable of
producing enough inventory of Product Units allowing for sales of the applicable
Total US Forecast Amount in each Target Year.

         "Other Capacity Event" shall mean the occurrence or achievement of an
event or series of events (e.g., utilization of existing production capacity at
Agent's facility or development of significant process improvements) which
collectively results in the creation of production capacity at Agent's facility
capable of producing enough inventory of Product Units allowing for sales of the
applicable Total US Forecast Amount in each Target Year.

         "Paul Royalty" shall mean Paul Royalty Fund, L.P. (formerly known as
Paul Capital Royalty Acquisition Fund, L.P).

         "Paul Royalty Transaction Agreements" shall mean the (i) Amended and
Restated Revenue Interests Assignment Agreement, dated as of February 26, 2003,
among Orcel LLC, Ortec and Paul Royalty, (ii) Amended and Restated Security
Agreement, dated as of October 18, 2004, among Orcel, Ortec and Paul Royalty,
and (iii) Pledge Agreement, dated as of February 26, 2003, between Ortec and
Paul Royalty.

         "Person" shall mean any individual, partnership, firm, corporation,
limited liability company, joint venture, association, trust or other entity or
any government or any governmental authority.

         "Pro Rata Manufacturing Fee" shall mean, with respect to any Product
Unit for which Agent has not collected payment within the Allowed Collection
Period (as defined in Section 3(c)(ii)), an amount equal to the quotient of: (i)
the total amount invoiced to Ortec for services provided by Agent under the
Manufacturing Agreement during the calendar month in which such Product Unit was
manufactured and (ii) the total number of Product Units manufactured by Agent
under the Manufacturing Agreement during such calendar month.

         "Product-Related Employee" shall mean any employee of Agent whose
business function (on a full- or part-time basis) involves the performance of
Agent's Marketing Efforts hereunder, including without limitation Product sales
representatives; provided, however, that order entry personnel shall not
constitute a Product-Related Employee.

         "Product Trademark" shall mean the Orcel'r' trademark or such other
trademark as may be selected by Ortec for use on the Products and/or
accompanying logos, trade dress and/or indicia of origin owned by Ortec.

         "Product Unit" shall mean a single patient dose or unit of Product.

                                       3








         "Products" shall mean all existing and future bilayered cellular matrix
products (including, without limitation, Orcel'r' products), in either the fresh
or cryopreserved version, with respect to which Ortec or any Affiliate of Ortec
has the right to commercialize in the United States during the Term for the
treatment of VLU, DFU and for any other therapeutic indication for
dermatological chronic or acute wound healing or any other dermatological
application.

         "Regulatory Approval" shall mean any approvals, licenses, registrations
or authorizations of the FDA, necessary for the commercialization of a Product
in the Territory.

         "Target Year" shall mean each successive period of twelve (12)
consecutive months beginning on the Launch Date and each anniversary thereof
during the Term.

         "Termination Fee" shall mean such payment due to Agent in the event
Ortec exercises its right to terminate this Agreement pursuant to Section
11(a)(7) hereto. The Termination Fee shall be equal to the difference between:

         (A) the present value on the effective date of such termination (the
         "Change in Control Termination Date") of all Commissions that Agent
         shall have been entitled to throughout the remaining term of this
         Agreement if this Agreement shall have expired on the Initial
         Expiration Date and assuming that:

                  (i) the number of Product Units sold by Agent during such
                  period equals the greater of (1) the sum of the Total US
                  Forecast Amounts for each remaining year of the term of this
                  Agreement assuming the Agreement expires on the Initial
                  Expiration Date and (2) the product of (x) the number of
                  Product Units sold by Agent during the twelve month period
                  preceding the Change in Control Termination Date and (y) the
                  remaining term of this Agreement (in years) assuming this
                  Agreement expires on the Initial Expiration Date, and

                  (ii) the price of each Product Unit equals the lower of (x)
                  One Thousand One Hundred Dollars ($1100) and (y) the average
                  price of a Product Unit during the twelve month period
                  preceding the Change in Control Termination Date, and

         (B) the present value on the Change in Control Termination Date of all
         amounts required to have been spent by Agent hereunder in support of
         Agent's Marketing Efforts between the Change in Control Termination
         Date and the Initial Expiration Date (with the required expenditure
         being prorated for any partial year). The discount rate to be applied
         in determining present value for the purposes of this definition shall
         be 10% per annum.

         "Territory" shall mean the United States (including the Commonwealth of
Puerto Rico and other U.S. territories and possessions).

         "Third Party" shall mean any Person other than Agent or Ortec or any of
their Affiliates.

         "TRS Machine" shall mean the Thaw Rinse System machine (including any
second

                                       4








generation or improved versions thereof) developed by Ortec which is to be used
by health care professionals for the preparation of the Product Units for
clinical use.

         "TRS Tray" shall mean the plastic tray (including any second generation
or improved versions thereof) developed by Ortec which is to be used by health
care professionals, in conjunction with a TRS Machine, for the preparation of
the Product Units for clinical use.

         "Unrelated Products" shall mean all products sold by Agent other than
the Products.

         2. REGULATORY APPROVALS. Ortec shall use all commercially reasonable
efforts to obtain Regulatory Approval of Orcel'r' for the treatment of venous
leg ulcers ("VLU") prior to January 1, 2005, and for diabetic foot ulcers
("DFU") prior to December 31, 2006. In addition, Ortec shall use best efforts to
provide Agent with a good faith estimate (and updates thereto) of the expected
Regulatory Approval date of Orcel'r' for the DFU indication (the "Expected DFU
Approval Date").

         3. AGENCY; OBLIGATIONS OF AGENT AND ORTEC.

         (a) Appointment of Agent. Ortec hereby appoints Agent as the exclusive
agent of Ortec in the Territory for (i) promoting the Products and (ii)
soliciting, taking and filling orders for the sale by Ortec of Products.
Accordingly, during the Term neither Ortec nor any Affiliate of Ortec will
directly solicit, take or fill orders for sales of Products in the Territory
(except through the agency established by this Agreement) or appoint any other
sales agent or representative to promote the Products in the Territory or
solicit, take or fill orders for sales by Ortec or any Affiliate of Ortec of
Products in the Territory.

         (b) Agent Obligations.

                  (i) Agent is authorized and, during the Term will use
         commercially reasonable efforts, on behalf of Ortec to solicit, take,
         fill and collect payment for orders for the Products in the Territory
         and to promote and market the Products in the Territory in accordance
         with the applicable Marketing Plans (such activities, "Agent's
         Marketing Efforts"); provided, however, that Agent shall be entitled to
         allocate its efforts between sales of Products and sales of Unrelated
         Products in a reasonable commercial manner consistent with maximizing
         sales of Products in the Territory and with the applicable Marketing
         Plan. Agent's obligations as Ortec's agent hereunder shall include
         using commercially reasonable efforts to maintain appropriate Product
         inventory availability levels, ship Products to fill orders, invoice
         and collect from customers payments for the Products and remit such
         collections to Ortec in accordance with Section 3(c). In addition,
         Agent shall be responsible for developing a Marketing Plan for each new
         Product indication to be marketed by Agent in the Territory under this
         Agreement. Agent shall not in any manner condition sales of the
         Products to any customer on such customer's purchase of Unrelated
         Products sold by Agent and Agent shall not in any manner condition
         sales of Unrelated Products to any customer on such customer's purchase
         of the Products.

                                       5








                  (ii) In addition to Agent's obligations set forth in clause
         (i) above, during the period (the "Initial VLU Marketing Period")
         commencing on the Effective Date and ending on the sixteen month
         anniversary of the date on which Orcel'r' receives Regulatory Approval
         for the treatment of VLU ("VLU Approval Date"), Agent shall spend a
         minimum of US$3,927,900 (representing $4,000,000 minus the aggregate
         amount spent by Agent in support of Agent's Marketing Efforts for the
         VLU indication prior to execution of this Agreement) (the "Initial VLU
         Marketing Amount") in support of Agent's Marketing Efforts for the VLU
         indication; provided, however, that, of the Initial VLU Marketing
         Amount, Agent shall spend a minimum of US$927,900 (representing
         $1,000,000 minus the aggregate amount spent by Agent in support of
         Agent's Marketing Efforts for the VLU indication prior to execution of
         this Agreement) during the period commencing on the Effective Date and
         ending on the four month anniversary of the VLU Approval Date.

                  (iii) During the period commencing on the date that is six
         months prior to the Expected DFU Approval Date and ending on the
         eighteen month anniversary of the date on which Orcel'r' receives
         Regulatory Approval for the treatment of DFU, Agent shall spend a
         minimum of US$1,000,000 (the "Initial DFU Marketing Amount") in support
         of Agent's Marketing Efforts for the DFU indication.

                  (iv) For each full Target Year following the expiration of the
         Initial VLU Marketing Period, Agent shall spend a minimum amount equal
         to (x) 95% of (y) the amount equal to 10% of the Target Revenue Amount
         (as set forth in Exhibit B) applicable to such Target Year (the amount
         represented by clause (y), the "Ongoing Marketing Amount"), in support
         of Agent's Marketing Efforts for Product, provided that any amount
         spent by Agent during any such Target Year in excess of 100% of the
         applicable Ongoing Marketing Amount, which excess expenditure has been
         approved in advance and in writing by Ortec (such approval not to be
         unreasonably withheld or delayed), shall be counted and applied towards
         the calculation of the Ongoing Marketing Amount for the immediately
         following Target Year. For the full calendar months (in the aggregate)
         following the expiration of the Initial VLU Marketing Period but prior
         to the commencement of the immediately following new Target Year, Agent
         shall spend a minimum amount equal to 95% of the product of (A) the
         Ongoing Marketing Amount applicable to such current Target Year and (B)
         the quotient of (i) the number of full calendar months remaining in
         such current Target Year divided by (ii) twelve.

                  (v) The Initial VLU Marketing Amount, the Initial DFU
         Marketing Amount and the Ongoing Marketing Amount shall include all
         internal costs (which shall be Fully Burdened Costs) and all external
         costs (i.e., consisting of payments to Third Parties), actually
         incurred or accrued by or on behalf of Agent in support of Agent's
         Marketing Efforts, including all costs related to the development of
         the Marketing Plan for an indication, and in connection with the
         provision of Reimbursement Support Services (as defined in Section 10).
         Within thirty (30) days after the end of each six-month period of each
         Target Year of the Term, Agent shall provide Ortec with a report
         setting forth in reasonably sufficient detail Agent's calculation of
         the Fully Burdened Costs incurred by Agent in support of Agent's
         Marketing Efforts during the prior six-month period.

                                       6








         (c) Invoicing and Collections. Subject to Section 2 of the Consent and
Agreement, Agent shall comply with the following provisions in connection with
invoicing customers and collecting payments from customers on behalf of Ortec
hereunder:

                  (i) Prior to the eighth business day of each month, Agent
         shall pay to Ortec into the Lockbox Account the following amount in
         respect of invoices issued to customers for Products:

                  (A) any amounts collected during the immediately preceding
                  calendar month from such customers (other than amounts already
                  paid to Ortec into the Lockbox Account pursuant to clause (ii)
                  below) on behalf of Ortec pursuant to such invoices (less
                  Commissions and Transaction Fees payable to Agent as provided
                  in Section 4 and which are attributable to such invoices),
                  minus

                  (B) any amounts invoiced, due and payable by Ortec to Agent
                  pursuant to the Manufacturing Agreement during the immediately
                  preceding calendar month for services and deliverables
                  provided by Agent thereunder, minus

                  (C) any amounts previously paid by Agent to Ortec pursuant to
                  this Section 3(c)(i) which are attributable to invoiced
                  Products subsequently returned by customers due to Product
                  being damaged as a result of a defect in or malfunction of a
                  TRS Machine or TRS Tray, minus

                  (D) any amounts previously paid by Agent to Ortec pursuant to
                  this Section 3(c)(i) which are attributable to invoiced
                  Products manufactured by a Person other than Agent and which
                  are subsequently returned by customers due to Product being
                  defective, minus

                  (E) Transaction Fees attributable to a shipment of Product to
                  a customer in replacement of Product returned by such customer
                  for the reasons described in clause (C) or (D) above, minus

                  (F) shipment fees reimbursed to, or paid for by Agent on
                  behalf of, a customer in connection with a return shipment of
                  Product to Agent for the reasons described in clause (C) or
                  (D) above;

         provided, however, that clauses (C) and (D) shall only apply in cases
         where a refund of the applicable invoiced amount is actually paid by
         Agent to a customer. Agent shall use commercially reasonable efforts to
         collect from customers payments of all invoices. Each such payment to
         Ortec shall be accompanied by a statement reasonably detailing the
         calculation of the Commissions and Transaction Fees deducted from such
         payment.

                  (ii) Other than with respect to returned Products for the
         reasons described in Section 3(c)(i)(C) or 3(c)(i)(D) above, Agent
         shall retain the risk of collectibility of accounts receivable relating
         to all Products sold under this Agreement. As such, with


                                       7








         respect to any accounts receivable not collected by Agent within ninety
         (90) days (the "Allowed Collection Period") after the applicable
         invoice issuance date (excluding any Applicable Sales Tax portion of an
         uncollected invoice, each, an "Overdue Invoice Amount"), Agent shall
         pay to Ortec into the Lockbox Account, on or prior to the last business
         day of the calendar month within which one hundred (100) days (the
         "Overdue Payment Period") after the invoice issuance date falls, the
         following amount (the "Section 3(c)(ii) Amount"): (A) the Overdue
         Invoice Amount less (B) (x) any Commissions and Transaction Fees
         payable to Agent as provided in Section 4 and which are attributable to
         such Overdue Invoice Amount and (y) any Pro Rata Manufacturing Fees
         attributable to such Overdue Invoice Amount, but only to the extent of
         any overdue invoiced amounts payable by Ortec to Agent under the
         Manufacturing Agreement, in which event the amount of such Pro Rata
         Manufacturing Fees not paid into the Lockbox Account shall be deducted
         from and applied to such overdue invoiced amounts payable by Ortec to
         Agent. Prior to the end of the 1st Target Year, the parties shall
         reconsider whether the duration of the Allowed Collection Period should
         be increased, taking into consideration the average period of time (the
         "Average Reimbursement Period") it takes for customers of Products in
         the Territory to obtain reimbursement of the cost of Product from
         third-party payors (e.g., Medicare). If the Average Reimbursement
         Period, which shall be reasonably determined in good faith by Agent
         based on a survey of customers in the Territory, exceeds seventy-five
         (75) days, each of the Allowed Collection Period and the Overdue
         Payment Period shall be increased by such excess number of days;
         provided, however, that the Allowed Collection Period and the Overdue
         Payment Period shall not exceed one hundred twenty (120) days and one
         hundred fifty (130) days, respectively. In the event of the foregoing,
         Agent shall provide Ortec with the results of such survey.

                  (iii) For purposes of this Agreement, Agent shall use the
         following procedures in matching payments received from customers to
         invoices relating to sales of Products hereunder: with respect to any
         payment received from a customer, if more than one invoice is
         outstanding with respect to such customer's account, Agent shall use
         commercially reasonable efforts to match invoices to applicable
         customer payments. If after such efforts Agent is unable to match any
         payment to a particular invoice, Agent shall apply the "first-in,
         first-out" principle in determining the invoice to which such payment
         applies. One or more invoices issued on the same date shall be
         aggregated and treated as a single invoice for purposes of this
         paragraph.

         (d) Reports. Within fifteen (15) days after the end of each month
during the Term, Agent shall provide Ortec with monthly reports relating to
Agent's Marketing Efforts and Product sales, invoices outstanding, collections,
inventories and other matters relevant to this Agreement in respect of such
month as Ortec shall reasonably request from time to time.

         (e) Access to Information; Audit. Agent shall furnish or cause to be
furnished to a mutually agreeable independent certified public accountant
access, during normal business hours and upon reasonable prior notice, to such
information (including all relevant books and records of Agent) as reasonably
requested by Ortec to the extent such information relates to Agent's activities
under this Agreement. Furthermore, Ortec shall have the right (through such
accountant) to review and audit such information (including all relevant books
and records of

                                       8








Agent) to its satisfaction for purposes of determining Agent's compliance with
the terms of this Agreement. Such accountant shall be bound in confidence to
disclose only noncompliance with the terms of this Agreement. If Agent has
underpaid any amount due, or spent less than any minimum marketing expenditures
required to be spent, under this Agreement resulting in a cumulative discrepancy
of more than seven and one-half percent (7.5%), Agent shall reimburse Ortec for
the costs of such audit (with the cost of the audit to be paid by Ortec in all
other cases). If any examination or audit of the records described above
discloses an under- or over-payment of amounts due hereunder, the party owing
any money hereunder shall pay the same to the party entitled thereto within
thirty (30) days after receipt of the written results of such audit pursuant to
this clause (e). Ortec's right to audit under this clause (e) shall be
exercisable no more than once per calendar year during the Term and the one year
period following the end of the Term, in each case in respect of the current or
immediately preceding calendar year.

         (f) Sales Tax. Agent shall comply with the following provisions in
connection with any Applicable Sales Tax that arises in connection with the sale
of Products pursuant to this Agreement. Subject to Section 2 of the Consent and
Agreement, on behalf of Ortec, Agent shall (i) collect Applicable Sales Tax on
behalf of Ortec from customers of Products; (ii) separately set forth any
Applicable Sales Tax on invoices issued to customers of Products; and (iii)
separately designate as "Sales Tax" any Applicable Sales Tax amounts remitted to
Ortec pursuant to Section 3(c). Ortec shall indemnify, hold harmless, and defend
Agent from any and all Losses (as defined below), including any interest or
penalties, with respect to sales taxes that arise in connection with the sale of
Products pursuant to this Agreement; provided, however, that Agent shall not be
entitled to any such indemnification or other action by Ortec with respect to
any portion of such Losses that arise as a result of the failure by Agent to
comply with the provisions of this Agreement or the Consent and Agreement. Ortec
shall be responsible for the timely payment of such sales taxes to the
appropriate governmental authorities and shall provide to Agent evidence that
such sales taxes were timely paid within five (5) days after the earlier of (x)
the date of each such payment and (y) the last date on which each such payment
shall be due and payable without interest or penalty.

         4. COMMISSIONS; TRANSACTION FEE.

         (a) Agent will be entitled to a commission on the Net Sales of each
separate order for Products (the "Commission"). The applicable Commission rate
shall be based on the cumulative aggregate amount of Product Units sold under
this Agreement, as follows:



        --------------------------------------------------------------------------------------
         Cumulative Aggregate Product Units Sold               Commission Rate (of Net Sales)
        --------------------------------------------------------------------------------------
                                                                       
                     0 - 2000 Units                                          40%
        --------------------------------------------------------------------------------------
                   2001 - 14,500 Units                                       35%
        --------------------------------------------------------------------------------------
                  14,501 - 42,000 Units                                      30%
        --------------------------------------------------------------------------------------
                    Over 42,000 Units                                        27%
        --------------------------------------------------------------------------------------


Agent will be entitled to withhold the applicable Commission from amounts paid
by Agent to Ortec with respect to related customer invoices pursuant to Section
3(c).

                                       9








         (b) In addition to Commissions, Agent will be entitled to a Transaction
Fee (as set forth in Exhibit D) per each separate order shipped by Agent for
Products under this Agreement in order to cover Agent's expenses in connection
with order processing, distribution, accounts receivable collection and
accounting. Agent will be entitled to withhold the applicable Transaction Fees
from amounts paid by Agent to Ortec with respect to related customer invoices
pursuant to Section 3(c).


         5. TERM OF AGREEMENT. The term of this Agreement shall commence on the
Effective Date and shall continue until the date that is six (6) years after the
Launch Date (the "Initial Expiration Date"), unless terminated earlier pursuant
to Section 11 below (the "Term"). The Term shall be automatically extended
beyond the Initial Expiration Date for successive periods of one (1) year each
unless and until either Ortec or Agent gives the other written notice, at least
six (6) months prior to the Initial Expiration Date or any anniversary thereof
to which the Term has then been extended, that the notifying party has elected
not to extend the Term beyond the Initial Expiration Date or such anniversary
thereof to which the Term has then been extended, as the case may be.


         6. PROMOTION; PRODUCT SUPPLY; THAW RINSE SYSTEM; PRICE.

         (a) Promotion. Agent will use commercially reasonable efforts to market
and promote the Products in the Territory in accordance with the applicable
Marketing Plan.

         (b) Source. During the Term, pursuant to, but except as provided in,
the Manufacturing Agreement, Agent shall be the exclusive source of Products for
all orders for Products solicited or received by Agent under this Agreement. At
any time during the Term in which Agent is not the exclusive source of Products
for the Territory, Ortec shall use its commercially reasonable efforts to timely
supply Agent with, or cause to have supplied to Agent, its requirements of
Products in connection with this Agreement consistent with maximizing sales of
Products in the Territory.

         (c) TRS Machines; TRS Trays.

                  (i) Prior to November 30, 2004, Ortec shall ensure that a
         minimum of forty (40) TRS Machines are available and ready for prompt
         shipment to Agent. Ortec shall deliver to Agent that number of such TRS
         Machines requested by Agent within seven (7) days of a delivery request
         by Agent. Such TRS Machines shall be distributed by Agent for use by
         customers of Products in the Territory. Prior to December 31, 2005, the
         parties shall agree upon a commercially reasonable plan of distribution
         with respect to the provision of additional TRS Machines to customers
         in the Territory ("TRS Distribution Plan"), taking into consideration
         the number of Product Units purchased by a customer and the cost of the
         TRS Machines at such time. Ortec shall be responsible for manufacturing
         and delivering to Agent TRS Machines pursuant to the TRS Distribution
         Plan. In addition, Ortec shall provide to Agent the operating
         instructions for the TRS Machines. Agent shall be responsible for
         distributing the TRS Machines to customers in the Territory pursuant to
         the TRS Distribution Plan. Ortec shall use all commercially

                                       10








         reasonable efforts to manufacture (or cause to be manufactured), make
         available and deliver to Agent enough TRS Machines in order to satisfy
         customer demand and use of the Products in the Territory.

                  (ii) Prior to November 30, 2004, Ortec shall ensure that a
         minimum of five hundred (500) TRS Trays are available and ready for
         prompt shipment to Agent. Ortec shall deliver to Agent that number of
         such TRS Trays requested by Agent within seven (7) days of a delivery
         request by Agent. Such TRS Trays shall be distributed by Agent for use
         by customers of Products in the Territory. Within sixty (60) days prior
         to each calendar quarter, Agent shall place an order for the quantity
         of TRS Trays Agent will need for distribution to customers during such
         calendar quarter. Ortec shall ensure that the TRS Trays ordered by
         Agent are available and ready for shipment to Agent within thirty (30)
         days after such order is placed. Ortec shall deliver to Agent that
         number of TRS Trays requested by Agent within seven (7) days of each
         such delivery request (but, in no event, sooner than 30 days after the
         original order for such TRS Trays is placed by Agent). Ortec shall use
         all commercially reasonable efforts to manufacture (or cause to be
         manufactured) and deliver to Agent enough TRS Trays in order to satisfy
         customer demand and use of the Products in the Territory, taking into
         the account the fact that the total number of TRS Tray units ordered by
         Agent for distribution during any calendar quarter will likely exceed
         the total number of Product Units sold in the Territory during such
         calendar quarter by approximately ten percent of Product Unit sales.

                  (iii) Title to all TRS Machines shall remain with Ortec and
         shall never vest in Agent or customer. Title to all TRS Trays shall
         remain with Ortec until transferred to the ultimate customer and will
         never vest in Agent. Risk of loss with respect to TRS Machines and TRS
         Trays shall only vest and remain with Agent during those times in which
         Agent has actual physical custody of such items. Ortec shall be solely
         responsible for all costs and expenses in connection with the
         manufacture and delivery (including shipping costs) of TRS Machines and
         TRS Trays under this Section 6(c).

         (d) Price; Price Changes. Ortec shall retain final decision-making
authority with respect to establishing prices for the Products; provided,
however, that Ortec shall consult with Agent in the establishment of such prices
in the Territory and prior to (but not less than ten business days) making any
changes thereto. Agent shall quote and offer prices for the Products to
customers on Ortec's behalf in accordance with the prices established by Ortec,
provided that Agent may offer commercially reasonable discounts or rebates to
customers in the Territory in accordance with such guidelines as may be
negotiated, in good faith, and agreed upon (in writing) from time to time by
Ortec and Agent during the Term (it being understood and agreed that, other than
negotiating such discount guidelines in good faith with Agent, Ortec shall have
no obligation to consent to the allowance of discounts or rebates).

         7. TITLE. In accordance with the Manufacturing Agreement, after
delivery by Agent to the carrier for shipment, title and risk of loss with
respect to Products shall pass to and remain with Ortec until transferred to the
ultimate customer and will never vest in Agent thereafter.

                                       11








         8. ADVERSE EVENT REPORTING.

         (a) Agent shall establish and maintain a system for the receipt,
recording and maintenance of Adverse Event information with respect to the
Products during regular business hours, which shall comply with all applicable
FDA regulations. Agent shall promptly notify the pharmacovigilance
representative of Ortec designated pursuant to Section 8(c) of all Adverse
Events concerning a Product reported to its personnel. Ortec and Agent shall
prepare an Adverse Event reporting form that may be used by the Agent as a basis
for such reports. Agent shall promptly notify Ortec of any complaint received by
Agent in sufficient detail and in sufficient time to allow Ortec to comply with
Adverse Event regulatory requirements imposed upon Ortec with respect to the
Products in the Territory. Ortec shall promptly advise Agent of any regulatory
developments (e.g., proposed recalls, labeling and other registrational dossier
changes, etc.) affecting the Products in the Territory.

         (b) Ortec shall have sole responsibility for notifying the FDA of any
Adverse Events relating to a Product. Agent shall assist Ortec by promptly
obtaining such follow-up information to the initial report from the reporter as
Ortec may reasonably request. Ortec shall hold the master safety database for a
Product.

         (c) All Adverse Event information to be reported to Ortec under this
Section 8 shall be reported as follows:

                      Ortec International, Inc.
                      3960 Broadway
                      New York, NY 10032
                      Attention: Steven Peltier
                      Telephone: (212) 740-6999
                      Facsimile: (212) 740-2570
                      E-Mail: steve.peltier@ortecinternational.com

or to such other address, contact person, telephone number, facsimile number or
e-mail address as may be specified by Ortec in writing to Agent.

         (d) Ortec shall be responsible for making all determinations as to how
Adverse Events concerning a Product will be reported to the FDA.

         9. PRODUCT TRADEMARK; PROMOTIONAL MATERIALS. The Products shall be
promoted and sold in the Territory under the Product Trademark. During the Term,
Ortec hereby grants to Agent a royalty-free license to use the Product Trademark
for the purposes of Agent's promotional activities pursuant to this Agreement
and subject to the terms and conditions of this Agreement. Agent shall utilize
the Product Trademark only in the format(s) approved by Ortec. The parties agree
that Agent shall own all right, title and interest in and to all trade dress,
logos and promotional materials created by, for or under Agent's direction in
connection with this Agreement, including all intellectual property rights
associated therewith (in each case, other than the Product Trademark)
(collectively, the "Promotional Materials"). In the event that Ortec notifies
Agent of its desire to license or acquire all or a portion of such Promotional
Materials from Agent, Ortec and Agent shall negotiate the terms and conditions
of such license or acquisition, as applicable, in good faith; provided, however,
that if the parties

                                       12








cannot agree upon a royalty rate or purchase price, as applicable, within a
reasonable amount of time (but no sooner than sixty days after commencement of
negotiations), such royalty rate or purchase price shall be determined by an
independent third party investment bank, or accounting or consulting firm,
mutually agreed upon by the parties, which entity shall have experience in
valuing intellectual property rights.

         10. REIMBURSEMENT SUPPORT. During the Term, Agent shall provide
reasonable reimbursement (i.e., third-party payment for medical products)
support services to customers of Products in the Territory ("Reimbursement
Support Services"), including reasonable monitoring of customers' claims for
reimbursement.

         11. TERMINATION.

         (a) This Agreement may be terminated as follows:

                           (1) In the event of a material breach of this
                  Agreement by either party, the other party shall have the
                  right to deliver a written notice of default to the defaulting
                  party (a "Default Notice"). In the event any such breach is
                  not cured within 90 days after service of the Default Notice,
                  this Agreement shall terminate if the non-defaulting party
                  delivers a written notice of termination to the defaulting
                  party within 180 days after the expiration of such 90-day cure
                  period. The parties agree that the failure of Agent to meet
                  the minimum spending amounts in accordance with clause (ii),
                  (iii) or (iv) of Section 3(b) shall be deemed a material
                  breach of this Agreement, provided that Agent shall have the
                  opportunity to cure any such breach in accordance with this
                  Section 11(a)(1). If the Manufacturing Agreement is terminated
                  for any reason and Agent is no longer the supplier of the
                  Products for the Territory, in no event shall Agent be deemed
                  to be in breach of this Agreement nor shall Ortec have the
                  right to terminate under Section 11(a)(2), if such breach or
                  failure of Agent to meet certain performance obligations
                  (including, without limitation, Agent's obligations to meet
                  certain Minimum Sales Target Amounts under Section 11(a)(2))
                  is primarily the result of or otherwise attributable to
                  Agent's inability to timely obtain its requirements of Product
                  from any subsequent supplier of Product and/or Ortec in
                  connection with its performance under this Agreement.

                           (2) By Ortec after the twelve (12) month anniversary
                  of the Effective Date and anytime thereafter, upon six (6)
                  month's prior written notice to Agent (which notice may not be
                  sent prior to such twelve month anniversary), if the aggregate
                  sales of Product Units under this Agreement attributable to
                  each of the 1st, 2nd, 3rd, 4th, 5th and 6th Target Years (and,
                  if applicable, each New Target Year (as defined in Exhibit A))
                  do not exceed the Minimum Sales Target Amount set forth in
                  Exhibit A with respect to each such Target Year or New Target
                  Year; provided, however, that (i) in the event that Agent
                  fails to meet the applicable Minimum Sales Target Amount for
                  such a Target Year or New Target Year, Ortec may only exercise
                  its right to terminate this Agreement under this clause (2)
                  prior to the expiration of the sixty (60) day period following
                  end of the applicable

                                       13








                  Target Year or New Target Year (e.g., if the 2nd Target Year
                  expires on March 31, 2007 and Agent fails to meet the Minimum
                  Sales Target Amount for such Target Year, Ortec must exercise
                  its termination right, if at all, prior to or on May 30,
                  2007), except that, if Ortec does not timely receive the sales
                  report described in Section 3(d) in respect of sales for the
                  last month of such Target Year or any other monthly sales
                  report due hereunder by the end of such Target Year, such
                  60-day period shall be extended by one day for each day that
                  such sales report is late, and (ii) Ortec shall have no right
                  to terminate this Agreement under this clause (2) if Agent's
                  failure to meet the applicable Minimum Sales Target Amount is
                  primarily due to (x) the unavailability of enough Product
                  Units to Agent, either from Agent's own production under the
                  Manufacturing Agreement or from third party manufacturing
                  sources arranged by Ortec, provided that this clause (x) shall
                  have no effect (i.e., Ortec shall once again have the right to
                  terminate this Agreement under and in accordance with this
                  clause (2)) in respect of the first full Target Year following
                  the expiration of the six-month period after the completion of
                  a New Custom Production Suite or the occurrence of an Other
                  Capacity Event, whichever is earlier, and each Target Year
                  thereafter, (y) a Force Majeure on the part of Agent or the
                  suspension of Ortec's license or authority to commercialize
                  Orcel'r' for the VLU or DFU indication in the Territory, or
                  (z) Ortec's failure to make available to Agent enough TRS
                  Machines in accordance with the TRS Distribution Plan and/or
                  TRS Trays for the TRS Machines already delivered in order to
                  satisfy customer demand and use of the Products in the
                  Territory, except when such failure on the part of Ortec is
                  due primarily to the failure of Agent to accurately and timely
                  forecast such demand.

                           (3) By Agent, upon six (6) month's prior written
                  notice to Ortec, if the average of the monthly sales of
                  Product Units under this Agreement attributable to any
                  consecutive six-month period during the Term, commencing with
                  the period starting on January 1, 2007, does not equal or
                  exceed 1500 Product Units (such an event, a "Section 11(a)(3)
                  Termination Event"). For the avoidance of doubt, the average
                  of monthly sales for any six-month period shall be calculated
                  by dividing the sum of all Product Units sold by Agent during
                  the applicable six-month period by six; provided, however,
                  that in the event a Section 11(a)(3) Termination Event occurs,
                  Agent may only exercise its right to terminate this Agreement
                  under this clause (3) within 45 days following the expiration
                  of the applicable six-month period.

                           (4) By either party, by written notice to the other
                  party, if the other party shall (i) voluntarily commence any
                  proceeding or file any petition seeking relief under Title 11
                  of the United States Code or any other Federal, state
                  bankruptcy, insolvency, liquidation, receivership or similar
                  law (a "Bankruptcy Law"), (ii) consent to the institution of,
                  or fail to contravene in a timely and appropriate manner, any
                  such proceeding or the filing of any such petition, (iii)
                  apply for or consent to the appointment of a receiver,
                  trustee, custodian, sequestrator or similar official for such
                  party or for a substantial part of its property or assets,
                  (iv) file an answer admitting the material allegations of a
                  petition filed against it in any such

                                       14








                  proceeding, (v) make a general assignment for the benefit of
                  creditors, (vi) take corporate action for the purpose of
                  effecting any of the foregoing or (vii) be subject to the
                  commencement of any involuntary proceeding or the filing of
                  any involuntary petition in a court of competent jurisdiction
                  seeking (A) relief in respect of such party or of a
                  substantial part of its property or assets under any
                  Bankruptcy Law, (B) the appointment of a receiver, trustee,
                  custodian, sequestrator or similar official for such party or
                  for a substantial part of its property or assets or (C) the
                  winding-up or liquidation of such party; and in the case of
                  this clause (vii) such proceeding or petition shall continue
                  undismissed for 120 days or an order or decree approving or
                  ordering any of the foregoing shall continue unstayed and in
                  effect for 60 days.

                           (5) By Agent, by written notice to Ortec, if Ortec
                  has not received Regulatory Approval for Orcel'r' for the VLU
                  indication prior to or on April 1, 2005.

                           (6) By Agent, by written notice to Ortec, if Ortec's
                  license or authority to commercialize Orcel'r' in the
                  Territory is (i) suspended by the FDA for a period in excess
                  of ninety (90) consecutive days or (ii) rescinded by the FDA,
                  in each case other than due to a cause for which Agent is
                  solely responsible and at fault.

                           (7) By either party, upon the occurrence of a Change
                  in Control of Ortec; provided, however, that (i) the
                  terminating party shall provide the other party with at least
                  six month's prior written notice of termination pursuant to
                  this provision, (ii) if Ortec terminates this Agreement
                  pursuant to this provision, Ortec shall pay to Agent the
                  Termination Fee by wire transfer to an account designated by
                  Agent prior to the effective date of such termination, and
                  (iii) Agent may only terminate this Agreement pursuant to this
                  provision if Agent reasonably determines that (x) the
                  acquiring entity or successor to Ortec, as the case may be, is
                  a direct or indirect competitor of Agent or any of its
                  Affiliates or (y) such Change of Control of Ortec has or may
                  otherwise have an adverse financial impact on Agent's and/or
                  its Affiliates' business or operations.

         (b) Upon the termination of this Agreement for any reason, the parties
shall cooperate to effect the transfer to Ortec or Ortec's designee of the
responsibilities of Agent hereunder (including, without limitation, the transfer
by Agent to Ortec or Ortec's designee of inventories of Products and accounts
receivable).

         (c) Upon termination of this Agreement for any reason, Agent shall
promptly provide Ortec with originals or copies of all account and business
information, including, without limitation, (i) customer lists, (ii) account
records, (iii) account balances, (iv) current inventory levels and (v) other
records or information, in each case to the extent relating to the business
conducted under this Agreement, that Ortec may reasonably request.

         (d) Remedies for breach, obligations to make payments (for Products
shipped prior to termination) and Sections 13 through 25 shall survive
termination.

                                       15








         12. ASSIGNMENT. This Agreement and the rights and obligations hereunder
shall not be assignable or transferable, directly or indirectly, by Ortec or
Agent without the prior written consent of the other party (which may not be
unreasonably withheld or delayed), except (i) to an Affiliate of a party so long
as such Affiliate agrees in writing to be bound by the terms of this Agreement
or (ii) in connection with a Change in Control. The assigning party shall remain
primarily liable hereunder notwithstanding any such assignment. Any attempted
assignment in violation hereof shall be void.

         13. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally or sent by prepaid
telex, cable or telecopy, or sent, postage prepaid, by registered, certified or
express mail (return receipt requested) or reputable overnight courier service
and shall be deemed given when so delivered by hand, telexed, cabled or
telecopied, or if mailed, three days after mailing (two business days in the
case of express mail or overnight courier service) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):

                   (i) if to Agent,

                   Cambrex Bio Science Walkersville, Inc.
                   8830 Biggs Ford Road
                   Walkersville, Maryland 21793
                   Fax: (301) 845-6099
                   Attention: N. David Eansor, President of BioProducts
                   Strategic Business Unit

                   with a copy to:

                   Cambrex Corporation
                   One Meadowlands Plaza
                   East Rutherford, New Jersey 07073
                   Fax: (201) 804-9852
                   Attention: Peter E. Thauer, General Counsel

                   (ii) if to Ortec,

                   Ortec International, Inc.
                   3960 Broadway
                   New York, NY 10032
                   Fax: (212) 740-2570
                   Attention: Ron Lipstein, Vice Chairman & CEO

                   with a copy to:
                   Feder Kaszovitz Isaacson Weber Skala Bass & Rhine, LLP
                   750 Lexington Avenue, 23rd Floor
                   New York, NY 10022


                                       16







                   Fax: (212) 888-7776
                   Attention: Gabriel Kaszovitz, Esq.

         14. REPRESENTATIONS AND WARRANTIES; COVENANTS.

         (a) Due Organization, Valid Existence and Due Authorization. Each party
hereby represents and warrants to the other party, as of the date hereof, as
follows: (a) Such party (i) is duly organized and validly existing under the
laws of its place of incorporation or organization; (ii) has full corporate
power and authority and has taken all corporate action necessary to enter into
and perform this Agreement; (b) the execution and performance by such party of
its obligations under this Agreement does not constitute a breach of, or
conflict with, its organizational documents or any material agreement or
arrangement, whether written or oral, by which it is bound; and (c) this
Agreement is its legal, valid and binding obligation, enforceable in accordance
with the terms and conditions hereof (subject to bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other laws (whether
statutory, regulatory or decisional), now or hereafter in effect, relating to or
affecting the rights of creditors generally or by equitable principles
(regardless of whether considered in a proceeding at law or in equity)).

         (b) Consents. Each party hereby represents and warrants to the other
party, as of the date hereof, that all necessary consents, approvals and
authorizations of all governmental authorities and other third parties required
to be obtained by such party in connection with the execution, delivery and
performance of this Agreement have been obtained.

         (c) Compliance with Law. Each party shall comply with all applicable
laws and regulations (including FDA regulations) in the discharge of its
obligations as set forth in this Agreement.

         (d) Product Claims. Neither party shall make any medical or promotional
claim for the Product beyond the scope of the relevant Regulatory Approval(s)
then in effect for the Product.

         (e) Intellectual Property. Ortec hereby represents and warrants that
(i) the use of the Product Trademark in the Territory will not infringe a
trademark of a Third Party, and (ii) subject only to Paul Royalty's rights under
the Paul Royalty Transaction Agreements as such agreements exist on the date
hereof, Ortec has, and will have throughout the remainder of the Term, all
right, power and authority to commercialize the Products in the Territory, and
neither Ortec nor any of its Affiliates is aware of any rights of any Person
that have been or will or may be infringed by the commercialization of the
Products in the Territory. Neither Ortec nor any of its Affiliates has notice
that any Person has claimed that the use or sale in the Territory of the
Products infringes rights of any Person.

         15. INDEMNIFICATION.

         (a) Ortec shall indemnify, hold harmless, and defend Agent from any and
all liability, loss, claims, lawsuits, damages, injury, settlements, costs and
expenses whatsoever (as incurred), including but not limited to court costs and
reasonable attorneys' fees (collectively, the

                                       17








"Losses"), arising out of or related to (i) the Products or the use thereof or
(to the extent relevant to infringement, product liability or similar claims)
distribution thereof, except to the extent such Losses result from a breach by
Agent of the Product Warranties (as defined in Manufacturing Agreement), (ii)
the TRS Machines and TRS Trays, or the use thereof, (iii) any breach by Ortec of
any representation, term, covenant or condition contained in this Agreement or
(iv) any gross negligence or willful misconduct by Ortec in the performance of
its obligations under this Agreement.

         (b) Agent shall indemnify, hold harmless, and defend Ortec from any and
all Losses arising out of or related to (i) any breach by Agent of any
representation, term, covenant or condition contained in this Agreement or (ii)
any gross negligence or willful misconduct by Agent in the performance of its
obligations under this Agreement.

         16. LIMITATION OF DAMAGES. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT
LIMITATION, LOSS OF PROFITS) SUFFERED BY ANY OTHER PARTY, EXCEPT TO THE EXTENT
OF ANY SUCH DAMAGES PAID TO A THIRD PARTY AS PART OF A THIRD-PARTY CLAIM.

         17. NON-COMPETITION. During the Term, Agent shall not sell or
distribute, on behalf of itself or any Third Party, any Competitive Product.

         18. NON-SOLICITATION. Each party agrees not to employ or solicit for
employment (or for use as an independent contractor), any employee of the other
party or its Affiliates during the Term and for a period of two years
thereafter, except with such other party's prior written consent; provided,
however, that, during the six-month period following the termination of this
Agreement, Ortec shall have the right to offer employment to those sales
representatives/agents employed by Agent who are responsible for marketing the
Product and who are not involved in the marketing of any other product on behalf
of Agent.

         19. NO THIRD PARTY BENEFICIARY. None of the provisions herein contained
are intended by the parties, nor shall they be deemed, to confer any benefit on
any Person not a party to this Agreement.

         20. GOVERNING LAW. This Agreement shall be construed and governed by
the laws of the State of New York without regard to the conflicts provisions
thereof.

         21. NO PARTNERSHIP RELATION. The parties hereto intend that no
partnership, joint venture or similar relationship be created pursuant to this
Agreement.

         22. NONWAIVER. Waiver by a party of a breach hereunder by the other
party shall not be construed as a waiver of any succeeding breach of the same or
any other provision. No delay or omission by a party in exercising or availing
itself of any right, power or privilege hereunder shall preclude the later
exercise of any such right, power or privilege by such party. No waiver shall be
effective unless made in writing with specific reference to the relevant
provision(s) of this Agreement and signed by a duly authorized representative of
the party

                                       18








granting the waiver.

         23. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute
any document or documents that may be reasonably requested from time to time by
the other party to implement or complete such party's rights or obligations
pursuant to this Agreement.

         24. ENTIRE AGREEMENT; MODIFICATION; SEVERABILITY. Other than the
Manufacturing Agreement and the Consent and Agreement, there are no other
agreements or understandings, written or oral, between the parties, regarding
this Agreement. This Agreement shall not be modified or amended except by a
written document executed by both parties to this Agreement, and such written
modifications shall be attached to this Agreement. If any term or other
provision of this Agreement is invalid, illegal or incapable of being enforced
by any law or public policy, all other terms and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions hereby is not affected in any manner
materially adverse to either party. The parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which between the parties comes as close
as possible to that of the invalid, illegal or unenforceable provisions.

         25. AUTHORIZATION. The persons executing this Agreement have due power
and authority to so execute this Agreement.

         26. SECTION HEADINGS. The section headings set forth herein are for
purposes of convenience only, and shall have no bearing whatsoever on the actual
content of this Agreement.

         27. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, and all of such counterparts shall
together constitute one and the same agreement.

         28. FORCE MAJEURE. In the event of strikes, lock-outs or other
industrial disturbances, rebellions, mutinies, epidemics, landslides, lightning,
earthquakes, fires, hurricanes or other storms, floods, sinking, drought, civil
disturbances, explosions, acts or decisions of duly constituted municipal, state
or national governmental authorities or of courts of law, as well as
impossibility to obtain equipment, supplies, fuel or other required materials,
in spite of having acted with reasonable diligence, or by reason of any other
causes which are not under the control of the party requesting the abatement of
performance, or causes due to unexpected circumstances which are not possible to
eliminate or overcome with due diligence by such party ("Force Majeure"), the
parties agree that, if either Agent or Ortec finds itself wholly or partially
unable to fulfill its respective obligations under this Agreement by reasons of
Force Majeure, the party affected shall advise such other party in writing of
its inability to perform, giving a detailed explanation of the occurrence of the
event which excuses performance as soon as possible after the cause or event has
occurred. If such notice is given, the performance of the party giving the
notification shall be abated, and any time deadlines shall be extended for so
long as performance may be prevented by Force Majeure; provided, however, that
in the event the suspension of performance continues for more than ninety (90)
days after the date of the occurrence of such

                                       19








Force Majeure, and such failure to perform would constitute a material breach of
this Agreement in the absence of such Force Majeure, the nonaffected party may
terminate this Agreement immediately by written notice to the other party. No
party shall be required to make up any performance that was prevented by Force
Majeure.

         29. SARBANES-OXLEY COMPLIANCE. During the Term, each party shall
reasonably cooperate with the other party (the "Complying Party') in order for
the Complying Party to satisfy its obligations under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 and any rules and regulations thereto, in each case
to the extent such cooperation is related to the transactions contemplated by
this Agreement.

                                       20








         IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first written above.

CAMBREX BIO SCIENCE WALKERSVILLE, INC.


By:   /s/ David Eansor
   -----------------------------
   Title: President, BioProducts
   Name: N. David Eansor


ORTEC INTERNATIONAL, INC.


By:   /s/ Ron Lipstein
   -----------------------------
   Title: Chief Executive Officer/Vice Chairman
   Name: Ron Lipstein

                                       21








                                    EXHIBIT A

                          MINIMUM SALES TARGET AMOUNTS


The Minimum Sales Target Amount for each Target Year shall equal 75% of the
Total US Forecast Amount (as defined below):

         "Total US Forecast Amount" with respect to each Target Year is defined
as:

                  1st Target Year:  10,000 Product Units
                  2nd Target Year:  25,000 Product Units
                  3rd Target Year:  40,000 Product Units
                  4th Target Year:  60,000 Product Units
                  5th Target Year:  80,000 Product Units
                  6th Target Year:  100,000 Product Units

Notwithstanding the foregoing, in the event that (i) Ortec does not receive
Regulatory Approval of Orcel'r' for the VLU indication prior to or on March 31,
2005, (ii) Ortec does not receive Regulatory Approval of Orcel'r' for the DFU
indication by July 1, 2007, (iii) the FDA approved label for the Product
incorporates commercially significant restrictions that could significantly
restrict usage of the Product or the patient population, or (iv) Ortec does not
pay to Agent the Construction Fee (as defined in the Manufacturing Agreement)
when such fee becomes due and payable under the Manufacturing Agreement, the
Minimum Sales Target Amounts set forth above for the Target Years shall no
longer apply, and Ortec and Agent shall renegotiate in good faith and promptly
agree upon a new Minimum Sales Target Amount for each such Target Year.

If this Agreement has not been terminated prior to the end of the ninth month of
the 6th Target Year or of each succeeding Target Year thereafter, and is
expected to remain in effect during the Target Year following each such year
(starting with the 7th Target Year, each a "New Target Year"), the parties shall
promptly negotiate in good faith and agree upon a Minimum Sales Target Amount
for each New Target Year, taking into account the then most recent sales and
forecast information available to the parties; provided, however, that the
Minimum Sales Target Amount for each New Target Year shall not be less than
75,000 Product Units.

                                       22








                                    EXHIBIT B

                              TARGET REVENUE AMOUNT

"Target Revenue Amount" with respect to each applicable Target Year is defined
as the amount equal to 75% of the product of (i) the Total US Forecast Amount
for such Target Year and (ii) the lower of (x) One Thousand One Hundred Dollars
($1100) and (y) the average price of a Product Unit during the prior Target
Year.








                                    EXHIBIT C

                              FULLY BURDENED COSTS

Fully Burdened Cost will be unique for each Product-Related Employee but may
include the following:

     o Base Salary
     o Bonus/Commission
     o Benefits
       o Charged as a Fixed Percentage of Base + Bonus/Commission
       o Fixed Percentage set by Agent's ultimate parent entity and
         adjusted on an annual basis
       o For 2004 the Fixed Percentage is 35%
     o Travel and Entertainment
     o Human Resources support - $4,000 per Product-Related Employee
     o Training
     o Office Supplies
     o Telephone
     o Auto

* Fully Burdened Costs shall be prorated for any Product-Related Employee who
allocates his/her time between sales of Products and sales of Unrelated
Products.








                                    EXHIBIT D

                                 TRANSACTION FEE

The Transaction Fee amount applicable to an order of Products shall be
calculated based upon the (i) the size (i.e., small box or large box) and (ii)
number of boxes required for shipment of an order. A small box holds 1 to 3
Product Units. A large box holds 4 to 10 Product Units.

The Transaction Fee associated with each box type is as follows:




- ----------------------------------------------------------------------------------------------------
                                                                Small Box                 Large Box
- ----------------------------------------------------------------------------------------------------
                                                                                       
Raw Materials (Box, Dry Ice, etc)                                $ 22.91                     $ 32.34
- ----------------------------------------------------------------------------------------------------
Freight                                                          $ 30.25                     $ 43.89
- ----------------------------------------------------------------------------------------------------
Labor                                                            $ 25.98                     $ 25.98
- ----------------------------------------------------------------------------------------------------
Total                                                            $ 79.14                    $ 102.21
- ----------------------------------------------------------------------------------------------------


Example: If a customer submits an order for 12 Product Units, the Transaction
Fee applicable to such order shall equal $181.35. The calculation is as follows:

                             $79.14  (Small Box containing 2 Product Units)

                           + $102.21 (Large Box containing 10 Product Units)
                           -------------------------------------------------

                             $181.35 (Total Transaction Fee/Order)

* The parties acknowledge and agree that Agent has had no participation or
involvement in the design of the Product package or the shipping/stability
studies conducted with respect to such packaging. In addition, the parties
acknowledge and agree that the Transaction Fee has been determined based upon
information provided to Agent by Ortec relating to dry ice requirements and
stability. In the event that such information is incorrect, the Transaction Fee
shall be promptly adjusted in accordance with the following paragraph.

** On a quarterly basis during the first year after Regulatory Approval of the
VLU indication and on an annual basis thereafter, Agent shall evaluate the
actual costs of raw materials, freight and labor associated with order
entry/processing and distribution (including obtaining Product Units from
inventory, packaging, labeling and shipment) of Products hereunder. The
Transaction Fee shall be adjusted upwards or downwards in order to take into
account any increase or decrease, respectively, of such actual costs (in the
aggregate). Agent shall provide Ortec with written notice of any such
adjustments at least 30 days prior to implementation thereof, together with
reasonable data supporting any such increase or decrease.

EX-10

                                                                    Exhibit 10.8


                                 AMENDMENT NO. 1
                                       TO
                      CELL THERAPY MANUFACTURING AGREEMENT

     AMENDMENT NO. 1 (this "Amendment"), dated as of October 18, 2004, to that
certain CELL THERAPY MANUFACTURING AGREEMENT (the "Agreement"), dated as of
October 29, 2003, between Cambrex Bio Science Walkersville, Inc., a Delaware
Corporation ("CBSW"), and Ortec International, Inc., a Delaware corporation
("Ortec") (each of CBSW and Ortec, a "Party" and, collectively, the "Parties").
Defined terms not otherwise defined herein shall have the meanings ascribed to
them in the Agreement.

                                    RECITALS

         WHEREAS, pursuant to the Agreement, subject to certain limitations,
CBSW agreed to manufacture, and Ortec agreed to purchase from CBSW, Ortec's
commercial requirements for Product; and

         WHEREAS, the Parties desire to amend the Agreement to reflect, among
other things, the fact that CBSW has agreed to distribute Product in the United
States on behalf of Ortec pursuant to the Sales Agency Agreement, dated as of
the date hereof, between Ortec and CBSW (the "Sales Agency Agreement").

         NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants hereinafter set forth, CBSW and Ortec hereby agree as
follows:

          1. Section 1.30 of the Agreement pertaining to the definition of
"Phase I" is hereby amended to change the reference to "Section 2.6" to "Section
2.7".

          2. Section 2.5 (Manufacture by CBSW) of the Agreement pertaining to
the delivery obligations of CBSW during the Production Term for Phase I is
hereby amended such that, in addition to CBSW's obligation to deliver Product to
Client or to a third party at Ortec's direction, CBSW shall be responsible for
delivering Product directly to customers of the Product in the United States
pursuant to and in accordance with the Sales Agency Agreement.

          3. Section 3.3.2 (Custom Production Suite) of the Agreement pertaining
to the amount to be contributed by Ortec for the construction of the Custom
Production Suite is hereby amended to lower the maximum amount of construction
and validation costs for which Ortec shall be responsible (the "Construction
Fee") to 50% of such costs (up to a maximum contribution of $1,000,000) from 50%
of such costs (up to a maximum contribution of $2,500,000). The Construction Fee
shall remain payable in five installments as set forth in Section 3.3.2 of the
Agreement.

          4. Section 3.4 (Manufacture by CBSW) of the Agreement pertaining to
the delivery obligations of CBSW during the Production Term for Phase II is
hereby amended such that, in addition to CBSW's obligation to deliver Product to
Client or to a third party at Ortec's











direction, CBSW shall be responsible for delivering Product directly to
customers of the Product in the United States pursuant to and in accordance with
the Sales Agency Agreement.

          5. For the avoidance of doubt, each reference to Ortec's commercial
requirements for Product in Section 6.1 (Requirements) of the Agreement shall be
deemed to include all Products to be sold by CBSW on behalf of Ortec pursuant to
the Sales Agency Agreement. Notwithstanding anything to the contrary contained
in Section 6.1 or any other Section of the Agreement, in the event that CBSW
advises Ortec that CBSW will be unable to, or is in fact unable to, supply
Ortec's commercial requirements of Product (such an event, a "Product
Shortage"), and such Product Shortage is primarily due to production capacity
restraints and occurs prior to the completion of a New Custom Production Suite
(as defined in the Sales Agency Agreement) or the occurrence of an Other
Capacity Event (as defined in the Sales Agency Agreement), Ortec shall not have
the right to order and purchase the remaining quantity of its commercial
requirements for Product from sources other than CBSW unless CBSW fails to
remedy such Product Shortage within the six-month period following such Product
Shortage. In addition, after the completion of a New Custom Production Suite or
the occurrence of an Other Capacity Event, in the event that a Product Shortage
occurs primarily as a result of a significant increase in customer demand for
Product, Ortec shall not have the right to order and purchase the remaining
quantity of its commercial requirements for Product from sources other than CBSW
unless CBSW fails to remedy such Product Shortage within the six-month period
following such Product Shortage; provided, however, that, if the Custom
Production Suite has previously been built and Ortec has paid to CBSW the
associated Construction Fee, CBSW shall be solely responsible for all costs
associated with implementation of such remedy (e.g., construction costs
associated with expansion of Production Suite), other than the fees described in
paragraphs 3, 4, 6, 7, 8, 9 and 10 of Schedule 11.1.

          6. Section 6.2 (Forecasting and Order Process) of the Agreement, to
the extent pertaining to (i) Ortec's obligation to supply CBSW with forecasts
for its requirements of commercial Product in the United States and (ii) Ortec's
obligations with respect to the submission of binding orders for Ortec's
requirements of commercial Product in the United States, is hereby deleted.
Hereafter, Ortec shall only be obligated to provide forecasting and otherwise
act pursuant to Section 6.2 of the Agreement to the extent such forecasting and
other obligations relate to the manufacture of Product by CBSW for distribution
outside the United States ("Non-US Distributed Products"). Instead of rolling
12-month forecasts, Ortec shall provide rolling 24-month forecasts of its
monthly requirements of Non-US Distributed Products with the first forecasted
month being at least 120 days in advance of such forecast date. CBSW shall,
within 60 days after receiving each such forecast, notify Ortec if any portion
of the first 12 months of each such forecast (each, a "12-Month Forecast")
exceeds CBSW's production capacity less CBSW's requirements of US Distributed
Products (as defined below) (but not including previous forecasted amounts not
timely objected to by CBSW in connection with previous 12-Month Forecasts).
Subject to CBSW's production capacity, CBSW shall be responsible for forecasting
CBSW's requirements of commercial Product to be sold by CBSW, on behalf of
Ortec, to customers in the United States pursuant to the Sales Agency Agreement.
Subject to CBSW's obligation to notify Ortec if any portion of a 12-Month
Forecast exceeds CBSW's production capacity as described above, CBSW shall only
be obligated to deliver Non-US Distributed Products to Ortec up to CBSW's
production capacity amount, less the amount of


                                       2








Product required by CBSW for sale, on behalf of Ortec, to customers in the
United States pursuant to the Sales Agency Agreement ("US Distributed
Products"). Subject to Ortec paying to CBSW the Construction Fee when such fee
becomes due and payable under the Agreement, to the extent that CBSW's supply
obligations with respect to US Distributed Products are made subject to CBSW's
production capacity, with respect to each full Target Year (as defined in the
Sales Agency Agreement) commencing after the expiration of the six-month period
after the completion of a New Custom Production Suite or the occurrence of an
Other Capacity Event, whichever is earlier (but no sooner than 2006), such
limitation shall only apply to the extent CBSW's requirements of US Distributed
Products for a particular Target Year exceed an amount equal to (x) 75% of the
Total US Forecast Amount (as defined in the Sales Agency Agreement) applicable
to such Target Year, less (y) the number of Non-US Distributed Products
delivered to Ortec during such Target Year.

          7. Section 6.3 (Packaging and Shipping) of the Agreement (other than
the first sentence thereof), to the extent pertaining to the Parties'
obligations in connection with the shipment of US Distributed Products, is
hereby deleted. Hereafter, Product intended for distribution to customers in the
United States under the Sales Agency Agreement shall be shipped by CBSW, on
behalf of Ortec, FCA (Incoterms 2000), delivered at the Facility by CBSW to a
common carrier chosen by CBSW. Title and risk of loss of all Products shall pass
to Ortec upon delivery by CBSW to the carrier at the Facility. It is understood
and agreed by the Parties that the shipping costs in connection with each
shipment of US Distributed Product constitutes a part of the Transaction Fee (as
defined in the Sales Agency Agreement) associated with each customer order of
such Product pursuant to the Sales Agency Agreement.

          8. The provision to Ortec of required shipping documentation and the
shipment approval process as set forth in Section 7.2 (Approval of Shipment) of
the Agreement shall also apply to shipments of US Distributed Product, except
that the Acceptance Period with respect to US Distributed Product shall be
shortened from 15 days to 7 days. Notwithstanding Section 7.2.3, if no
Disapproval Notice with respect to a shipment of US Distributed Product is
received by CBSW within such 7-day period, such shipment shall be deemed
approved by Ortec.

          9. Section 11.7 (Method of Payment) of the Agreement is hereby amended
such that, in addition to payment by check, wire transfer or money order,
payments due to CBSW under the Agreement (or a portion thereof) may be made in
the form of a deduction by CBSW of the amounts payable to Ortec pursuant to
Section 3(c)(i) of the Sales Agency Agreement or pursuant to Section 2 of the
Consent and Agreement, dated as of the date hereof, between Paul Royalty Fund,
L.P. and CBSW.

          10. Section 12.5 (Publicity) of the Agreement is hereby amended such
that CBSW shall be permitted to refer to, display and use Ortec's name and
trademarks pursuant to and in accordance with the Sales Agency Agreement.

          11. Section 16.2.4.2 of the Agreement is hereby amended to delete the
phrase "below in Section 16.2.4.5(d)" and to replace such phrase with "Schedule
3.5.1".


                                       3








          12. Commencing with calendar year 2006 and thereafter, CBSW shall not,
without Ortec's prior written consent, invoice Ortec for Products manufactured
and released more than 3 months in advance of the first day of the calendar
month in which such Product is forecasted to be sold, as shown in the applicable
annual U.S. sales forecast of Product (expressed as a number of Product units)
which shall be mutually agreed upon by the Parties from time to time. CBSW shall
invoice Ortec for each such Product only after a period of 3 months has passed
from the date such Product was released. For purposes of this Section 12, the
invoice amount attributable to each such Product shall be equal to the quotient
of: (i) the total amount that would have been invoiced to Ortec for services
provided by CBSW under the Agreement during the calendar month in which such
Product was manufactured had it not been for the prohibition contained in this
Section 12 and (ii) the total number of Product units manufactured by CBSW
during such calendar month.

          13. Effective simultaneously with the termination of the Sales Agency
Agreement, this Amendment (other than Sections 1 and 11) shall become null and
void and be of no further force and effect. Thereafter, the rights and
obligations of the Parties under the Agreement shall be governed solely by the
terms and condition set forth therein, without giving effect to any of the
provisions contained in this Amendment (other than Sections 1 and 11). As such,
for the avoidance of doubt, upon termination of the Sales Agency Agreement,
Ortec shall once again be responsible for paying (to the extent not already paid
or credited) 50% of the Custom Production Suite construction costs up to a
maximum amount of $2,500,000 (and not $1,000,000); provided, however, that if
(x) CBSW terminates the Sales Agency Agreement pursuant to Section 11(a)(3) or
11(a)(7) thereof or (y) Ortec terminates the Sales Agency Agreement pursuant to
Section 11(a)(1) or 11(a)(2) thereof, Ortec shall only be responsible for paying
up to a maximum amount of $1,000,000 (and not $2,500,000).

          14. This Amendment constitutes the entire agreement of the Parties
with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral and written, among the Parties with respect to the
subject matter hereof.

          15. This Amendment will be governed by and construed in accordance
with the internal laws of the State of Maryland, without giving effect to any
conflicts of laws provisions thereof that would cause the application of the
laws of a different jurisdiction. The second sentence of Section 18.6 of the
Agreement is hereby amended to delete the second sentence thereof and to replace
such sentence with the following sentence: "All suits, disputes, actions, and
other legal proceedings related to or arising out of this Agreement, will be
brought in the state or federal courts located in New York City, New York."

          16. This Amendment may be executed in counterparts, each of which will
be deemed an original, but all of which together will constitute one and the
same instrument.

          17. This Amendment may not be amended or modified, and no provisions
hereof may be waived, without the written consent of the Parties.

          18. Each provision of this Amendment will be treated as a separate and
independent clause, and the unenforceability of any one clause will in no way
impair the enforceability of any

                                       4








of the other clauses herein. If one or more of the provisions contained in this
Amendment will for any reason be held to be excessively broad as to scope,
activity, subject or otherwise, so as to be unenforceable at law, such provision
or provisions will be construed by the appropriate judicial body by limiting or
reducing it or them so as to be enforceable to the maximum extent compatible
with the applicable law as it will then appear.








                                       5










         IN WITNESS WHEREOF, the Parties have executed this Amendment as of the
day and year first above written.

   WITNESS:                                 ORTEC INTERNATIONAL, INC.


   By: /s/ Alan Schoenbart                  By: /s/ Ron Lipstein
     -------------------------                ----------------------------------
                                             Ron Lipstein
                                             Vice Chairman, Board of Directors


   WITNESS:                                 CAMBREX BIO SCIENCE
                                            WALKERSVILLE, INC.


   By: /s/ David W. Smith                   By: /s/ David Eansor
     -------------------------                ----------------------------------
                                             N. David Eansor
                                             President
                                             BioProducts Strategic Business Unit









                                       6

EX-10

                                                                    Exhibit 10.9


                                LICENSE AGREEMENT

         LICENSE AGREEMENT (this "Agreement") dated as of the 18th day of
October, 2004 (the "Effective Date"), by and among ORCEL LLC ("Orcel") and ORTEC
INTERNATIONAL INC. ("Ortec"; Orcel and Ortec being herein individually called a
"Licensor" and collectively called the "Licensors") and CAMBREX BIO SCIENCE
WALKERSVILLE, INC. (the "Licensee").

                              W I T N E S S E T H:

         WHEREAS, Ortec and the Licensee are parties to a Cell Therapy
Manufacturing Agreement, dated as of October 29, 2003, as amended by Amendment
No. 1 to Cell Therapy Manufacturing Agreement dated as of October 18, 2004 (as
so amended and as the same may be further amended from time to time, the
"Manufacturing Agreement"), pursuant to which the Licensee has agreed, among
other things, to produce a product containing human cells intended for
therapeutic use in humans;

         WHEREAS, concurrently with the execution and delivery hereof, Ortec and
the Licensee are entering into a Sales Agency Agreement, dated as of October 18,
2004 (as the same may be amended from time to time, the "Sales Agreement"),
pursuant to which the Licensee has agreed to be Ortec's exclusive agent to
market and sell Orcel'r' on behalf of Ortec;

         WHEREAS, concurrently with the execution and delivery hereof, Orcel,
Ortec and the Licensee are entering into a Security Agreement dated as of
October 18, 2004 (as the same may be amended from time to time, the "Security
Agreement"), pursuant to which Orcel and Ortec grant the Licensee a security
interest in the Collateral (as defined in the Security Agreement) to secure the
Licensors' obligations to the Licensee under the Manufacturing Agreement, the
Sales Agreement and this Agreement;

         WHEREAS, Orcel and Ortec are parties to a Management and Licensing
Agreement dated as of August 29, 2001 (as the same may be amended from time to
time, the "Management and Licensing Agreement") pursuant to which, among other
things, Orcel has licensed certain intellectual property rights to Ortec; and

         WHEREAS, in connection with the performance of its duties under the
Manufacturing Agreement and the execution of the Sales Agreement, the Licensee
desires to obtain from the Licensors, and the Licensors are willing to grant, an
exclusive license under the Licensed Intellectual Property (as defined below) in
the Territory (as defined below) upon the terms and conditions set forth below.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:

                          SECTION 1. DEFINITIONS, ETC.

         1.1 Definitions. For the purpose of this Agreement, the following words
and phrases shall have the meanings set forth below:


                                       1










         1.1.1 "Affiliate" means, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person and, in the case of
any natural Person, any other Person related by blood or marriage or the legal
representative of any such Person. For purposes hereof, the term "control"
(including, with its correlative meanings, the terms "controlled by" and "under
common control with", with respect to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person (whether through the ownership of voting securities,
by contract or otherwise); provided, that in each event in which any Person owns
directly or indirectly more than 50% of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
more than 50% of the ownership interest of any other Person, such Person shall
be deemed to control such corporation or other Person.

         1.1.2 "CCS Technology" means the proprietary technology set forth and
described on Exhibit A hereto.

         1.1.3 "Confidential Information" has the meaning provided in Section
7.1 hereof.

         1.1.4 "Consent and Agreement" means the Consent and Agreement dated as
of October 18, 2004 between PRF and the Licensee, as the same may be amended
from time to time.

         1.1.5 "Control" means, with respect to any Licensed Intellectual
Property, the possession of the ability to grant a license or sublicense with
respect thereto as provided for herein without violating the terms of any
agreement with, or the rights of, any third Person.

         1.1.6 "Know-How" means any and all non-patented proprietary technology
and information necessary for the practice of the Patents included in the
Licensed Intellectual Property, and owned or Controlled by one or both Licensors
or their Affiliates.

         1.1.7 "Launch Date" shall have the meaning provided in the Sales
Agreement.

         1.1.8 "Licensed Intellectual Property" means, relating to the Licensed
Products, the CCS Technology, all inventions (whether patentable or unpatentable
and whether or not reduced to practice), all improvements thereto, and all
patents, patent rights, patent applications and invention disclosures, together
with all reissuance, continuations, continuations-in-part, names, service names,
including all goodwill associated therewith, and copyrights and all applications
and registrations for any of the foregoing, and all Know-How.

         1.1.9 "Licensed Products" means any and all "Products" as such term is
defined in the Sales Agreement.

         1.1.10 "Licensee Improvements" means any and all improvements to the
Licensed Intellectual Property or any Licensed Product discovered or developed
by the Licensee during the Term (as defined in Section 12.1 hereof) of this
Agreement.

                                       2









         1.1.11 "Licensor Improvements" means any and all improvements to the
Licensed Intellectual Property or any Licensed Product discovered or developed
by a Licensor or both Licensors during the Term of this Agreement.

         1.1.12 "Ortec/Orcel License Agreement" means the Exclusive License
Agreement dated as of August 29, 2001 between Ortec and Orcel, as the same may
be amended from time to time.

         1.1.13 "Patents" means, relating to the Licensed Products, all patents,
patent applications and patent disclosures, together with all reissuance,
continuations, continuations-in-part, revisions, extensions, and reexaminations
thereof relating to the Licensed Products, composition of matter, formulation,
or methods of manufacture or use thereof, including, without limitation, those
identified on Exhibit B hereto.

         1.1.14 "Person" means any individual, estate, trust, partnership, joint
venture, association, firm, corporation or company, or governmental body, agency
or official, or any other entity.

         1.1.15 "PRF" means Paul Royalty Fund, L.P.

         1.1.16 "PRF Security Agreement" means the Amended and Restated Security
Agreement dated as of October 18, 2004 among Ortec, Orcel and PRF, as the same
may be amended from time to time.

         1.1.17 "Territory" means the United States of America (including the
Commonwealth of Puerto Rico and other U.S. territories and possessions).

         1.1.18 "Trademarks" means each Licensor's registered and unregistered
tradenames and/or trademarks that relate to the Licensed Products, whichever is
appropriate.

         1.1.19 "U.S. Dollars" and the sign "$" each means lawful currency of
the United States of America.

         1.2 Manufacturing Agreement and Sales Agreement. Copies of the
Manufacturing Agreement and the Sales Agreement, as in effect on the date
hereof, are attached hereto as Exhibit C and Exhibit D, respectively. To the
extent applicable to this Agreement, all financial terms of Section 11 of the
Manufacturing Agreement, the terms of Section 15 of the Sales Agreement and all
financial terms of Sections 3(c) and 4 of the Sales Agreement, in each case as
amended from time to time, are hereby incorporated herein by reference and shall
apply to this Agreement, whether or not the Manufacturing Agreement or the Sales
Agreement shall be in effect at any particular time. However, this Agreement is
separate and distinct from the Manufacturing Agreement and the Sales Agreement
and, in the event of any termination or suspension of the Manufacturing
Agreement and/or the Sales Agreement, this Agreement shall continue in full
force and effect.




                                       3










                                SECTION 2. GRANT

         2.1 Grant of License. Upon the terms and subject to the conditions
herein stated, each Licensor hereby grants the Licensee as of the Effective
Date:

                  (a) an exclusive license (and/or sublicense, as applicable) to
         make (including the right to practice methods, processes and
         procedures), have made, manufacture, package, use, distribute, market
         and sell the Licensed Products in the Territory under the Licensed
         Intellectual Property now or hereinafter owned or licensed by such
         Licensor, including, without limitation, Patent applications and
         Patents now or hereinafter acquired, covering the Licensed Products
         and/or any process relating to the manufacture of the Licensed
         Products; and

                  (b) an exclusive license (and/or sublicense, as applicable) to
         use the Trademarks in the Territory.

         2.2 Management and Licensing Agreement. The rights granted to the
Licensee pursuant to Section 2.1 above include, but are not limited to, a
license by Orcel and a sublicense by Ortec of certain "Intellectual Property"
and "Trademarks" (as such terms are defined in the Management and Licensing
Agreement) and other rights which previously have been licensed on an exclusive
basis by Orcel to Ortec under the Management and Licensing Agreement. To the
extent that the rights granted to the Licensee under Section 2.1 above are
included in such exclusive license to Ortec under the Management and Licensing
Agreement, (a) the exclusive license by Orcel to the Licensee under Section 2.1
hereof and the exclusive license by Orcel to Ortec under the Management and
Licensing Agreement shall be deemed to be co-exclusive and (b) all of the rights
so licensed to Ortec on a co-exclusive basis are included in the exclusive
sublicense by Ortec to the Licensee pursuant to Section 2.1 above. The parties
hereto agree that this Agreement is a permitted license or sublicense, as
applicable, under the terms of the Management and Licensing Agreement and does
not constitute a default by Orcel or Ortec under any of the provisions thereof.
Orcel and Ortec agree that they will not modify, amend or terminate the
Management and Licensing Agreement without the prior written consent of the
Licensee, which (for any modification, amendment or termination approved by PRF)
shall not be unreasonably withheld unless such modification, amendment or
termination could reasonably be expected to have an adverse effect on the
Licensee's rights hereunder or under the Manufacturing Agreement, the Sales
Agreement, the Security Agreement or the Consent and Agreement, in which case
the Licensee may withhold its consent without regard to whether such withholding
is reasonable. The provisions of this Section 2.2 clarify but do not expand the
license grant contained in Section 2.1 above.

         2.3 Ortec/Orcel License Agreement. The rights granted to the Licensee
pursuant to Section 2.1 above include, but are not limited to, a license by
Ortec and a sublicense by Orcel of certain "Licensed Patent Rights" (as defined
in the Ortec/Orcel License Agreement) and other rights which previously have
been licensed on an exclusive basis by Ortec to Orcel under the Ortec/Orcel
License Agreement. To the extent that the rights granted to the Licensee under
Section 2.1 above are included in such exclusive license to Orcel under the
Ortec/Orcel License Agreement, (a) the exclusive license by Ortec to the
Licensee under Section 2.1 hereof and the exclusive license by Ortec to Orcel
under the Ortec/Orcel License Agreement shall be deemed to


                                       4









be co-exclusive and (b) all of the rights so licensed to Orcel on a co-exclusive
basis are included in the exclusive sublicense by Orcel to the Licensee pursuant
to Section 2.1 above. The parties hereto agree that this Agreement is a
permitted license or sublicense, as applicable, under the terms of the
Ortec/Orcel License Agreement and does not constitute a default by Orcel or
Ortec under any of the provisions thereof. Orcel and Ortec agree that they will
not modify, amend or terminate the Ortec/Orcel License Agreement without the
prior written consent of the Licensee, which (for any modification, amendment or
termination approved by PRF) shall not be unreasonably withheld unless such
modification, amendment or termination could reasonably be expected to have an
adverse effect on the Licensee's rights hereunder or under the Manufacturing
Agreement, the Sales Agreement, the Security Agreement or the Consent and
Agreement, in which case the Licensee may withhold its consent without regard to
whether such withholding is reasonable. The provisions of this Section 2.3
clarify but do not expand the license grant contained in Section 2.1 above.

                              SECTION 3. ROYALTIES

         3.1 Royalty Obligations. The Licensee shall pay to the Licensors
royalties in an amount equal to the net amount payable to the Licensors pursuant
to Sections 3(c) and 4 of the Sales Agreement (or the net amount which would be
so payable to the Licensors, if all payments were then being made under the
Sales Agreement and the Manufacturing Agreement). For the avoidance of doubt, in
calculating such net amount, the Licensee shall be entitled to take into account
any payments then actually being made under the Manufacturing Agreement and /or
the Sales Agreement and shall also be entitled to deduct from such net amount
(a) all Commissions and Transaction Fees (as such terms are defined in the Sales
Agreement) and any other amounts which the Licensee would be permitted to deduct
under the Sales Agreement, whether or not the Sales Agreement is then in effect,
and (b) any amounts which would be due and payable by one or both Licensors to
the Licensee under the Manufacturing Agreement, whether or not the Manufacturing
Agreement is then in effect. Such net amount shall be payable at the times and
in the manner provided in the Sales Agreement. Upon any payment of such net
amount to the Licensors under the Sales Agreement, such payment shall be deemed
to have been made hereunder and no additional or duplicative payment shall be
due hereunder with respect thereto. To the extent that the Licensors receive
proceeds from the sale of Licensed Products which would otherwise be part of the
net amount payable to them hereunder, the Licensee shall be deemed to have paid
such net amount to the Licensors hereunder.

         3.2 Acknowledgement. The Licensors and the Licensee acknowledge that,
pursuant to the PRF Security Agreement, PRF has been granted a security interest
in the Licensors' right, title and interest in and to this Agreement. All
amounts payable by the Licensee to the Licensors hereunder shall be paid into
the PRF/Cambrex Lockbox Account (as defined in the Consent and Agreement) and
disposition of those funds will be governed by the Consent and Agreement.



                                       5











                         SECTION 4. PATENT PROSECUTION

         4.1 Prosecution Obligation. The Licensors shall apply for, seek prompt
issuance of and maintain during the Term of this Agreement any and all Patents
in the Territory which are included in the Licensed Intellectual Property. All
costs and expenses of the prosecution and maintenance of such Patents shall be
borne by the Licensors and not by the Licensee.

                      SECTION 5. THIRD PARTY INFRINGEMENT

         5.1 Third Party Infringement.

                  5.1.1 Notice. In the event that any party becomes aware of any
         potential infringement of the Licensed Intellectual Property or the
         Patents, such party shall notify the other parties of the potential
         infringement in writing and must provide a summary of the relevant
         facts and circumstances known to such party relating to such
         infringement. Neither party will notify a third Person of the potential
         infringement of any of the Licensed Intellectual Property or the
         Patents without first obtaining consent of the other parties, which
         consent shall not be unreasonably withheld or delayed. The parties
         agree to consult with each other, prior to the commencement of any
         legal or patent office proceedings, as to the most effective way of
         pursuing such matter.

                  5.1.2 Licensors' Options. During the Term of this Agreement,
         the Licensors shall be entitled to prosecute, at their own expense, any
         infringements of the Licensed Intellectual Property and the Patents, to
         defend the Licensed Intellectual Property and Patents and to recover
         any damages, awards or settlements resulting therefrom. The Licensee
         hereby agrees that the Licensors may join the Licensee as a party
         plaintiff in any such suit, without expense to the Licensee. The
         Licensors shall hold harmless and indemnify the Licensee from and
         against any order for costs arising without fault of the Licensee that
         may be made against the Licensee by reason of being named a party
         plaintiff in such proceedings. The Licensors shall have sole control of
         any such suit and all negotiations for its settlement or compromise,
         provided that the Licensors shall not settle or compromise any such
         suit or enter into any consent order for the settlement or compromise
         thereof that adversely affects the Licensed Intellectual Property or
         the Patents or any of the licenses or rights of the Licensee hereunder,
         without the prior written consent of the Licensee, which consent shall
         not be unreasonably withheld or delayed. The total cost of any
         infringement action commenced or defended solely by the Licensors shall
         be borne by the Licensors.

                  5.1.3 Licensee's Options. If, within ninety (90) days after
         having been notified of any potential infringement subject to the
         provisions of Sections 5.1.2, the Licensors shall have been
         unsuccessful in causing the alleged infringer to desist and shall not
         have brought and shall not be diligently prosecuting an infringement
         action, or if the Licensors notify the Licensee at any time prior
         thereto of their intention not to bring suit against any alleged
         infringer, then, in those events only, the Licensee shall have the
         right, but shall not be obligated, to prosecute, at its own expense,
         any infringements of the Licensed Intellectual Property and the
         Patents, to defend the Licensed Intellectual Property and the Patents
         and to recover any damages, awards or settlements resulting therefrom.
         The Licensors hereby agree that the Licensee may join the Licensors as
         party plaintiffs in any such suit, without expense to the Licensors.
         The Licensee

                                       6










shall hold harmless and indemnify the Licensors from and against any order for
costs arising without fault of the Licensors that may be made against the
Licensors by reason of being named party plaintiffs in such proceedings. The
Licensee shall have sole control of any such suit and all negotiations for its
settlement or compromise, provided that the Licensors shall not settle or
compromise any such suit or enter into any consent order for the settlement or
compromise thereof that adversely affects the Licensed Intellectual Property and
the Patents, without the prior written consent of the Licensors. The total cost
of any infringement action commenced or defended solely by the Licensee shall be
borne by the Licensee.

                  5.1.4 Applications of Awards. Any damages, awards or
         settlements collected pursuant to this Section 5.1 shall be allocated
         first to the costs and expenses of the party bringing suit, then to the
         costs and expenses of the other party. Any amounts remaining shall be
         considered as proceeds of the sale of Licensed Products manufactured
         under the Manufacturing Agreement and sold under the Sales Agreement
         and such amounts shall, subject to the terms of the Consent and
         Agreement, be distributed as provided in the Manufacturing Agreement
         and Sales Agreement or, if applicable, Section 3.1 hereof.

         5.2 Infringement Charges Against the Licensee. In the event that any
action, suit or proceeding is brought against, or written notice or threat
thereof is provided to, the Licensee alleging infringement of any patent or
unauthorized use or misappropriation of technology arising out of or in
connection with the Licensee's practice of the Licensed Intellectual Property
and the Patents, the Licensee shall have the right to defend at its own expense
such action, suit or proceeding and, in furtherance of such rights, the
Licensors hereby agree that the Licensee may join the Licensors as parties in
such suit, without expense to the Licensors. The Licensee shall hold harmless
and indemnify the Licensors from and against any order for costs arising without
fault of the Licensors that may be made against the Licensors in such
proceedings, unless such order arises out of or relates to facts and
circumstances involving a breach of any representation or warranty by the
Licensors. The Licensors agree to cooperate with the Licensee, at the Licensee's
expense, in connection with the Licensee's response to or defense of such
action, suit or proceeding, or notice or threat thereof.

         5.3 Cooperation. In the event that a party shall undertake the
enforcement and/or defense of the Licensed Intellectual Property or the Patents
by legal or patent office proceedings pursuant to this Agreement, the other
party shall, at the request and expense of the party undertaking such
enforcement and/or defense, cooperate in all reasonable respects and, to the
extent possible, have its employees testify when requested and make available
relevant records, papers, information, samples and the like.

                           SECTION 6. INDEMNIFICATION

         6.1 Indemnification by Licensors. Each Licensor hereby agrees that it
shall be responsible for, indemnify, hold harmless and defend the Licensee and
its Affiliates and their respective directors, officers, managing members,
shareholders, partners, attorneys, accountants, agents, employees and
consultants and their respective heirs, successors and assigns (collectively,
the "Licensee Indemnitees"), from and against any and all liability, loss,
claims, lawsuits, damages, injury, settlements, costs and expenses whatsoever
(as incurred), including but not limited to court costs and reasonable
attorneys' fees (collectively, "Losses") suffered or

                                       7










incurred by any Licensee Indemnitee arising out of, relating to, resulting from
or in connection with (a) any patent infringement claims or actions brought by
third parties related to the manufacture, use or sale of the Licensed Products,
and (b) any action, suit or other proceeding, or compromise, settlement or
judgment, relating to any of the foregoing matters described in subparagraph (a)
hereof with respect to which the Licensee Indemnitees are entitled to
indemnification hereunder. The foregoing shall not apply to the extent that such
Losses are due to the willful misconduct or gross negligence of any of the
Licensee Indemnitees.

         6.2 Notice of Claims. In the event that a claim is made pursuant to
Section 6.1 above against any party which seeks indemnification hereunder (the
"Indemnitee"), the Indemnitee agrees to promptly notify the other party (the
"Indemnitor") of such claim or action and, in any such case the Indemnitor may,
at its option, elect to assume control of the defense of such claim or action;
provided, however, that (a) the Indemnitee shall be entitled to participate
therein through counsel of its own choosing at the Indemnitee's sole cost and
expense, (b) the Indemnitee shall fully cooperate with the Indemnitor in all
reasonable respects, and (c) the Indemnitor shall not settle or compromise any
such claim or action without the prior written consent of the Indemnitee unless
such settlement or compromise includes a general release of the Indemnitee from
any and all liability with respect thereto.

                           SECTION 7. CONFIDENTIALITY

         7.1 Definition. "Confidential Information" means all technical,
scientific and other know-how and information, trade secrets, knowledge,
technology, means, methods, processes, practices, formulas, instructions,
skills, techniques, procedures, specifications, data, results and other
material, pre-clinical and clinical trial results, manufacturing procedures,
test procedures and purification and isolation techniques, and any tangible
embodiments of any of the foregoing, and any scientific, manufacturing,
marketing and business plans, any financial and personnel matters relating to
any party hereto or its present or future products, sales, suppliers, customers,
employees, investors or business, that has been disclosed by or on behalf of the
Licensee to one or both Licensors or by one or both Licensors to the Licensee
either in connection with the discussions and negotiations pertaining to this
Agreement or in the course of performing or otherwise in connection with this
Agreement. Without limiting the foregoing, the terms of this Agreement will be
deemed "Confidential Information" and will be subject to the terms and
conditions set forth in this Section 7.

         7.2 Exclusions. Notwithstanding the foregoing Section 7.1, any
information disclosed by a party to the other party will not be deemed
"Confidential Information" to the extent that such information:

                  (a) at the time of disclosure is in the public domain;

                  (b) becomes part of the public domain, by publication or
         otherwise, through no fault of the party receiving such information;

                  (c) at the time of disclosure is already in possession of the
         party who received such information, as established by contemporaneous
         written records;

                                       8











                  (d) is received by a party in good faith from any third party
         independent of the disclosing party, where the receiving party has no
         reason to believe that such third party has obtained such information
         by any wrongful means;

                  (e) is independently developed by a party without use of or
         reference to any other party's Confidential Information, as established
         by contemporaneous written records; or

                  (f) is required to be disclosed under securities laws, rules
         and regulations applicable to the Licensee, Ortec or Orcel, as the case
         may be, or pursuant to the rules and regulations of the Nasdaq Stock
         Market or any other stock exchange or stock market on which securities
         of the Licensee, Ortec or Orcel may be listed for trading.

         7.3 Disclosure and Use Restriction. Except as expressly provided
herein, the parties agree that, for the longer of (i) fifteen years from the
Effective Date, and (ii) the Term of this Agreement and the ten-year period
following any termination of this Agreement, each party and its Affiliates will
keep completely confidential and will not publish or otherwise disclose any
Confidential Information of the other parties, its Affiliates or sublicensees.
None of the parties will use Confidential Information of the other parties
except as necessary to perform its obligations or to exercise its rights under
this Agreement.

         7.4 Permitted Disclosure. The obligations of Section 7.3 will not apply
to any disclosure of Confidential Information to the extent such disclosure is
required by operation of the law or the requirement of a court or governmental
agency; provided, however, that: (i) the party subject to such required
disclosure will have promptly notified the other party prior to such disclosure
and such other party will have been given the opportunity to oppose such
disclosure by the party subject to the required disclosure by seeking a
protective order or other appropriate remedy; (ii) the party subject to such
required disclosure will disclose only that portion of Confidential Information
legally required to be disclosed; and (iii) the party subject to such required
disclosure will exercise all reasonable efforts to maintain the confidential
treatment of Confidential Information.

                 SECTION 8. INTELLECTUAL PROPERTY; IMPROVEMENTS

         8.1 Rights to Proprietary Technology. No party shall through this
Agreement obtain any rights to any other party's proprietary technology except
for such rights as are expressly granted or allocated under this Agreement.

         8.2 Improvements and Filing, Prosecution and Maintenance of Patents.

                  8.2.1 As between the parties, the Licensee will own all right,
         title and interest in and to the Licensee Improvements. Each Licensor
         agrees to assign and hereby assigns to the Licensors all of such
         Licensor's right, title, and interest in and to the Licensee
         Improvements.

                  8.2.2 As between the parties, the Licensors will own all
         right, title and interest in and to the Licensor Improvements. The
         Licensee agrees to assign and hereby assigns to the Licensors all of
         the Licensee's right, title and interest in and to the Licensor
         Improvements.

                                       9











                  8.2.3 Each Licensor hereby grants to the Licensee a license in
         the Territory to the Licensor Improvements upon the same terms (and for
         no additional royalty or other consideration) as set forth in Section
         2.1 hereof.

                  8.2.4 The Licensee hereby grants to each Licensor a
         non-exclusive, royalty-free, paid-up license to use the Licensee
         Improvements solely as needed by such Licensor to make or have made the
         Licensed Products.

                  8.2.5 In the event that any Licensee Improvements or Licensor
         Improvements owned by any party are deemed patentable, such party shall
         be entitled to file and prosecute patent applications related thereto
         and maintain patents issued thereon, in its own name and at its own
         cost. The other parties shall render reasonable assistance to such
         party in filing such applications whenever requested to do so, at such
         filing party's sole cost and expense. The Licensee and the Licensors
         agree to sign and execute such forms and documents as may be reasonably
         requested by the other party as being necessary or desirable to vest or
         confirm in such other party title to all such Licensee Improvements or
         Licensor Improvements, as the case may be, owned by such other party.

                      SECTION 9. LIMITATIONS ON LIABILITY

         9.1 No Warranties. Except as expressly set forth herein, none of the
parties makes any representations or warranties as to any matter whatsoever.
EACH PARTY HEREBY DISCLAIMS ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES,
EXPRESS OR IMPLIED, WITH RESPECT TO THE LICENSED INTELLECTUAL PROPERTY AND THE
LICENSED PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.

         9.2 Limitation of Damages. IN NO EVENT SHALL ANY PARTY BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT
LIMITATION, LOSS OF PROFITS) SUFFERED BY ANY OTHER PARTY, EXCEPT TO THE EXTENT
OF ANY SUCH DAMAGES PAID TO A THIRD PARTY AS PART OF A THIRD-PARTY CLAIM.

         9.3 Force Majeure. In the event of strikes, lock-outs or other
industrial disturbances, rebellions, mutinies, epidemics, landslides, lightning,
earthquakes, fires, hurricanes or other storms, floods, sinking, drought, civil
disturbances, explosions, acts or decisions of duly constituted municipal, state
or national governmental authorities or of courts of law, as well as
impossibility to obtain equipment, supplies, fuel or other required materials,
in spite of having acted with reasonable diligence, or by reason of any other
causes which are not under the control of the party requesting the abatement of
performance, or causes due to unexpected circumstances which are not possible to
eliminate or overcome with due diligence by such party ("Force Majeure"), the
party or parties agree that, if either the Licensee or the Licensors finds
themselves wholly or partially unable to fulfill their respective obligations
under this Agreement by reasons of Force Majeure, the party or parties affected
shall advise such other parties in writing of its or their inability to perform,
giving a detailed explanation of the occurrence of the event which excuses
performance as soon as possible after the cause or event has occurred. If such
notice is

                                       10










given, the performance of the party or parties giving the notification shall be
abated, and any time deadlines shall be extended for so long as performance may
be prevented by Force Majeure; provided, however, that in the event the
suspension of performance continues for more than ninety (90) days after the
date of the occurrence of such Force Majeure, and such failure to perform would
constitute a material breach of this Agreement in the absence of such Force
Majeure, the non-affected party may terminate this Agreement immediately by
written notice to the other party.

                          SECTION 10. NON-USE OF NAMES

         Except to the extent permitted under the license of Trademarks in
Section 2.1 (b) above, the Licensee shall not use the name of the Licensors, and
the Licensors shall not use the name of the Licensee, nor in either case the
name of any of the Affiliates or employees of such other party or parties, nor
any adaptation thereof, in any advertising, promotional or sales literature
without prior written consent obtained from such other party in each case (which
consent shall not be unreasonably withheld or delayed).

                           SECTION 11. PATENT MARKING

         The Licensee shall mark all Licensed Products made, used, offered for
sale, sold or imported under this Agreement, or their containers, in accordance
with the applicable patent marking laws.

                        SECTION 12. TERM AND TERMINATION

         12.1 Term. The term of this Agreement shall commence on the Effective
Date and shall continue until the date that is six (6) years after the Launch
Date (the "Initial Expiration Date"), unless sooner terminated in accordance
with the provisions of this Section 12 (the "Term"). The Term shall be
automatically extended beyond the Initial Expiration Date for each successive
one (1) year period for which the term of the Sales Agreement is extended
pursuant to Section 5 of the Sales Agreement.

         12.2 Termination for Default.

                  12.2.1 The Licensee shall have the right to terminate this
         Agreement upon the occurrence of any of the following events: (a) the
         Licensee may terminate this Agreement immediately on written notice to
         the Licensors in the event that the Manufacturing Agreement and/or the
         Sales Agreement shall have terminated by reason of material breach of
         one or both Licensors thereunder and (b) the Licensee may terminate
         this Agreement if either Licensor shall commit a material breach of the
         terms of this Agreement and the same shall not be remedied within
         ninety (90) days after written notice thereof is given by the Licensee
         to the Licensors.

                  12.2.2 The Licensors shall have the right to terminate this
         Agreement upon the occurrence of any of the following events: (a) the
         Licensors may terminate this Agreement immediately on written notice in
         the event that the Manufacturing Agreement and/or the Sales Agreement
         shall have terminated by reason of material breach of the Licensee
         thereunder and (b) the Licensors may terminate this Agreement if the
         Licensee shall commit a material breach of

                                       11










the terms of this Agreement and the same shall not be remedied within ninety
(90) days after written notice thereof is given by the Licensors to the
Licensee.

         12.3 Termination by Licensee. The Licensee may terminate this Agreement
or any license hereunder at any time by giving at least thirty (30) days' prior
written notice to the Licensors. The termination right contained in this Section
12.3 is independent of any termination right the Licensee or Licensors may have
under the Manufacturing Agreement or the Sales Agreement and any termination of
this Agreement by the Licensee pursuant to this Section 12.3 shall not be
interpreted or construed as any action with respect to or in furtherance of
termination of the Manufacturing Agreement or the Sales Agreement.

         12.4 Termination by Licensors. In the event that Ortec at any time has
the right to terminate, and in fact properly terminates, the Sales Agreement
pursuant to Section 11(a)(2) thereof (or, if the Sales Agreement is not then in
effect, would have the right to terminate the Sales Agreement pursuant to said
Section 11(a)(2)), then the Licensors may terminate this Agreement upon the same
prior written notice and after the occurrence of the same events and subject to
the same terms and conditions as are provided in said Section 11(a)(2).

         12.5 Termination for Change in Control. Upon the occurrence of a Change
in Control (as defined in the Sales Agreement) of Ortec, in the event that the
Licensee or Ortec has the right to terminate, and in fact properly terminates,
the Sales Agreement pursuant to Section 11(a)(7) thereof (or, if the Sales
Agreement is not then in effect, would have the right to terminate the Sales
Agreement pursuant to said Section 11(a)(7)), such party may terminate this
Agreement on the same terms and conditions (including the same prior written
notice) and subject to the same terms and conditions as are provided for in
Section 11 (a)(7) of the Sales Agreement; provided, however, that no such
termination of this Agreement by Ortec or the Licensors shall be effective
unless and until Ortec shall have indefeasibly paid the Termination Fee (as
defined in the Sales Agreement) in full to the Licensee.

         12.6 Consequences of Termination. The termination of this Agreement for
any reason shall be without prejudice to (i) the right of the Licensors to
receive all amounts accrued under Section 3 hereof prior to the effective date
of such termination, (ii) the rights and obligations of the parties pursuant to
Sections 5, 6, 7, 8 and 9 hereof, and (iii) any other remedies as may now or
hereafter be available to any party, whether under this Agreement or otherwise.
After the effective date of the termination of this Agreement for any reason,
the Licensee may sell all Licensed Products in inventory and complete Licensed
Products in the process of manufacture at the time of such termination and sell
the same.

                           SECTION 13. MISCELLANEOUS

         13.1 Notices. All notices, reports and/or other communications made in
accordance with this Agreement, shall be deemed to be duly made or given (i)
when delivered by hand, (ii) three days after being mailed by registered or
certified mail (air mail, if mailed overseas), return receipt requested, or
(iii) when received by the addressee, if sent by facsimile transmission or by
Express Mail, Federal Express or other express delivery service (receipt
requested), in each case addressed to such party at its address set forth below
(or to such other address as such party may hereafter designate as to itself by
notice to the other party hereto):

                                       12












         In the case of the Licensee:

                           Cambrex Bio Science Walkersville, Inc.
                           8830 Biggs Ford Road
                           Walkersville, Maryland 21793
                           Telecopier: (301) 845-6099
                           Attention: N. David Eansor,
                                      President of BioProducts
                                      Strategic Business Unit

                  with a copy to:

                           Cambrex Corporation
                           One Meadowlands Plaza
                           East Rutherford, New Jersey 07073
                           Telecopier: (201) 804-9852
                           Attention: Peter E. Thauer, General Counsel

                  with a copy to:

                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower
                           140 East 45th Street
                           44th Floor
                           New York, NY 10017
                           Attention: Lionel Leventhal

         In the case of Orcel:

                           Orcel LLC
                           c/o Ortec International Inc.
                           3960 Broadway
                           New York, New York  10032
                           Telecopier: (212) 740-2570
                           Attention: Ron Lipstein,
                           Vice Chairman

                  with a copy to:

                           Feder Kaszovitz Isaacson
                           Weber Skala Bass & Rhine, LLP
                           750 Lexington Avenue, 23rd Floor
                           New York, New York 10022
                           Telecopier: (212) 888-7776
                           Attention: Gabriel Kaszovitz, Esq.

                  with a copy to:
                                       13










                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower
                           140 East 45th Street
                           44th Floor
                           New York, NY 10017
                           Attention: Lionel Leventhal

         In the case of Ortec:

                           Ortec International Inc.
                           3960 Broadway
                           New York, New York 10032
                           Telecopier: (212) 740-2570
                           Attention: Ron Lipstein,
                                      Vice Chairman

                  with a copy to:

                           Feder Kaszovitz Isaacson
                           Weber Skala Bass & Rhine, LLP
                           750 Lexington Avenue, 23rd Floor
                           New York, New York 10022
                           Telecopier: (212) 888-7776
                           Attention: Gabriel Kaszovitz, Esq.

                   with a copy to:

                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower
                           140 East 45th Street
                           44th Floor
                           New York, NY 10017
                           Attention: Lionel Leventhal

         13.2 Amendments, etc. This Agreement may not be amended or modified,
nor may any right or remedy of any party be waived, unless the same is in
writing and signed by such party or a duly authorized representative of such
party. The waiver by any party of the breach of any term or provision hereof by
any other party shall not be construed as a waiver of any other subsequent
breach.

         13.3 No Waiver; Remedies. No failure or delay by any party in
exercising any of its rights or remedies hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or remedy
preclude any other or further exercise thereof or the exercise of any other
right or remedy. The rights and remedies of the parties provided in this
Agreement are cumulative and not exclusive of any rights or remedies provided by
law.

                                       14











         13.4 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, legal
representatives, successors and permitted assigns. This Agreement and the rights
and obligations hereunder shall not be assignable or transferable, directly or
indirectly, by the Licensee or either Licensor without the prior written consent
of the other parties (which may not be unreasonably withheld or delayed) except
(i) to an Affiliate of a party so long as such Affiliate agrees in writing to be
bound by the terms of this Agreement, (ii) in connection with a Change in
Control (as defined in the Sales Agreement) or (iii) in the case of any
foreclosure or other similar exercise of remedies by PRF under the PRF Security
Agreement, to PRF or its assignees in accordance with applicable law. The
assigning party shall remain primarily liable hereunder notwithstanding any such
assignment. Any attempted assignment in violation hereof shall be void.

         13.5 Relationship of Parties. The Licensee and the Licensors are not
(and nothing in this Agreement shall be construed to constitute them) partners,
joint venturers, agents, representatives or employees of each other, nor to
create any relationships between them other than that of an independent
contractor. Neither the Licensee nor the Licensors shall have any responsibility
or liability for the actions of the other party except as specifically provided
herein. Neither the Licensee nor the Licensors shall have any right or authority
to bind or obligate the other in any manner or make any representation or
warranty on behalf of the other. The foregoing provisions of this Section 13.5
relate solely to the relationship between the Licensee, on the one hand, and the
Licensors, on the other hand.

         13.6 Expenses. Unless otherwise provided herein, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party which shall have incurred the same and the
other party shall have no liability relating thereto.

         13.7 TRS Machines and TRS Trays. In the event that Ortec breaches its
obligations under Section 6(c) of the Sales Agreement or the Sales Agreement
terminates, Cambrex shall have the right to make arrangements directly with
Ortec's supplier(s) of TRS Machines and TRS Trays (as such terms are defined in
the Sales Agreement), or with an alternative supplier, to have TRS Machines
and/or TRS Trays made for and supplied to Cambrex in sufficient quantities to
satisfy customer demand and use of the Licensed Products in the Territory. Title
to all such TRS Machines and TRS Trays shall be in Cambrex. In calculating
royalties payable to the Licensors under Section 3.1 hereof, Cambrex shall be
entitled to deduct any and all amounts paid by Cambrex to obtain such TRS
Machines and/or TRS Trays. The Licensors will cooperate with and provide
reasonable assistance to the Licensee so that the Licensee can obtain sufficient
quantities of TRS Machines and TRS Trays in order to satisfy customer demand and
use of the Licensed Products in the Territory.

         13.8 Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior proposals, communications,
representations and agreements, whether oral or written, with respect to the
subject matter hereof.

         13.9 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms

                                       15









and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions hereof in any other jurisdiction.

         13.10 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be deemed an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.

         13.11 Headings. The headings used in this Agreement are for convenience
of reference only and shall not affect the meaning or construction of this
Agreement.

         13.12 Governing Law. This Agreement, including the performance and
enforceability hereof, shall be governed by and construed in accordance with the
laws of the State of New York, without reference to choice of law doctrine. Each
party hereby submits itself for the sole purpose of this Agreement and any
controversy arising hereunder to the jurisdiction of the courts located in the
State of New York and any courts of appeal therefrom, and waives any objection
(on the grounds of lack of jurisdiction, or forum non conveniens or otherwise)
to the exercise of such jurisdiction over it by any such courts.

         13.13 Arbitration. Except as expressly provided herein, any dispute,
controversy, or claim arising out of or relating to this Agreement, its
validity, construction or enforceability or the breach of any of the terms or
provisions hereof shall be settled by arbitration under the American Arbitration
Association by a panel of three arbitrators, one selected by each party and the
third selected by the other two arbitrators. Any arbitration proceeding
commenced by either party shall be held in the New York City, New York. The
decision of the arbitrators shall be final and binding upon the parties and
judgment upon the decision by the arbitrators may be entered in any court of
competent jurisdiction, and execution may be had thereon. The expense of such
arbitration, including attorneys' fees, shall be allocated between the parties
as the arbitrators may decide and as the claims and interests of each party may
prevail. Notwithstanding anything to the contrary contained in this Section
13.13, any dispute, controversy or claim relating to actual or threatened
unauthorized use or disclosure of any Confidential Information, or the validity,
applicability, enforceability or infringement of any Patents, shall not be
required to be submitted to arbitration hereunder and shall be resolved by a
court of competent jurisdiction.

         13.14 Acknowledgement. The parties hereto acknowledge that this
Agreement is a license of intellectual property within the meaning of 11 U.S.C.
'SS'365(n).



                            [SIGNATURE PAGE FOLLOWS]

                                       16










         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.


                                    ORCEL LLC


                                    By:    /s/ Ron Lipstein
                                         --------------------------------
                                    Name:  Ron Lipstein
                                         --------------------------------

                                    Title: Chief Executive Officer
                                         --------------------------------


                                    ORTEC INTERNATIONAL INC.


                                    By:    /s/ Ron Lipstein
                                         --------------------------------
                                    Name:  Ron Lipstein
                                         --------------------------------
                                    Title: Chief Executive Officer
                                         --------------------------------



                                    CAMBREX BIO SCIENCE WALKERSVILLE, INC.


                                    By:    /s/ David Eansor
                                         --------------------------------
                                    Name:  N. David Eansor
                                         --------------------------------
                                    Title: President, BioProducts
                                         --------------------------------

                                       17











                                    Exhibit A

                                 CCS Technology

The method for making skin equivalents and the product obtained thereby as
described in the claims of:

1.   U.S. Patent RE 35,399 (re-issue of U.S. Patent 5,282,859);

2.   U.S. Patent 6,039,760;

3.   U.S. Patent Application Serial No. 09/749,226, Filing Date - December 27,
     2000, now abandoned;

4.   U.S. Patent Application Serial No. 09/751,001, Filing Date - December 28,
     2000, now U.S. Patent No. 6,500,464;

The cryopreservation method for the skin equivalents described above and the
product obtained thereby as described in:

5.   U.S. Patent Application Serial No. 10/032,929, now U.S. Patent 6,638,709;

6.   U.S. Patent Application No. 10/641,655.  This is a Divisional Application
     of No. 5 above directed to product claims.



                                       18











                                    Exhibit B



                                     Patents

                 U.S. Patent No.                                Expiration Date
                 --------------                                 ---------------
                                                            
 RE # 35,399 (re-issue of U.S. Patent 5,282,859)               February 1, 2011

                    5,282,859                                  February 1, 2011

                    6,039,760                                  February 1, 2011

                    6,500,464                                  December 28, 2020

                    6,638,709                                  December 26, 2020


U.S. Patent Application No. 10/641,655. This is a divisional application of U.S.
Patent No. 6,638,709 listed above.


                                       19













                                    Exhibit C

                             Manufacturing Agreement








                                       20













                                    Exhibit D

                                 Sales Agreement








                                       21

EX-10

                                                                   Exhibit 10.10

                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT (this "Agreement") is made effective as of the
18th day of October, 2004 (the "Effective Date"), by and among CAMBREX BIO
SCIENCE WALKERSVILLE, INC., a Delaware corporation ("Secured Party"), ORCEL LLC,
a Delaware limited liability company ("OrCel") and ORTEC INTERNATIONAL INC., a
Delaware corporation ("Ortec") (OrCel and Ortec being herein individually called
a "Grantor" and collectively called the "Grantors").

                                    RECITALS:

         WHEREAS, Secured Party and Ortec are parties to a Cell Therapy
Manufacturing Agreement, dated as of October 29, 2003, as amended (as amended
from time to time, the "Manufacturing Agreement"), and a Sales Agency Agreement,
dated as of October 18, 2004 (as amended from time to time, the "Sales
Agreement"), pursuant to which Secured Party will provide, among other things,
certain manufacturing, sales and marketing services necessary for the
production, distribution and sale of OrCel'r';

         WHEREAS, Ortec, OrCel and Secured Party are parties to a License
Agreement, dated as of October 18, 2004 (as amended from time to time, the
"Cambrex License Agreement"), pursuant to which OrCel and Ortec have agreed to
license to Secured Party certain of their intellectual property rights; and

         WHEREAS, in connection with the performance of its duties under the
Manufacturing Agreement and the execution of the Sales Agreement and the Cambrex
License Agreement, Secured Party desires to obtain and the Grantors desire to
grant to Secured Party a security interest in the Collateral (as hereinafter
defined) to secure the performance of certain obligations of Ortec and OrCel to
Secured Party under the Manufacturing Agreement, the Cambrex License Agreement
and the Sales Agreement.

         NOW, THEREFORE, the Grantors and Secured Party, intending to be legally
bound, hereby agree as follows:

         1. Definitions.

                  (a) "Account" shall have the meaning as provided in the UCC.

                  (b) "Assignment Agreement" means that certain Amended and
         Restated Revenue Interests Assignment Agreement, dated as of February
         26, 2003, among PRF, Ortec and OrCel.

                  (c) "Collateral" shall mean:









                                    (i) all Accounts, contract rights, payment
                           intangibles, Instruments and General Intangibles
                           arising out of or in connection with the sale of
                           Products pursuant to the Sales Agreement and/or the
                           License Agreement, and all supporting obligations,
                           guarantees and other security therefor, whether
                           secured or unsecured, and whether now existing or
                           hereafter created;

                                    (ii) all money now or at any time in the
                           possession or under the control of, or in transit to,
                           the PRF/Cambrex Lockbox Bank (as defined in the
                           Consent and Agreement) or Secured Party received from
                           or on account of the sale of Products pursuant to the
                           Sales Agreement and/or the License Agreement, or
                           otherwise relating to any of the foregoing
                           Collateral;

                                    (iii) the PRF/Cambrex Lockbox Account (as
                           defined in the Consent and Agreement), all funds on
                           deposit in the PRF/Cambrex Lockbox Account, all funds
                           on deposit in any bank account or deposit account of
                           Secured Party which were received from or on account
                           of the sale of Products pursuant to the Sales
                           Agreement and/or the License Agreement, all
                           investments arising out of such funds, all claims
                           thereunder or in connection therewith, and all monies
                           and credit balances from time to time held in the
                           PRF/Cambrex Lockbox Account or such bank accounts or
                           deposit accounts; all notes, certificates of deposit,
                           deposit accounts, checks and other instruments from
                           time to time hereafter delivered to or otherwise
                           possessed by Secured Party in substitution for or in
                           addition to any or all of the then existing items
                           described in this clause (iii); and all interest,
                           dividends, cash, securities, rights, instruments and
                           other property at any time and from time to time
                           received, receivable or otherwise distributed in
                           respect of such accounts, such funds, or such
                           investments or received in exchange for any or all of
                           the items described in this clause (iii); and

                                    (iv) all products and Proceeds of and from
                           any and all of the foregoing Collateral, and all
                           proceeds which constitute property of the types
                           described in clauses (i) through (iii).

                  (d) "Consent and Agreement" means the Consent and Agreement
         dated as of October 18, 2004 between Secured Party and PRF, as the same
         may be amended from time to time.

                  (e) "Event of Default" is defined in Section 8.

                  (f) "General Intangible" shall have the meaning as provided in
         the UCC.

                  (g) "Instrument" shall have the meaning as provided in the
         UCC.

                  (h) "Obligations" shall mean any and all obligations of
         Grantors to Secured Party under the Manufacturing Agreement, the
         Cambrex License Agreement and the Sales Agreement and all costs and
         expenses of Secured Party incurred in connection with enforcement or
         collection under this Agreement.


                                      -2-









                  (i) "Ortec/OrCel Security Agreement" shall mean that certain
         Security Agreement, dated as of August 29, 2001, between Ortec and
         OrCel, as amended by Amendment No. 1 to Security Agreement dated as of
         October 18, 2004 and as the same may be further amended from time to
         time.

                  (j) "PRF" shall mean Paul Royalty Fund, L.P. (formerly known
         as Paul Capital Royalty Acquisition Fund, L.P.).

                  (k) "PRF-Ortec-Orcel Agreements" shall have the meaning as
         provided in the Consent and Agreement.

                  (l) "PRF Security Agreement" shall mean that certain Amended
         and Restated Security Agreement dated as of October 18, 2004 among
         Ortec, OrCel and PRF as the same may be amended from time to time.

                  (m) "Proceeds" shall have the meaning as provided in the UCC.

                  (n) "Products" shall mean any and all (i) "Products" as such
         term is defined in the Sales Agreement and (ii) "Licensed Products" as
         such term is defined in the Cambrex License Agreement.

                  (o) "UCC" shall mean the Uniform Commercial Code as in effect
         on the date hereof in the State of Delaware, as amended from time to
         time, and any successor statute; provided that if by reason of
         mandatory provision of law, the perfection or the effect of perfection
         or non-perfection of the security interest in the Collateral is
         governed by the Uniform Commercial Code of another jurisdiction, "UCC"
         means the Uniform Commercial Code as in effect in such other
         jurisdiction for purposes of the provision hereof relating to such
         perfection or effect of perfection or non-perfection.

         2. Grant of Security Interest. As collateral security for the prompt,
full and faithful payment and performance when due of the Obligations, each
Grantor hereby assigns, pledges, transfers and grants to Secured Party a
continuing lien on and a security interest in all of such Grantor's right, title
and interest in and to the Collateral, where the same may be now or hereafter
located, whether now owned or hereafter existing or acquired. The lien and
security interest granted herein are subordinate and junior in priority to the
perfected lien and security interest granted to PRF as secured party under the
PRF Security Agreement and are subject to the terms and provisions of the
Consent and Agreement.

         3. Change in Name or Locations. Each Grantor hereby agrees that if such
Grantor changes its name or form of organization or jurisdiction of
organization, or establishes a name in which it may do business that is not
listed as a trade name on Exhibit "A" hereto, such Grantor will immediately
notify Secured Party in writing of the additions or changes.

         4. Representations and Warranties. Each Grantor represents, warrants
and covenants to Secured Party that: (a) other than the lien granted pursuant to
the PRF Security Agreement and the Ortec/OrCel Security Agreement, such Grantor
has not made


                                      -3-









any prior sale, pledge, encumbrance, assignment or other disposition of any of
the Collateral and the same are free from all encumbrances and rights of setoff
of any kind; and (b) except as herein provided, such Grantor will not hereafter
without the prior written consent of Secured Party sell, pledge, encumber,
assign or otherwise dispose of any of the Collateral or permit any right of
setoff, lien or security interest to exist thereon except to Secured Party
and/or PRF.

         5. Grantors' Covenants. Each Grantor covenants that it shall obtain,
make, execute and deliver all such additional and further acts, things, deeds,
assurances and instruments as Secured Party may reasonably require to vest in
and assure to Secured Party its rights hereunder and in or to the Collateral.

         6. Covenants for Accounts. With respect to accounts, accounts
receivable and general intangibles that are included in the definition of
Collateral, upon the occurrence and during the continuance of an Event of
Default, at the request of Secured Party, but subject to the Consent and
Agreement (including, without limitation, the requirements that payments in
respect thereof shall be made to the PRF/Cambrex Lockbox Account), each Grantor
will direct any persons who are indebted to such Grantor on any Collateral
consisting of accounts, accounts receivable or general intangibles to make
payment directly to Secured Party.

         7. Further Assurances. By its signature hereto, each Grantor hereby
authorizes Secured Party to file against such Grantor, one or more financing,
continuation or amendment statements pursuant to the UCC.

         8. Events of Default. The Grantors shall, at the option of Secured
Party, be in default under this Agreement upon the happening of any of the
following events or conditions (each, an "Event of Default"): (a) any default
under the Obligations; (b) the failure by either Grantor to perform any of its
obligations under this Agreement; (c) falsity, inaccuracy or breach in any
material respect by either Grantor of any written warranty, representation or
statement that, pursuant to this Agreement, is made or furnished to Secured
Party by or on behalf of such Grantor; (d) any lien (except for liens in favor
of PRF under the PRF Security Agreement) against or the making of any levy,
seizure or attachment of or on the Collateral; or (e) except as otherwise
provided herein, the failure of Secured Party to have a perfected security
interest in the Collateral.

         9. Remedies. Upon the occurrence of any such Event of Default and at
any time thereafter, Secured Party may declare the Obligations secured hereby
immediately due and payable and shall have, in addition to any remedies provided
herein or by any applicable law or in equity, all the remedies of a secured
party under the UCC. Notwithstanding the foregoing, nothing in this Section 9
shall be deemed to limit any provision contained in the Consent and Agreement.

         10. Power of Attorney. Each Grantor does hereby make, constitute and
appoint any officer, director or agent of Secured Party as such Grantor's true
and lawful attorney-in-fact, with power to endorse the name of such Grantor or
any of such Grantor's officers or agents upon any notes, checks, drafts, money
orders, or other


                                      -4-











instruments of payment or Collateral that may come into the possession of
Secured Party in full or part payment of any amounts owing to Secured Party;
granting to such Grantor's said attorney full power to do any and all things
necessary to be done in and about the premises as fully and effectually as such
Grantor might or could do, including the right to sign, for such Grantor, UCC-1
financing statements and UCC-3 Statements of Change and, from and after the
occurrence of an Event of Default, to sue for, compromise, settle and release
all claims and disputes with respect to, the Collateral; provided, however, that
Secured Party may not sue for, compromise, settle or release any claims and
disputes with respect to any accounts receivable for which Secured Party has
previously made a deduction pursuant to Section 3(c)(i)(C) or (D) of the Sales
Agreement and has the indefeasible right to retain the amounts so deducted.

         11. Payment of Expenses. At its option, Secured Party may discharge
taxes, liens, security interests or such other encumbrances as may attach to the
Collateral. Each Grantor will reimburse Secured Party for bona fide payments so
made pursuant to the foregoing authorization, and the Collateral also will
secure any advances or payments so made by Secured Party.

         12. Notices. Any notice, request, demand, report, offer, acceptance,
approval, consent or other communication (collectively, a "Notice") required or
permitted under this Agreement must be in writing and delivered personally, or
by certified mail, return receipt requested, postage prepaid, or by a nationally
recognized courier, addressed to the parties at their respective addresses set
forth below or to such other address as any party may request with advanced
Notice to the other parties. A Notice that is sent by certified mail is deemed
given three (3) business days after it is mailed.

If to OrCel:               Orcel LLC
                           c/o Ortec International Inc.
                           3960 Broadway
                           New York, New York  10032
                           Telecopier: (212) 740-2570
                           Attention:  Ron Lipstein,
                                       Vice Chairman

                  with a copy to:

                           Feder Kaszovitz Isaacson
                           Weber Skala Bass & Rhine, LLP
                           750 Lexington Avenue, 23rd Floor
                           New York, New York 10022
                           Telecopier: (212) 888-7776
                           Attention:  Gabriel Kaszovitz, Esq.

                  with a copy to:

                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower


                                      -5-









                           140 East 45th Street
                           44th Floor
                           New York, NY  10017
                           Attention: Lionel Leventhal

If to Ortec:               Ortec International Inc.
                           3960 Broadway
                           New York, New York 10032
                           Telecopier: (212) 740-2570
                           Attention: Ron Lipstein,
                                      Vice Chairman

                  with a copy to:

                           Feder Kaszovitz Isaacson
                           Weber Skala Bass & Rhine, LLP
                           750 Lexington Avenue, 23rd Floor
                           New York, New York 10022
                           Telecopier: (212) 888-7776
                           Attention:  Gabriel Kaszovitz, Esq.

                  with a copy to:

                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower
                           140 East 45th Street
                           44th Floor
                           New York, NY  10017
                           Attention: Lionel Leventhal

If to Secured Party:       Cambrex Bio Science Walkersville, Inc.
                           8830 Biggs Ford Road
                           Walkersville, Maryland 21793
                           Telecopier: (301) 845-6099
                           Attention: N. David Eansor,
                                      President of BioProducts
                                      Strategic Business Unit

                  with a copy to:

                           Sills Cummis Epstein & Gross P.C.
                           One Riverfront Plaza
                           Newark, NJ 07102-5400
                           Telecopier:  (973) 643-6500
                           Attention:  Ira A. Rosenberg, Esq.


                                      -6-









                  with a copy to:

                           Paul Royalty Fund, L.P.
                           Two Grand Central Tower
                           140 East 45th Street
                           44th Floor
                           New York, NY  10017
                           Attention: Lionel Leventhal

         13. Preservation of Rights. No delay or omission on the part of Secured
Party to exercise any right or power arising hereunder will impair any such
right or power or be considered a waiver of any such right or power or any
acquiescence therein, nor will the action or inaction of Secured Party impair
any right or power arising hereunder. Secured Party's rights and remedies
hereunder are cumulative and not exclusive of any other rights or remedies which
Secured Party may have under other agreements, at law or in equity.

         14. Illegality. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.

         15. Changes in Writing. No modification, amendment or waiver of any
provision of this Agreement nor consent to any departure by either Grantor
therefrom, will in any event be effective unless the same is in writing and
signed by the parties hereto, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on either Grantor in any case will entitle either Grantor to any other
or further notice or demand in the same, similar or other circumstance.

         16. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof.

         17. Counterparts. This Agreement may be signed in any number of
counterpart copies and by the parties hereto on separate counterparts, but all
such copies shall constitute one and the same instrument.

         18. Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of Grantors and Secured Party and their respective legal
representatives, successors and permitted assigns. Neither Grantor may assign
this Agreement in whole or in part without the prior written consent of Secured
Party. Any assignment or any attempt by either Grantor to make an assignment of
this Agreement or any of its rights or obligations hereunder will be void ab
initio, and of no force and effect. Secured Party may assign this Agreement, or
any of its rights and obligations hereunder, at any time to any other person or
entity it deems necessary or desirable without advance notice to


                                      -7-









Grantors, provided that prior to or concurrently with such assignment such
person or entity agrees in writing (in form and substance reasonably
satisfactory to PRF) to assume and be bound by the provisions of the Consent and
Agreement and provided that written notice of such assignment is promptly
thereafter given to Grantors and PRF.

         19. Term. This Agreement shall be effective from the Effective Date and
shall continue until the date that is two years after the Launch Date (as
defined in the Sales Agreement) (the "Expiration Date"); provided, however, that
if on or as of the Expiration Date an Event of Default, or event which with the
lapse of time or notice or both would become an Event of Default, or a default
by OrCel and/or Ortec under the Assignment Agreement, has occurred and is
continuing, this Agreement shall continue in full force and effect after the
Expiration Date unless and until such Event of Default or event or default has
been waived in writing by Secured Party or is no longer continuing or has been
cured.

         20. Interpretation. In this Agreement, unless the parties otherwise
agree in writing, the singular includes the plural and the plural the singular;
words importing any gender include the other genders; references to statutes are
to be construed as including all statutory provisions consolidating, amending or
replacing the statute referred to; the word "or" shall be deemed to include
"and/or", the words "including", "includes" and "include" shall be deemed to be
followed by the words "without limitation"; references to articles, sections (or
subdivisions of sections) or exhibits are to those of this Agreement unless
otherwise indicated. Section headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.

         21. Governing Law. This Agreement will be interpreted and the rights
and liabilities of the parties hereto determined in accordance with the laws of
the State of New York without regard to its conflicts of law principles.

         22. Subordination of Security Interest under Ortec/OrCel Security
Agreement. Each Grantor hereby agrees that the security interest granted by
Ortec to OrCel in the Collateral (as such term is defined in the Ortec/OrCel
Security Agreement) pursuant to the Ortec/OrCel Security Agreement shall be and
is hereby made subordinate and junior in priority to the security interest
granted herein to Secured Party in the Collateral (as such term is defined is
defined in this Agreement).





                            [SIGNATURE PAGE FOLLOWS]


                                      -8-









         IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.

                          SECURED PARTY:
                          CAMBREX BIO SCIENCE WALKERSVILLE, INC.


                          By:    /s/ David Eansor
                               ---------------------------------------------
                               [Signature]

                                 N. David Eansor
                               ---------------------------------------------
                               [Name]

                                 President, BioProducts
                               ---------------------------------------------
                               [Title]


                          GRANTOR:
                          ORCEL LLC

                          By:    /s/ Ron Lipstein
                               ---------------------------------------------
                               [Signature]

                                 Ron Lipstein
                               ---------------------------------------------
                               [Name]

                                 Chief Executive Officer / Vice Chairman
                               ---------------------------------------------
                               [Title]


                          GRANTOR:
                          ORTEC INTERNATIONAL INC.

                          By:    /s/ Ron Lipstein
                               ---------------------------------------------
                               [Signature]

                                 Ron Lipstein
                               ---------------------------------------------
                               [Name]

                                 Chief Executive Officer / Vice Chairman
                               ---------------------------------------------
                               [Title]


                                      -9-









                                   EXHIBIT "A"
                              TO SECURITY AGREEMENT


                                   Trade Names



                                      None.


                                      -10-

EX-10

                                                                   Exhibit 10.11



                     AMENDED AND RESTATED SECURITY AGREEMENT

                          Dated as of October 18, 2004

                                     between

                                   ORCEL LLC,
                                       and
                            ORTEC INTERNATIONAL INC.,
                               each as a Grantor,

                                       and


                            PAUL ROYALTY FUND, L.P.,
                                   as Grantee








                                TABLE OF CONTENTS



                                                                                                              Page
                                                                                                              ----
                                                                                                         
ARTICLE I  DEFINITIONS.........................................................................................1

   Section 1.1.       Certain Terms............................................................................1
   Section 1.2.       Assignment Agreement Definitions.........................................................3
   Section 1.3.       UCC Definitions..........................................................................3
   Section 1.4.       Other Interpretive Provisions............................................................3

ARTICLE II  SECURITY INTEREST..................................................................................4

   Section 2.1.       Grant of Security........................................................................4
   Section 2.2.       Continuing Security Interest.............................................................6
   Section 2.3.       Grantors Remains Liable..................................................................6

ARTICLE III  REPRESENTATIONS AND WARRANTIES....................................................................7

   Section 3.1.       Legal Status of Each Grantor, Location of Collateral, etc................................7
   Section 3.2.       Ownership; No Liens......................................................................7
   Section 3.3.       Validity.................................................................................7
   Section 3.4.       Intellectual Property....................................................................8
   Section 3.5.       Authorization, Approval..................................................................8
   Section 3.6.       Enforceability...........................................................................8

ARTICLE IV  COVENANTS..........................................................................................8

   Section 4.1.       As to Receivables........................................................................8
   Section 4.2.       Insurance...............................................................................10
   Section 4.3.       Intellectual Property...................................................................10
   Section 4.4.       Transfers and Other Liens...............................................................10
   Section 4.5.       Further Assurances......................................................................10
   Section 4.6.       General Covenants.......................................................................11

ARTICLE V  RIGHTS AND DUTIES OF GRANTEE.......................................................................12

   Section 5.1.       Grantee Appointed Attorney-in-Fact......................................................12
   Section 5.2.       Grantee May Perform.....................................................................13
   Section 5.3.       Limitations on Duties of Grantee........................................................13
   Section 5.4.       Reasonable Care.........................................................................14

ARTICLE VI  REMEDIES..........................................................................................14

   Section 6.1.       Certain Remedies........................................................................14

ARTICLE VII  MISCELLANEOUS PROVISIONS.........................................................................15



                                       i







                                                                                                         
   Section 7.1.       Amendments..............................................................................15
   Section 7.2.       Release of Collateral...................................................................15
   Section 7.3.       Notices.................................................................................16
   Section 7.4.       Waiver; Cumulative Remedies.............................................................16
   Section 7.5.       Successors and Assigns..................................................................16
   Section 7.6.       Counterparts............................................................................16
   Section 7.7.       Severability............................................................................16
   Section 7.8.       Governing Law and Jurisdiction..........................................................17
   Section 7.9.       Waiver of Jury Trial....................................................................17





Exhibits

Exhibit A                  Form of Patent Security Agreement



Schedules

Schedule I                 Locations of Certain Collateral
Schedule II                Offices For Filing Financing Statements
Schedule 3.1               Names and Corporate Reorganizations and Mergers



                                       ii









                     AMENDED AND RESTATED SECURITY AGREEMENT

         AMENDED AND RESTATED SECURITY AGREEMENT (as amended, supplemented or
otherwise modified from time to time, this "Security Agreement"), dated as of
October 18, 2004 and entered into among ORCEL LLC, a Delaware limited liability
company ("Orcel") and ORTEC INTERNATIONAL INC., a Delaware corporation ("Ortec")
( Orcel and Ortec being herein individually, a "Grantor" and collectively, the
"Grantors"), and PAUL ROYALTY FUND, L.P., a Delaware limited partnership (and
formerly known as Paul Capital Royalty Acquisition Fund, L.P. (the "Grantee").

                                    RECITALS

         WHEREAS, Orcel, Ortec and the Grantee are parties to the Amended and
Restated Revenue Interests Assignment Agreement dated as of February 26, 2003
(as amended from time to time, the "Assignment Agreement");

         WHEREAS, Orcel and Grantee are parties to that certain Security
Agreement, dated as of August 29, 2001, as amended by Amendment No. 1 to
Security Agreement dated as of February 26, 2003 (the "Original Agreement"); and

         WHEREAS, in order to induce the Grantee to enter into the Consent and
Agreement (as defined below), Orcel and Grantee now wish to amend and restate
the Original Agreement in its entirety to, among other things, (i) add Ortec as
an additional grantor of the security interests contemplated by this Security
Agreement and (ii) make certain clarifications to the definition of Collateral.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Grantors hereby agree, for the
benefit of Grantee, as follows:

                                   ARTICLE I

                                   DEFINITIONS

         Section 1.1. Certain Terms.

         Capitalized terms used herein but not otherwise defined, shall have the
meanings set forth in the Assignment Agreement. The following terms (whether or
not underscored) when used in this Security Agreement, including its preamble
and recitals, shall have the following meanings:

         "Account" shall have the meaning as provided in the UCC.

         "Assignee Concentration Account" shall have the meaning set forth in
the Assignment Agreement.








         "Assignor Concentration Account" shall have the meaning set forth in
the Assignment Agreement.

         "Assignment Agreement" shall have the meaning set forth in the recitals
hereto.

         "Cambrex" means Cambrex Bio Science Walkersville, Inc., a Delaware
corporation.

         "Cambrex Collateral" shall mean the "Collateral" as such term is
defined in the Cambrex Security Agreement.

         "Cambrex Security Agreement" means the Security Agreement dated as of
October 18, 2004 between Cambrex, Ortec and Orcel, as amended from time to time.

         "Collateral" shall have the meaning set forth in Section 2.1.

         "Consent and Agreement" shall mean the Consent and Agreement dated as
of October 18, 2004 between Cambrex and Grantee, as amended from time to time.

         "Event of Default" shall mean a Funding Termination Event.

         "General Intangible" shall have the meaning as provided in the UCC.

         "Grantor" shall have the meaning set forth in the preamble hereto.

         "Instrument" shall have the meaning as provided in the UCC.

         "Intellectual Property" shall have the meaning set forth in the
Assignment Agreement.

         "Joint Concentration Account" shall have the meaning set forth in the
Assignment Agreement.

         "Lockbox Account" shall have the meaning set forth in the Assignment
Agreement.

         "Lockbox Agreement" shall have the meaning set forth in the Assignment
Agreement.

         "Lockbox Bank" shall have the meaning set forth in the Assignment
Agreement.

         "Obligations" shall have the meaning set forth in the Assignment
Agreement.

         "Patent License" means any written agreement now or hereafter in
existence granting to Grantor any right to use any invention on which a patent
is in existence, including, without limitation, the agreements described in
Schedule l of the Patent Security Agreement.



                                       2








         "Patent Security Agreement" means the Patent Security Agreement
executed and delivered by Grantor to Grantee and attached hereto as Exhibit A,
as such agreement may be amended, supplemented or otherwise modified from time
to time.

         "Pledged Deposit Accounts" shall have the meaning set forth in Section
2.1(i) hereof.

         "Proceeds" shall have the meaning as provided in the UCC.

         "Receivables" mean the Revenue Interests and the Related Receivables.

         "Related Receivables" shall have the meaning set forth in Section
2.1(f).

         "Security Agreement" shall have the meaning set forth in the preamble
hereto.

         "UCC" means the Uniform Commercial Code as in effect on the date hereof
in the State of New York, as amended from time to time, and any successor
statute; provided that if by reason of mandatory provision of law, the
perfection or the effect of perfection or non-perfection of the security
interest in the Collateral is governed by the Uniform Commercial Code of another
jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provision hereof relating to such perfection or
effect of perfection or non-perfection.

         Section 1.2. Assignment Agreement Definitions.

         Unless otherwise defined herein or the context otherwise requires,
terms used in this Security Agreement, including its preamble and recitals, have
the meanings provided in the Assignment Agreement.

         Section 1.3. UCC Definitions.

         Unless otherwise defined herein or the context otherwise requires,
terms for which meanings are provided in the UCC are used in this Security
Agreement, including its preamble and recitals, with such meanings.

         Section 1.4. Other Interpretive Provisions.

         (a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.

         (b) The words "hereof," "herein," "hereunder" and similar words refer
to this Security Agreement as a whole and not to any particular provision of
this Security Agreement; and subsection, Section, Schedule, and Exhibit
references are to this Security Agreement unless otherwise specified.

         (c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.


                                       3








             (ii) The term "including" is not limiting and means "including
without limitation".

             (iii) The term "property" includes any kind of property or asset,
personal or mixed, tangible or intangible, other than real property.

         (d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Security Agreement) and other contractual instruments
shall be deemed to include all subsequent amendments and other modifications
thereto, but only to the extent such amendments and other modifications are not
prohibited by the terms of any Transaction Document, and (ii) references to any
statute or regulation are to be construed as including all statutory and
regulatory provisions consolidating, amending, replacing, supplementing, or
interpreting the statute or regulation.

         (e) The captions and headings of this Security Agreement are for
convenience of reference only and shall not affect the interpretation of this
Security Agreement.

                                   ARTICLE II

                                SECURITY INTEREST

         Section 2.1. Grant of Security.

         As collateral security for the prompt, full and faithful payment and
performance when due of the Obligations, each Grantor hereby assigns, pledges,
transfers and grants to Grantee a continuing lien on and a first priority
security interest in all of such Grantor's right, title, and interest in and to
the following property, wherever the same may be now or hereafter located, and
all supporting obligations and other security therefor, whether secured or
unsecured, and whether now owned or hereafter existing or acquired (the
"Collateral"):

         (a) all Revenue Interests;

         (b) all Assigned Interests;

         (c) all License Agreements (but only with respect to sales of Products
in North America), including, without limitation, that certain License
Agreement, dated as of October 18, 2004 between Ortec, Orcel and Cambrex;

         (d) all Distribution Agreements (but only with respect to sales of
Products in North America), including without limitation, that certain Sales
Agency Agreement, dated as of October 18, 2004 between Ortec and Cambrex;

         (e) the Management Agreement;

         (f) the Ortec Security Agreement;


                                       4







         (g) the Exclusive License Agreement;

         (h) all Intellectual Property (but with respect to Patents and
trademark applications and registrations, only those registered or filed in
North America);

         (i) all Accounts, contract rights, payment intangibles, Instruments,
and General Intangibles, in each case, constituting, comprising, evidencing or
otherwise relating to any of the foregoing in this Section 2.1 (any and all such
Accounts, contract rights, payments intangibles, Instruments, and General
Intangibles being the "Related Receivables");

         (j) all books, records, data bases, and information, in each case,
specifically relating to any of the foregoing in this Section 2.1;

         (k) all money now or at any time in the possession or under the control
of, or in transit to, the Lockbox Bank, Grantee, the bank with the PRF/Cambrex
Lockbox Account (as defined in the Consent and Agreement), or each Grantor
relating to any of the foregoing in this Section 2.1; and

         (l) the Lockbox Account, the Joint Concentration Account and the
Assignee Concentration Account, the PRF/Cambrex Lockbox Account or in any bank
account or deposit account in which funds were received by each Grantor from or
on account of or relating to each of the foregoing in this Section 2.1
(collectively, the "Pledged Deposit Accounts"), all funds on deposit in each
such account, all investments arising out of such funds, all claims thereunder
or in connection therewith and special purpose subaccounts maintained therein,
and all monies and credit balances from time to time held in the Pledged Deposit
Accounts or such subaccounts; all notes, certificates of deposit, deposit
accounts, checks and other instruments from time to time hereafter delivered to
or otherwise possessed by any Grantor in substitution for or in addition to any
or all of the then existing items described in this subsection (l); and all
interest, dividends, cash, securities, rights, instruments and other property at
any time and from time to time received, receivable or otherwise distributed in
respect of such accounts, such funds, or such investments or received in
exchange for any or all of the items described in this subsection (l); and

         (m) all Cambrex Collateral, but only to the extent that such Cambrex
Collateral is the property of either Grantor;

         (n) all products and Proceeds of and from any and all of the foregoing
Collateral, all proceeds which constitute property of the types described in
clauses (a) through (m) and, to the extent not otherwise included, all payments
under insurance (whether or not Grantee is the loss payee thereof), including
return premiums with respect thereto, or any indemnity, warranty, or guaranty
payable by reason of loss or damage to or otherwise with respect to any of the
foregoing Collateral;

provided, however, that the term "Collateral" shall not include, and neither
Grantor shall be deemed to have granted a security interest in, any of such
Grantor's right, title or interest in, or any rights under, any contract or
other agreement existing on the Closing Date to the extent that


                                       5








such grant would result in a breach of a term of such contract or agreement
prohibiting such grant without the consent of the other party thereto, other
than to the extent that any such term would be rendered ineffective pursuant to
Section 9-406 of the UCC.

         Section 2.2. Continuing Security Interest.

         This Security Agreement shall create a continuing security interest in
the Collateral and shall:

         (a) remain in full force and effect until the payment and performance
in full of all the Obligations;

         (b) be binding upon each Grantor and their respective successors,
transferees and assigns; and

         (c) inure, together with the rights and remedies of Grantee, to the
benefit of Grantee and its successors and assigns.

Upon the payment and performance in full of the Obligations, the security
interest granted herein shall terminate and all rights to the Collateral shall
revert to each Grantor. Upon any such termination, Grantee will, at the
Grantors' sole expense, promptly execute and deliver to each Grantor such
instruments and documents necessary and as such Grantor shall reasonably request
to evidence such termination.

         Section 2.3. Grantors Remains Liable.

         Anything herein to the contrary notwithstanding:

         (a) The Grantors shall remain liable under the contracts and agreements
included in the Collateral to the extent set forth therein and shall perform all
of its duties and obligations under such contracts and agreements to the same
extent as if this Security Agreement had not been executed;

         (b) The exercise by Grantee of any of its rights and remedies hereunder
shall not release the Grantors from any of their duties or obligations under any
such contracts or agreements included in the Collateral; and

         (c) Grantee shall not have any obligation or liability under any such
contracts or agreements included in the Collateral by reason of this Security
Agreement, and Grantee shall not be obligated to perform or fulfill any of the
obligations or duties of each Grantor thereunder or to take any action to
collect or (x) to make any inquiry as to the nature or sufficiency of any
payment the Grantors may be entitled to receive thereunder; (y) present or file
and claim or (z) enforce any claim for payment assigned hereunder.


                                       6









                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

         Each Grantor represents and warrants to Grantee as follows:

         Section 3.1. Legal Status of Each Grantor, Location of Collateral, etc.


         (a) Each Grantor's exact legal name is set forth on Schedule I and the
signature page hereof.

         (b) Orcel is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware. Ortec is
a corporation duly incorporated, validly existing and in good standing under the
laws of Delaware.

         (c) On the date hereof, the place(s) of business and chief executive
office of each Grantor and the office(s) where each Grantor keeps its respective
records concerning the Receivables are located at the addresses set forth on
Schedule I.

         (d) Neither Grantor has a trade name.

         (e) Except as set forth on Schedule 3.1, during the past five years,
neither Grantor has been known by any name different from the one set forth on
the signature page hereto, and neither Grantor has been the subject of any
merger or other corporate reorganization.

         (f) None of the Receivables is evidenced by a promissory note or other
instrument.

         Section 3.2. Ownership; No Liens.

         Orcel owns the Collateral free and clear of any Liens except for the
security interest created by this Security Agreement and, to the extent
applicable, the security interest created by the Cambrex Security Agreement, and
except as set forth in the next sentence. To the extent that Ortec owns any of
the Collateral, Ortec owns such Collateral free and clear of any Liens except
for the security interest created by this Security Agreement and, to the extent
applicable, the security interest created by the Cambrex Security Agreement. No
effective security agreement, financing statement, assignment, equivalent
security, lien or other instrument similar in effect covering all or any part of
the Collateral is on file or of record in any public office, except such as may
have been filed in favor of Grantee relating to this Security Agreement or in
favor of Cambrex relating to the Cambrex Security Agreement.

         Section 3.3. Validity.

         This Security Agreement creates a valid security interest in the
Collateral securing the payment and performance in full of the Obligations. Upon
the filing of appropriate financing statements in the applicable filing offices
in the jurisdictions listed in Schedule II, all filings, registrations and
recordings necessary or appropriate to create, preserve, protect and perfect the


                                       7







first priority security interest granted by each Grantor to Grantee in the
Collateral will have been accomplished and will create a perfected security
interest therein prior to the rights of all other Persons therein and subject to
no other Liens, except as set forth in Schedule 3.04 to the Assignment
Agreement.

         Section 3.4. Intellectual Property.

         The Patents constitute all registered Intellectual Property owned or
used by each Grantor and the Patent Licenses constitute all agreements relating
to Intellectual Property owned or used by each Grantor. The execution, delivery
and performance of this Security Agreement or the Assignment Agreement by each
Grantor will not violate or cause a default under any of the Intellectual
Property or any material agreement in connection therewith. Each Grantor further
represents and warrants as to those representations and warranties set forth in
Section 3.12 of the Assignment Agreement as if set forth in its entirety herein.

         Section 3.5. Authorization, Approval.

         No authorization, approval, or other action by, and no notice to or
filing with, any Government Authority or other Person is required either:

         (a) for the grant by each Grantor of the security interest granted
hereby or for the execution, delivery, and performance of this Security
Agreement by such Grantor; or

         (b) for the perfection of or exercise by Grantee of its rights and
remedies hereunder, other than (i) the filing of financing statements in the
offices listed in Item B of Schedule I and (ii) the establishment of the Pledged
Deposit Accounts and the Assignor Concentration Account in accordance with
Section 5.10 of the Assignment Agreement.

         Section 3.6. Enforceability.

         This Security Agreement is the legally valid and binding obligation of
each Grantor, enforceable against such Grantor in accordance with its terms.

                                   ARTICLE IV

                                    COVENANTS

         Each Grantor hereby covenants and agrees that, so long as this Security
Agreement shall remain in effect, such Grantor agrees to the following:

         Section 4.1. As to Receivables.

         (a) Each Grantor shall keep its place(s) of business and its chief
executive office and the office(s) where it keeps its books and records
(including those concerning the Receivables) and all original copies of the
Distribution Agreements and the License Agreements located, in each case, at its
address specified in Item A of Schedule I, or, upon 30 days' prior


                                       8








written notice to Grantee, at such other locations in a jurisdiction where all
actions required by the first sentence of Section 4.4 shall have been taken with
respect to the Receivables, the Distribution Agreements and the License
Agreements; not change its name or its state or place of incorporation or
organization except upon 30 days' prior written notice to Grantee; and hold and
preserve such books and records.

         (b) Except as otherwise provided in this subsection (b), until an Event
of Default has occurred and is continuing, each Grantor shall, subject to
Section 5.10 of the Assignment Agreement, continue to collect, at its own
expense, all amounts due or to become due either Grantor under the Management
Agreement, the Ortec Security Agreement, the Distribution Agreements and the
License Agreements. In connection with such collections, provided no Event of
Default shall have occurred and be continuing, each Grantor may, subject to
Section 5.10 of the Assignment Agreement, take (and, at Grantee's direction,
shall take) such action as such Grantor may deem necessary or advisable to
enforce collection of the Management Agreement, the Ortec Security Agreement or
the applicable Distribution Agreement or License Agreement. At any time after an
Event of Default has occurred and is continuing, Grantee shall have the right to
notify the account debtors or obligors under any Receivables of the security
interest of Grantee in such Receivables to Grantee and to direct such account
debtors or obligors to make payment to Grantee of any amounts due or to become
due thereunder and enforce collection of any of the Receivables by suit or
otherwise and surrender, release or exchange all or any part thereof, or adjust,
settle or compromise or extend or renew for any period (whether or not longer
than the original period) any indebtedness thereunder or evidenced thereby. If
an Event of Default has occurred and is continuing, upon the request of Grantee,
each Grantor will, at its own expense, notify any parties obligated on any of
the Receivables to make payment to Grantee of any amounts due or to become due
thereunder, and in such event, Grantee is authorized to endorse, in the name of
such Grantor, any item representing any payment on or other proceeds of any of
the Receivables.

         (c) After delivery to each Grantor by Grantee of a notice that an Event
of Default has occurred and is continuing: (i) all amounts and proceeds
(including Instruments) received by the Grantors in respect of any Receivables
shall be received in trust for the benefit of Grantee hereunder, shall be
segregated from other funds of the Grantors, and shall be forthwith paid over to
Grantee in the same form as so received (with any necessary endorsements) to be
held as cash collateral and applied as provided by this Security Agreement; and
(ii) subject to Section 5.10 of the Assignment Agreement, neither Grantor shall
adjust, settle, or compromise the amount or payment of any Receivable, or
release wholly or partly any account debtor or obligor thereof, or allow any
credit or discount thereon.

         (d) After the occurrence and during the continuance of an Event of
Default, (A) Grantee may in its own name or in the name of others communicate
with account debtors in order to verify with them to Grantee's reasonable
satisfaction the existence, amount and terms of (h) any Receivables and (B)
Grantee shall have the right, at the Grantors' expense, to make test
verifications of the Receivables in any reasonable manner and through any medium
that it considers advisable, and each Grantor agrees to furnish all such
assistance as Grantee may reasonably require in connection therewith.


                                       9










         (e) Notwithstanding the foregoing, nothing in this Section 4.1 shall be
deemed to limit any provision contained in the Consent and Agreement.

         Section 4.2. Insurance.

         The Grantors will maintain or cause to be maintained at all times
insurance against loss or damage sufficient to cover all the Collateral that are
of an insurable nature to the same extent assets of a similar character are
usually so insured by companies similarly situated and owning like assets, with
insurers believed by the Grantors to be responsible and reputable. If an Event
of Default exists at the time any insurance proceeds relating to the Collateral
are received, all such proceeds shall be paid to Grantee for application in
accordance with the terms and conditions of the Assignment Agreement and this
Security Agreement.

         Section 4.3. Intellectual Property.

         The Grantors shall concurrently herewith deliver to Grantee the Patent
Security Agreement and all other documents, instruments and other items as may
be necessary for Grantee to file such agreements with the United States Patent
and Trademark Office and any similar domestic or foreign office, department or
agency. If, before the Obligations are paid in full, either Grantor obtains any
new Intellectual Property or rights thereto or becomes entitled to the benefit
of any Intellectual Property not listed on the schedules to each security
agreement, such Grantor shall give to Grantee prompt written notice thereof, and
shall amend the respective security agreement to include any such new
Intellectual Property. Each Grantor shall: (a) preserve and maintain all rights
in the Intellectual Property; and (b) upon and after the occurrence of an Event
of Default, use its best efforts to obtain any consents, waivers or agreements
necessary to enable such Grantor to exercise its remedies with respect to the
Intellectual Property. Neither Grantor shall abandon any right to file a patent
or trademark application relating to the Intellectual Property nor shall such
Grantor abandon any pending patent or trademark application or patent, trademark
or copyright (including without limitation any Patents or Patent Licenses)
without the prior written consent of Grantee.

         Section 4.4. Transfers and Other Liens.

         Each Grantor shall not:

         (a) subject to Section 4.7 below and except for the Cambrex Security
Agreement, grant a security interest in the Assigned Interests or the other
Collateral described in this Agreement to any other party without the prior
written consent of Grantee; or

         (b) subject to Section 4.7 below, sell, assign (by operation of law or
otherwise), lease, transfer or otherwise dispose of any of, or grant any Person
an option with respect to, the Collateral.

         Section 4.5. Further Assurances.

         Each Grantor agrees that, from time to time at its own cost and
expense, such Grantor will promptly execute and deliver and will cause to be
executed and delivered all further


                                       10










instruments, assignments, notices, agreements and documents, including, without
limitation, financing and continuation statements, and will take all further
action and will cause all further action to be taken, that may be reasonably
necessary or desirable, or that Grantee may reasonably request, in order to
create, preserve, perfect and protect any security interest granted or purported
to be granted hereby and the priority thereof or to enable Grantee to exercise
and enforce its rights and remedies hereunder with respect to any Collateral.
Without limiting the generality of the foregoing each Grantor will:

         (a) if any Collateral shall be evidenced by a promissory note or other
instrument or negotiable document, deliver and pledge to Grantee hereunder such
promissory note, instrument or negotiable document duly endorsed and accompanied
by duly executed instruments of transfer or assignment, all in form and
substance reasonably satisfactory to Grantee;

         (b) execute and file, record or register such financing or continuation
statements, or amendments thereto, and such other instruments, assignments or
notices, as may be necessary or desirable, or as Grantee may request, in order
to create, preserve, perfect and protect the security interests and other rights
granted or purported to be granted to Grantee;

         (c) furnish to Grantee, from time to time, statements and schedules
further identifying and describing the Collateral and such other reports in
connection with the Collateral as Grantee may reasonably request, and all in
reasonable detail and in accordance with the terms of the Assignment Agreement;
and

         (d) at Grantee's request, appear in and defend any action or proceeding
that may affect such Grantor's title to or Grantee's security interest in the
Collateral.

With respect to the foregoing and the grant of the security interest hereunder,
each Grantor hereby authorizes Grantee to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of such Grantor where permitted by law. A
carbon, photographic, or other reproduction of this Security Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.

         Section 4.6. General Covenants.

         Without limiting any of the foregoing covenants, each Grantor agrees
(a) not to use or permit any Collateral to be used unlawfully or in material
violation of any provision of the Assignment Agreement, this Security Agreement,
any other Transaction Document or any applicable statute, regulation or
ordinance or any policy of insurance covering the Collateral; and (b) to pay
promptly when due all taxes, assessments, charges, encumbrances and Liens now or
hereafter imposed upon or affecting any Collateral.

         Section 4.7. Factoring of Revenue Interests.

         Should either Grantor propose to enter into a factoring of the accounts
receivable represented by the Revenue Interests, Grantee shall negotiate and
enter into an intercreditor


                                       11










arrangement with any party with which such Grantor enters into a factoring of
such accounts receivable containing terms and provisions mutually satisfactory
to such Grantor, the factor and Grantee and providing for, among other things,
the following:

         (a) the factor receiving a security interest in not more than an
undivided 81.5% of the accounts receivable represented by the Revenue Interests;

         (b) the maintenance in favor of Grantee of (i) a 100% exclusive
security interest in 18.5% of the accounts receivable represented by the total
Revenue Interests; (ii) a 100% exclusive security interest in the proceeds from
the factoring of the accounts receivable represented by the Revenue Interests;
and (iii) to the extent that any portion of the accounts receivable represented
by the Revenue Interests are not factored, a 100% exclusive security interest in
such unfactored portion of the accounts receivable represented by the Revenue
Interests;

         (c) the security interest that is granted to such factoring party in
the accounts receivable represented by the Revenue Interests in accordance with
clause (a) above shall be pari passu to Grantee's security interest granted in
Section 2.1 in the accounts receivable represented by the Revenue Interests; and

         (d) all proceeds from the factoring arrangement shall be disbursed
pursuant to instructions from Grantee first to Grantee in respect of all amounts
owing by either Grantor to Grantee and the balance into the Lockbox Account to
be disbursed in accordance with the terms of the Lockbox Agreement.

         Notwithstanding the foregoing, nothing in this Section 4.7 shall be
deemed to limit any provision contained in the Consent and Agreement.

                                   ARTICLE V

                          RIGHTS AND DUTIES OF GRANTEE

         Section 5.1. Grantee Appointed Attorney-in-Fact.

         Each Grantor hereby irrevocably appoints Grantee (and all Persons
designated for that purpose) as such Grantor's true and lawful attorney-in-fact,
with full authority and power in the place and stead of such Grantor and in the
name of such Grantor, Grantee or otherwise, from time to time in Grantee's
discretion from and after the occurrence and during the continuation of an Event
of Default and at such time or times thereafter as Grantee may, in its sole
discretion determine, to take any appropriate action and to execute any
instrument that Grantee may deem reasonably necessary or advisable to accomplish
the purposes of this Security Agreement (but Grantee shall not be obligated to
and shall have no liability to any Grantor or any third party for failure so to
do) including, without limitation:


                                       12










         (a) to ask, demand, collect, enforce, sue for, recover, compromise,
receive, and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;

         (b) to receive, endorse, and collect any checks, drafts or other
instruments, documents, and chattel paper in connection with clause (a) above;

         (c) to file any claims or take any action or institute any proceedings
(or to settle, adjust or compromise any such proceeding) that Grantee may deem
necessary or desirable for the collection of any of the Collateral or otherwise
to enforce the rights of Grantee with respect to any of the Collateral;

         (d) to perform the affirmative obligations of each Grantor hereunder
(including all obligations of such Grantor pursuant to Section 4.4);

         (e) to execute and deliver for and on behalf of each Grantor any and
all instruments, documents, agreements, and other writings necessary or
advisable for the exercise on behalf of such Grantor of any rights, benefits or
options created or existing under or pursuant to the Collateral; and

         (f) to execute endorsements, assignments, or other instruments of
conveyance and transfer.

Each Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section 5.1 is irrevocable and coupled with an
interest.

         Section 5.2. Grantee May Perform.

         If any Grantor fails to perform any agreement contained herein, Grantee
may itself (but shall not be obliged to) perform, or cause performance of, such
agreement, provided that Grantee shall in any event first have given the
Grantors written notice of its intent to do the same and neither Grantor shall
have, within 30 days of such notice (or such shorter period as Grantee may
reasonably determine is necessary in order to preserve the benefits of this
Security Agreement with respect to any material portion of the Collateral), paid
such claim or obtained to Grantee's satisfaction the release of the claim or
Lien to which such notice relates. Each Grantor agrees to reimburse Grantee upon
demand for any costs and expenses, including, without limitation, reasonable
attorneys' fees, Grantee incurs while acting as such Grantor's attorney-in-fact
hereunder, all of which costs and expenses are included in the Obligations
secured hereby.

         Section 5.3. Limitations on Duties of Grantee.

         Grantee shall be obligated to perform such duties and only such duties
as are specifically set forth in this Security Agreement, and no implied
covenants or obligations shall be read into this Security Agreement against
Grantee. If an Event of Default has occurred and is continuing, Grantee shall
exercise the rights and powers vested in it by this Security Agreement, and
shall not be liable (except for its gross negligence or willful misconduct) with
respect to any


                                       13









action taken by it, or omitted to be taken by it, in accordance with, and
subject to the limitations contained in, the Assignment Agreement.

         Section 5.4. Reasonable Care.

         It is understood and agreed between the parties hereto that Grantee's
duty with respect to the custody, safekeeping, and physical preservation of the
Collateral in its possession should be to deal with it in the same manner as
Grantee deals with similar property for its own account; provided, however, that
Grantee shall not be required to make any presentment, demand, or protest, or
give any notice, and need not take any action to preserve any rights against any
other Person with respect to the Collateral.

                                   ARTICLE VI

                                    REMEDIES

         Section 6.1. Certain Remedies.

         If any Event of Default shall have occurred and is continuing:

         (a) Grantee may exercise in respect of the Collateral, in addition to
other rights available to it at law or in equity or otherwise, all the rights
and remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral) and also may (i) require each Grantor to,
and each Grantor hereby agrees that it will, at its expense and upon request of
Grantee forthwith, assemble all or part of the Collateral as directed by Grantee
and make it available to Grantee at a place to be designated by Grantee that is
reasonably convenient to both parties, (ii) exercise any and all rights and
remedies of the Grantors under or in connection with the Collateral, (iii)
withdraw all monies, securities and other property in the Pledged Deposit
Accounts for application to the Obligations, (iv) foreclose or otherwise enforce
Grantee's security interest in any manner permitted by law or provided for in
this Security Agreement, (v) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any place or places for cash, on credit, or for future delivery, and upon
such other terms as Grantee may deem commercially reasonable, (vi) recover from
each Grantor all costs and expenses, including, without limitation, reasonable
attorneys' fees, incurred or paid by Grantee in exercising any right, power,
privilege or remedy provided by this Security Agreement or by law, (vii) without
notice or demand of legal process, all of which are hereby expressly waived by
each Grantor, enter into property where any Collateral is located and take
possession thereof, and (viii) prior to the disposition of the Collateral,
prepare it for disposition in any manner and to the extent Grantee deems
appropriate; provided, however, that notwithstanding the foregoing to the
contrary, Grantee may sell or otherwise dispose the Collateral or any portion
thereof in its then condition without any preparation or processing. Each
Grantor agrees that, to the extent notice of sale shall be required by law, at
least ten (10) days' prior notice to such Grantor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification. Grantee shall not be obligated to make any
sale of Collateral regardless of notice of sale having


                                       14









been given. Grantee may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned. Upon
any sale or other disposition pursuant to this Security Agreement, Grantee shall
have the right to deliver, assign and transfer to a transferee thereof the
Collateral or portion thereof and transfer to a transferee thereof the
Collateral or portion thereof so sold or disposed of. Each transferee at any
such sale or other disposition (including Grantee) shall hold the Collateral
free from any claim or right of whatever kind, including any equity or right of
redemption of each Grantor and each Grantor specifically waives (to the extent
permitted by law) all rights of redemption, stay or appraisal which it has or
may have under any rule of law or statute now existing or hereafter adopted.

         (b) All cash proceeds received by Grantee in respect of any sale of,
collection from, or other realization upon all or any part of the Collateral
shall be applied: first, to all costs, fees and expenses incurred by Grantee;
and second, to the Obligations. If any non-cash proceeds are received in
connection with any sale of Collateral, Grantee shall not apply such non-cash
proceeds to the Obligations unless and until such proceeds are converted to
cash; provided, however, that if such non-cash proceeds are not expected on the
date of receipt thereof to be converted to cash within one year after such date,
Grantee shall nonetheless use commercially reasonable efforts to convert such
non-cash proceeds to cash within such one-year period. Any surplus of such cash
or cash proceeds held by Grantee after payment in full of all the Obligations
shall be paid over to the Grantors or to whomsoever may be lawfully entitled to
receive such surplus.

         Notwithstanding the foregoing, nothing in this Section 6.1 shall be
deemed to limit any provision contained in the Consent and Agreement.

                                  ARTICLE VII

                            MISCELLANEOUS PROVISIONS

         Section 7.1. Amendments.

         No amendment, modification or waiver of any provision of this Security
Agreement or the Assignment Agreement, and no consent to any departure by any
Grantor herefrom shall in any event be effective unless the same shall be in
writing and signed by Grantee, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

         Section 7.2. Release of Collateral.

         If any of the Collateral shall be sold, transferred, or otherwise
disposed of by any Grantor in a transaction not expressly prohibited by the
Assignment Agreement, then Grantee shall, at such Grantor's written request,
promptly execute and deliver to such Grantor (at the sole cost and expense of
such Grantor) such instruments or documents necessary and as Grantor shall


                                       15









reasonably request to release the Liens created hereby on such Collateral,
including any necessary UCC amendment, termination statement or partial
termination statement.

         Section 7.3. Notices.

         All notices and other communications shall be given as set forth in
Section 8.03 of the Assignment Agreement.

         Section 7.4. Waiver; Cumulative Remedies.

         (a) No failure to exercise and no delay in the exercise, on the part of
Grantee, of any right, remedy, power, or privilege hereunder and no course of
dealing with respect thereto shall impair such right, remedy, power or privilege
or be construed to or operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof, or the exercise of any other right, remedy,
power or privilege.

         (b) Each Grantor waives any right to require Grantee to proceed against
any Person or to exhaust any Collateral or to pursue any remedy in such
Grantee's power.

         (c) The rights, powers and remedies of Grantee under this Security
Agreement shall be in addition to all rights, powers and remedies given to
Grantee by virtue of any statute or rule of law, the Assignment Agreement or any
other agreement, all of which rights, powers and remedies shall be cumulative
and may be exercised successively or concurrently without impairing Grantee's
security interest in the Collateral.

         Section 7.5. Successors and Assigns.

         The provisions of this Security Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that neither Grantor may assign or transfer any of its rights or
obligations under this Security Agreement without the prior written consent of
Grantee. Grantee may assign this Security Agreement, or any of its rights and
obligations hereunder, at any time to any other person or entity it deems
necessary or desirable without advance notice to Grantors, provided that prior
to or concurrently with such assignment such person or entity agrees in writing
(in form and substance reasonably satisfactory to Cambrex) to take subject to
and be bound by the provisions of the Consent and Agreement and provided that
written notice of such assignment is promptly thereafter given to Grantors and
Cambrex.

         Section 7.6. Counterparts.

         This Security Agreement may be executed in any number of separate
counterparts, each of which, when so executed, shall be deemed an original, and
all of said counterparts taken together shall be deemed to constitute but one
and the same instrument.

         Section 7.7. Severability.


                                       16









         The illegality or unenforceability of any provision of this Security
Agreement or any instrument or agreement required hereunder shall not in any way
affect or impair the legality or enforceability of the remaining provisions of
this Security Agreement or any instrument or agreement required hereunder.

         Section 7.8. Governing Law and Jurisdiction.

         (a) THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS
CONFLICTS OF LAW PRINCIPLES).

         (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURITY
AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS
SECURITY AGREEMENT, EACH GRANTOR HEREBY IRREVOCABLY CONSENTS TO AND ACCEPTS, FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY THE
NON-EXCLUSIVE JURISDICTION OF SUCH COURTS. EACH GRANTOR HEREBY FURTHER
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS SECURITY AGREEMENT OR ANY DOCUMENT RELATED HERETO.

         Section 7.9. Waiver of Jury Trial.

         EACH OF THE GRANTORS AND GRANTEE HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS SECURITY AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. THIS WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS SECURITY AGREEMENT.



                            [Signature page follows]


                                       17










         IN WITNESS WHEREOF, Ortec, Orcel and Grantee have caused this Security
Agreement to be duly executed and delivered by their respective duly authorized
officers as of the date first above written.




GRANTOR:                                ORCEL LLC



                                        By:     /s/ Ron Lipstein
                                           -------------------------------------
                                            Name:  Ronald Lipstein
                                            Title: Manager




GRANTOR:                                ORTEC INTERNATIONAL INC.




                                        By:     /s/ Ron Lipstein
                                           -------------------------------------
                                            Name:  Ronald Lipstein
                                            Title: Manager




GRANTEE:                                PAUL ROYALTY FUND, L.P.

                                        By: Paul Capital Management, LLC,
                                            its General Partner



                                            By:  /s/ Walter Flamenbaum
                                               ---------------------------------
                                               Name:  Walter Flamenbaum, M.D.
                                               Title: Managing Member



                     [SIGNATURE PAGE TO SECURITY AGREEMENT]










                                                                       EXHIBIT A
                                                           to Security Agreement


                        FORM OF PATENT SECURITY AGREEMENT


            WHEREAS, ORCEL LLC, a Delaware limited liability company ("Grantor")
owns the Patents and Patent Applications listed on Schedule 1 annexed hereto,
and is a party to the Patent Licenses listed on Schedule l annexed hereto; and

            WHEREAS, Grantor, Ortec International Inc., a Delaware corporation
and Paul Capital Royalty Acquisition Fund, L.P., a Delaware limited partnership
("Grantee") are parties to a Revenue Interests Assignment Agreement dated as of
August 29, 2001 (the "Assignment Agreement"), pursuant to which, among other
things, Grantor sells, assigns, transfers and conveys to Grantee, and Grantee
purchases from Grantor, all of Grantor's rights and interests in and to the
Assigned Interests (as defined in the Assignment Agreement);

             WHEREAS, pursuant to the terms of the Security Agreement dated as
of August 29, 2001 (the "Security Agreement;" all capitalized terms defined in
the Assignment Agreement or the Security Agreement and not otherwise defined
herein have the respective meanings provided for in the Assignment Agreement or
the Security Agreement), between Grantor and Grantee, Grantor has granted to
Grantee a security interests as contemplated by the Security Agreement,
including, without limitation, all right, title and interest of Grantor in, to
and under all now owned and hereafter acquired North American Patents, Patent
applications and Patent Licenses, and all products and proceeds thereof (to the
extent granted therein), to secure the payment of all amounts owing by Grantor
under the Assignment Agreement and the other Obligations;

             NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee a continuing security interest in all of Grantor's right, title and
interest in, to and under the following (all of the following items or types of
property being herein collectively referred to as the "Patent Collateral"),
whether presently existing or hereafter created or acquired:

      (1) each North American Patent and Patent application included in the
      Intellectual Property, including, without limitation, each Patent and
      Patent application referred to in Schedule l annexed hereto, together with
      any reissues, continuations or extensions thereof, and all of the goodwill
      of the business conducted in North America connected with the use of, and
      symbolized by, each such Patent and Patent application;









      (2) each Patent License, including, without limitation, each Patent
      License listed on Schedule 1 annexed hereto; and

      (3) all products and proceeds of the foregoing, including, without
      limitation, any claim by Grantor against third parties for past, present
      or future infringement of any such Patent, including, without limitation,
      any Patent referred to in Schedule 1 annexed hereto, any Patent issued
      pursuant to a Patent Application referred to in Schedule l and any patent
      licensed under any Patent License listed on Schedule 1 annexed hereto.

             This security interest is granted in conjunction with the security
interests granted to Grantee pursuant to the Security Agreement. Grantor hereby
acknowledges and affirms that the rights and remedies of Grantee with respect to
the security interest in the Patent Collateral made and granted hereby are more
fully set forth in the Security Agreement, the terms and provisions of which are
incorporated by reference herein as if fully set forth herein.

             IN WITNESS WHEREOF, Grantor has caused this Patent Security
Agreement to be duly executed by its duly authorized officer thereunto as of the
29th day of August, 2001.


                                              ORCEL LLC

                                              By:
                                                   -----------------------------
                                                   Name:  Ronald Lipstein
                                                   Title: Manager

Agreed and Accepted as of the
29th day of August, 2001

PAUL CAPITAL ROYALTY ACQUISITION FUND, L.P.

By:  Paul Capital Management, LLC,
     its General Partner

By:
   --------------------------------------
     Name:  Walter Flamenbaum, M.D.
     Title: Managing Member


                                       2










                                 ACKNOWLEDGEMENT

STATE OF NEW YORK          )
                           )       ss:
COUNTY OF NEW YORK         )


         On the 29th day of August, 2001 before me personally appeared Ronald
Lipstein, to me personally known or proved to me on the basis of satisfactory
evidence to be the person described in and who executed the foregoing instrument
as the Manager of Orcel LLC who being by me duly sworn, did depose and say that
he is the Manager of Orcel LLC, the corporation described in and which executed
the foregoing instrument; that he knows the seal of said limited liability
company; that the seal affixed to said limited liability company by order of its
Management Committee; that he signed his name thereto by like order; and that he
acknowledged said instrument to be the free act and deed of limited liability
company.



                                              Notary Public


(Seal)


My commission expires:


                                       3








                     Schedule I to Patent Security Agreement

                                     PATENTS



                U.S. Patent No.                                        Expiration Date
                ---------------                                        ---------------
                                                                
RE # 35,399 (re-issue of U.S. Patent 5,282,859)                       February 1, 2011
   5,282,859 (Canadian Patent No. 2,080,693)                          February 1, 2011
                   6,039,760                                          February 1, 2011
                   6,500,464                                          December 28, 2020
                   6,638,709                                          December 26, 2020



                                 PATENT LICENSES


None.








                                                                      SCHEDULE I
                                                           to Security Agreement


                         LOCATIONS OF CERTAIN COLLATERAL



Exact Legal Name of Grantors
- ----------------------------

Orcel LLC
Ortec International Inc.


Jurisdiction of Incorporation of each Grantor
- ---------------------------------------------

Delaware


Place(s) Of Business And Chief Executive Office of the Grantors:
- ----------------------------------------------------------------

Each Grantor's principal place of business and chief executive offices are
located at 3960 Broadway, New York, New York 10032.


Addresses of the Properties at which the Grantors Maintain Records Relating to
- ------------------------------------------------------------------------------
the Collateral:
- ---------------

3960 Broadway
New York, New York 10032







                                                                     SCHEDULE II
                                                           to Security Agreement



                     OFFICES FOR FILING FINANCING STATEMENTS



Delaware Secretary of State
UCC Division
P.O. Box 793
Dover, DE 19903







                                                                    SCHEDULE 3.1
                                                           to Security Agreement



                 NAMES AND CORPORATE REORGANIZATIONS AND MERGERS


None.

EX-10

                                                                   Exhibit 10.12


                             SUPPLY AGREEMENT


This SUPPLY AGREEMENT (the "Agreement"), dated the 30th day of December 2004, is
by and between ORTEC INTERNATIONAL, INC. ("Ortec") and LYOPHILIZATION SERVICES
OF NEW ENGLAND, INC. ("LSNE").

                                   WITNESSETH:

WHEREAS, LSNE has expertise in the provision of collagen based processing
services related to the manufacture of powder and sponges; and

WHEREAS, Ortec desires to have LSNE perform certain manufacturing activities
related to collagen powder, lyophilized collagen sponge and crosslinked collagen
sponge, all in accordance with Current Good Manufacturing Practice (cGMP).

NOW, THEREFORE, in consideration of the above premises and the mutual covenants
and undertakings hereinafter set forth, Ortec and LSNE hereby agree as follows:



Section 1.  Definitions

Except as otherwise defined, the following terms shall have the meanings
ascribed to them:

 1.1 "Effective Date" shall mean the date of this Agreement as
first written above.

1.2 "Ortec Equipment" shall mean equipment owned by Ortec and identified on
Exhibit "A" as it may be amended from time to time to reflect the addition or
removal of Ortec Equipment from the LSNE facility.

1.3 "Materials" shall mean all expendable materials required in performance of
the Processing Services and as furnished to LSNE or specified by Ortec.

1.4 "Finished Materials" shall mean the medical grade dehydrothermal (DHT)
crosslinked collagen sponge units that are delivered to a contract sterilizer,
or designee, as determined by Ortec after performance of the Processing Services
on the Materials.

1.5 "Lyophilization Machine" shall mean the primary item of equipment used to
perform the Lyophilization process.

1.6 "Purchase Order" shall mean Ortec's standard purchase order.

1.7 "Specifications" shall mean the specifications for Finished Materials
defined under the Manufacturing Control Procedures.

1.8 "Processing Services" shall mean the manufacture of i) Collagen Powder, ii)
Pre-DHT Lyophilized Collagen Sponge and iii) Crosslinked Collagen Sponge in
accordance with the following procedures.

         1.8.1    The Collagen Powder entails the steps of washing of the corium
                  slurry, lyophilization of collagen pre-powder foam sheets and
                  milling of said sheets.

         1.8.2    The Pre-DHT Lyophilized Collagen sponge entails the steps of
                  preparing the collagen bulk solution, lyophilization of same
                  to create the collagen sponge.






Ortec Legal Review
1-dec-04


         1.8.3    The Crosslinked Collagen sponge involves loading the sponge
                  product, as per Paragraph 1.8.2, into a shelf dryer where it
                  undergoes a dehydrothermal (DHT) crosslinking operation
                  according to a prescribed vacuum-heating-cooling program.

         1.8.4    All Processing Services defined within this section are to be
                  performed in conformance with Manufacturing Control Procedures
                  approved by both Parties and in accordance with cGMP
                  guidelines.

         1.8.5    LSNE shall provide Processing Services for Ortec pursuant to
                  the terms of this Agreement, and Ortec shall, in its sole
                  discretion and as it deems appropriate, transport to LSNE or
                  direct LSNE to purchase subject to Ortec's credit standing
                  with LSNE, Materials for Processing Services from third-party
                  suppliers. Upon release of Finished Materials to Ortec, LSNE
                  certifies and agrees that the Finished Materials were produced
                  in accordance with manufacturing specifications. Ortec shall
                  provide Materials in a timely manner and in such quantities as
                  necessary to enable LSNE to perform Processing Services and
                  deliver Finished Materials consistent with the Specifications
                  and other terms of this Agreement.



Section 2.  Scope of "Processing Services"

2.1 Capacity. LSNE shall provide all appropriate provisions, including
facilities and personnel, required to meet projected volume demands, as
determined by Ortec, for collagen powder and pre-DHT sponges. Both parties shall
cooperate in good faith to expeditiously establish an increase in capacity of
the DHT crosslinking operation, as warranted by projected demand, and Ortec
shall be responsible for costs related to the purchase and installation of the
DHT oven. However, LSNE shall provide, at Ortec's request, provisions for
installation of a minimum of one additional shelf dryer or replacement of the
current shelf dryer with a larger capacity unit.

2.2 Purchase Orders. Ortec shall issue written Purchase Orders for Processing
Services and the return of Finished Materials as Ortec, in its sole discretion,
determines necessary. Each Purchase Order must be in writing, signed by an
authorized representative of Ortec, and specifically refer to this Agreement.
Ortec shall have no obligation to accept or pay for Processing Services related
to Finished Materials if not performed pursuant to the terms of such Purchase
Order.

2.3      Minimum Quantities of "Processing Services"

         2.3.1    Upon execution of this agreement, Ortec agrees to purchase a
                  minimum of 3,500 units of Finished Product within the first
                  12-month period following the date of this agreement. LSNE
                  shall deliver said amount at times specified by Ortec.

         2.3.2    Within 30 days following the receipt by Ortec of written
                  notification from FDA allowing Ortec to sell OrCel'r'
                  commercially for treatment of venous ulcers, Ortec will
                  provide a non-binding 12-month forecast, which will be updated


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                  every 6 months. Also, no later than 30 days prior to the start
                  of any quarter Ortec will provide LSNE with projections for
                  one or more subsequent quarters all which shall be mutually
                  binding on both parties.

2.4      Delivery.

         2.4.1    Ortec shall specify delivery dates for return of Finished
                  Materials on applicable Purchase Orders for Processing
                  Services. LSNE shall use commercially reasonable efforts to
                  meet all such requested delivery dates, but in no event shall
                  the actual delivery date be more than forty-five (45) days
                  from LSNE's receipt of a Purchase Order and receipt of the
                  necessary Materials for the performance of Processing Services
                  related to the specific Purchase Order. Standard terms will
                  require delivery of related Finished Materials within
                  forty-five (45) days of receipt of an Ortec purchase order by
                  LSNE. Finished Materials shall be delivered F.O.B. place of
                  shipment (LSNE's Manchester, New Hampshire location).

         2.4.2    Finished Materials shall be properly prepared for shipment by
                  LSNE to protect against weather, contamination and damage
                  during shipment and shall comply with the Specifications. When
                  requested by Ortec, LSNE shall submit for approval the LSNE's
                  proposed method of preparation for shipment for Finished
                  Materials. Ortec's approval of such methods shall relieve LSNE
                  of its responsibility for any loss or damage occasioned to any
                  Finished Materials prior to receipt by Ortec. LSNE shall only
                  use labeling and packaging supplies as provided or specified
                  by Ortec for this particular purpose.

Section 3.  Pricing; Invoices; Payment

3.1 Prices. During the term of this Agreement, Ortec shall pay, and LSNE shall
invoice Ortec, for Processing Services related to i) powder manufacturing ii)
sponge manufacturing, and iii) delivery of Finished Materials.


         3.1.1    Powder shall be charged at a rate of $6,520 per lot, each lot
                  consisting of a minimum of 260 grams and maximum of 350 grams
                  of dry powder, and be set for the term of the contract unless
                  Ortec changes the Specifications in which case LSNE agrees to
                  charge an incrementally and commercially reasonable increase
                  consistent with the actual cost of implementation. LSNE shall
                  provide Ortec with written justification for such cost
                  increase 60 days prior to implementation in production. Ortec
                  shall provide written notice to LSNE rejecting or accepting
                  such justification for cost increase within 30 days of
                  receiving written justification from LSNE. No production using
                  these revised specifications should be initiated by LSNE prior
                  to its receiving notice from Ortec accepting justification for
                  the price increase.

         3.1.2    Pre-DHT Lyophilized Collagen Sponge shall be charged at a rate
                  of $7,700 per single lot, consisting of a minimum of 300 and
                  maximum of 400 1st quality sponges, which shall be set for the
                  term of the contract unless Ortec changes the Specifications
                  in which case LSNE agrees to charge an incrementally and
                  commercially reasonable


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                  increase consistent with the actual cost of implementation and
                  in accordance with the provisions specified in 3.1.1.

         3.1.3    Finished Material, which includes DHT crosslinking of the
                  collagen sponge, shall be charged at a rate of $700 per single
                  lot of no less than 270 and no more than 720 commercially
                  suitable sponges and in accordance with the provisions in
                  3.1.1.

         3.1.4    Both Parties agree to actively identify and implement cost
                  reduction opportunities and negotiate in good faith a reduced
                  and commercially reasonable pricing schedule reflecting such
                  cost reduction measures. Any cost increase resulting from
                  significant alteration(s) to the manufacturing operation, as
                  requested by Ortec in writing and used in executing Processing
                  Services, is also to be negotiated in good faith between the
                  Parties to determine fair compensation for such changes.

3.2 Invoices. LSNE shall submit invoices to Ortec for all Processing Services
and all related Finished Materials that Ortec has accepted. Ortec shall not be
obligated to pay any charges set forth in an invoice which were performed more
than three hundred and sixty-five (365) days prior to the invoice date or which
relate to Finished Materials not accepted by Ortec pursuant to the terms of this
Agreement.

3.3 Payment. Payment Terms will be Net 30 days from the time of shipment of
released Powder, Pre-DHT Lyophilized Collagen Sponge or Finished Materials from
LSNE to Ortec or it's designee. Ortec shall be entitled to withhold payments if
the raw materials are substituted without prior written consent of Ortec and the
Powder, Pre-DHT sponge or the Finished Materials are not provided in accordance
with the Manufacturing Control Documents. Delay in receiving LSNE's invoices,
material discrepancies between invoices and packing lists or other material
errors or omissions will be considered just cause for withholding payment. Ortec
shall promptly notify LSNE in writing upon determination by Ortec of any
discrepancy or other errors in any LSNE invoices to Ortec. In the event of a
substantive LSNE error in billing, the due date of the invoice will be offset
only by the number of days required for LSNE to resubmit a corrected invoice
from the date of such notification. Where there is only a partial discrepancy,
Ortec shall pay for the non-discrepant portions of the invoice according to the
payment terms above.

3.4 Taxes. The Parties agree that, to each of the Parties knowledge, there are
no taxes applicable to the purchase of Processing Services by Ortec from LSNE
under this Agreement. In the event it is subsequently determined that taxes are
applicable, Ortec shall pay all sales taxes related solely to LSNE' provision of
Processing Services as set forth in an invoice from LSNE, excluding taxes
applicable to LSNE's income or revenue from the performance of Processing
Services under this Agreement.

Section 4.  Inspection; Acceptance

4.1 Inspection. Ortec shall have the right to make inspections of Finished
Materials in progress by LSNE at LSNE's facilities, after reasonable
notification to LSNE. For the purpose of making such inspections, and if
requested by Ortec, Ortec shall be notified reasonably in advance of the start
of work on the Finished Materials, and its representatives shall be given access
to the facilities of LSNE at all reasonable times during working hours. Upon
request, Ortec shall be furnished with a copy of LSNE's standard test procedures
and test reports, and a sample of the


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Finished Materials. Ortec shall be entitled to a minimum of ten (10) days per
year for purposes of observing production activities. All site inspections of
Ortec suppliers or suppliers of materials used in production of Ortec's Finished
Materials shall be the sole responsibility of Ortec.

4.2 Acceptance All Finished Materials shall be received subject to Ortec's
approval of any process deviations prior to shipment and inspection upon
delivery. In the event Finished Materials fail to meet the Specifications and
warranties of this Agreement because of an unapproved process deviation, LSNE
shall provide at its sole expense replacement Processing Services within 20 days
of written notification. Finished Materials shall be deemed accepted by Ortec if
Ortec fails to notify LSNE of rejection of such Finished Materials within seven
(7) days of Ortec's receipt of said materials. Parties acknowledge that there
are frequent minor deviations that occur in the manufacturing process because of
its complexity. Ortec agrees that only material deviations, which in fact limit
Ortec's ability to utilize Powder, Pre-DHT Collagen Sponges or Finished Product
for commercial use, shall entitle Ortec to reject delivery of said product and
withhold payment. Ortec shall return to LSNE any rejected product upon the
request of LSNE and LSNE shall destroy at its cost said product within a
reasonable period following receipt. Ortec may not reject product in which
failure is the direct result of the malfunction of Ortec Equipment, through no
fault of or neglect by LSNE to properly maintain and operate Ortec Equipment or
to utilize approved raw materials or to respond to special requests to ship
unreleased products to Ortec.



Section 5.  Equipment; Materials; Suppliers

LSNE shall provide the equipment, except Ortec Equipment owned by Ortec, labor,
utilities, facilities, and supervision necessary and related to the performance
of the Processing Services and packaging of the Finished Materials. Subject to
provisions in 10.0, LSNE shall bear the risk of loss for the Ortec Equipment and
Materials while in its possession and shall maintain adequate insurance for the
replacement value of the Ortec Equipment and Materials in the event of loss.
Upon termination of the Agreement, LSNE shall make the Ortec Equipment and
unused Materials and supplies provided by Ortec immediately available for
pick-up by Ortec upon written notice from Ortec.

Ortec shall retain title to the Ortec Equipment, the Materials, and all other
supplies provided to LSNE by Ortec pursuant to this Agreement and LSNE shall
keep all such Ortec property free and clear of all liens, claims or encumbrances
of any other parties and shall give Ortec prompt notice of any such claims or
judicial process affecting this Ortec property. LSNE shall segregate all Ortec
Equipment, Materials, Finished Materials and supplies from similar types of its
own assets. Ortec shall reserve the right to attach property tags to all Ortec
Equipment identifying that such assets are the Property of Ortec, Inc.

LSNE shall maintain at its cost all LSNE owned equipment and instrumentation,
necessary to execute the "Processing Services, in proper working condition and
calibration. Ortec shall be notified within 45 days prior to routine calibration
or maintenance being required and upon authorization from Ortec, LSNE agrees to
perform or arrange the required services at the sole expense of Ortec.


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Risk of loss for the Materials, Finished Materials, Ortec Equipment and
suppliers shall transfer to LSNE upon its receipt thereof; provided, however,
LSNE shall not be responsible for any damages to the Materials or Finished
Materials which occurs solely as a result of submitting the Materials to the
Processing Services. Risk of loss for Finished Materials, Ortec Equipment and
supplies shall return to Ortec upon shipment of such items. For purposes of this
agreement, Ortec stipulates that the package specifications are Ortec's and are
acceptable.



Section 6.  Term; Termination

6.1 Term. This Agreement shall be effective as of the Effective Date and shall
continue for a period of two (2) years after the Effective Date.

6.2 Termination. In addition to any specified rights of termination set forth
elsewhere in this Agreement, this Agreement may be terminated as follows:

         6.2.1    By Ortec if Ortec rejects an incremental cost increase
                  resulting from Ortec changing Specifications or LSNE does not
                  possess the capability to accommodate the requested change(s)
                  as denoted in Section 3.1, Ortec shall have the right to
                  either continue with the Agreement as-is or terminate the
                  Agreement pursuant to Section 6.2.4.

         6.2.2    In the event of a material breach of this Agreement by either
                  party, the other party shall have the right to deliver a
                  written notice of default to the defaulting party (a "Default
                  Notice"). In the event any such breach is not cured within 90
                  days after service of the Default Notice, this Agreement shall
                  terminate if the non-defaulting party delivers a written
                  notice of termination to the defaulting party within 180 days
                  after the expiration of such 90-day cure period.

         6.2.3    By either party, by written notice to the other party, if the
                  other party shall (i) voluntarily commence any proceeding or
                  file any petition seeking relief under Title 11 of the United
                  States Code or any other Federal, state bankruptcy,
                  insolvency, liquidation, receivership or similar law (a
                  "Bankruptcy Law"), (ii) consent to the institution of, or fail
                  to contravene in a timely and appropriate manner, any such
                  proceeding or the filing of any such petition, (iii) apply for
                  or consent to the appointment of a receiver, trustee,
                  custodian, sequestrator or similar official for such party or
                  for a substantial part of its property or assets, (iv) file an
                  answer admitting the material allegations of a petition filed
                  against it in any such proceeding, (v) make a general
                  assignment for the benefit of creditors, (vi) take corporate
                  action for the purpose of effecting any of the foregoing or
                  (vii) be subject to the commencement of any involuntary
                  proceeding or the filing of any involuntary petition in a
                  court of competent jurisdiction seeking (A) relief in respect
                  of such party or of a substantial part of its property or
                  assets under any Bankruptcy Law, (B) the appointment of a
                  receiver, trustee, custodian, sequestrator or similar official
                  for such party or for a substantial part of its property or
                  assets or (C) the winding-up or liquidation of such party; and
                  in the case of this clause (vii) such proceeding or petition
                  shall continue un-dismissed for 120 days or an order or decree
                  approving or ordering any of the foregoing shall continue
                  un-stayed and in effect for 60 days.


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         6.2.4    Subject to Section 6.2.5, Ortec may terminate this Agreement
                  without cause or penalty and for any reason upon 180 days
                  prior written notice to LSNE.

         6.2.5    In the event Ortec terminates this Agreement, Ortec's
                  liability shall be limited to payment of Finished Product,
                  costs associated with partially completed Processing Services
                  and charges for unused Materials required to fulfill the
                  balance of the binding forecast which becomes due upon
                  termination. Upon full payment of said Services and charges
                  and at the request of Ortec, LSNE shall deliver to Ortec any
                  in-process product, Powder, Pre-DHT Collagen Sponge, Finished
                  Product or raw materials held in LSNE's inventory.



Section 7. Representations and Warranties

LSNE represents, warrants and covenants that:

         (i)      Finished Materials, unless otherwise agreed to by the parties
                  in writing, shall be made only from Materials provided and or
                  specified by Ortec, conform to Manufacturing Control
                  procedures;

         (ii)     Finished Materials shall be transferred free and clear of all
                  liens, claims and encumbrances of any kind whatsoever; (iii)
                  Finished Materials will have been produced in compliance with,
                  and LSNE agrees to be bound by, and shall at all times be in
                  compliance with, all applicable federal, state and local laws,
                  executive orders, orders, rules and regulations, Good
                  Manufacturing Practice Regulations issued by the Food and Drug
                  Administration (FDA).

         (iv)     Except where the Ortec Equipment is cleaned by LSNE, by
                  process validated by Ortec (or agreed to in writing by Ortec),
                  prior to use for purposes of performing Processing Services.
                  LSNE shall be prohibited from utilizing Ortec Equipment for
                  any purpose other than in the execution of manufacturing
                  Finished Materials on behalf of Ortec in compliance with the
                  Specifications and obligations under this Agreement. Without
                  Ortec's prior written consent, the process used for cleaning
                  the Lyophilization Machine and Ortec Equipment shall not be
                  modified after being validated by Ortec

         (v)      LSNE shall provide adequate capacity, in conformance with 2.2,
                  for timely delivery of Finished Product



Section 8.  Compliance with Laws

During the term of this Agreement, LSNE represents and warrants to Ortec that it
shall conduct itself in full compliance with all applicable Federal, State and
local laws, Executive Orders, orders, rulings, and regulations, including but
not limited to regulations administered by the Federal Food and Drug
Administration ("FDA"). LSNE shall promptly provide Ortec with copies of all
communications between LSNE and FDA with respect to LSNE 's operations that
relate to Ortec and shall otherwise immediately notify Ortec of any matters of
importance that may affect LSNE 's operations as they relate to Ortec. LSNE
further agrees to inform FDA or any other competent inquiring regulatory agency
that LSNE acts as an independent contractor for Ortec in


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connection with the Finished Materials, Processing Services or Ortec 's
specifications relating thereto and that, as required by 21 C.F.R. Section
801.150(e), this Agreement has been entered into between Ortec and LSNE.



Section 9.  Indemnity

         a)       Ortec shall indemnify, hold harmless, and defend LSNE from any
                  and all liability, loss, claims, lawsuits, damages, injury,
                  settlements, costs and expenses whatsoever (as incurred),
                  including but not limited to court costs and reasonable
                  attorneys' fees (collectively, the "Losses"), arising out of
                  or related to the Finished Products or the use thereof or (to
                  the extent relevant to infringement, product liability or
                  similar claims) distribution thereof, except to the extent
                  such Losses result from: (i) a breach by LSNE of the Product
                  Warranties, or (ii) its obligations under this agreement.

         b)       LSNE shall indemnify, hold harmless, and defend Ortec from any
                  and all Losses arising out of or related to (i) any breach by
                  LSNE of any representation, term, covenant or condition
                  contained in this Agreement or (ii) any gross negligence or
                  willful misconduct by LSNE in the performance of its
                  obligations under this Agreement.



Section 10.  Insurance

LSNE shall keep and maintain throughout the term of the agreement comprehensive
liability insurance in an amount no less than $1,000,000, which shall include
without limitation, replacement cost for loss of or damage to the Ortec
Equipment, Materials or Finished Materials on an occurrence basis with Ortec
named as loss payee. LSNE will make available copies of certificates of
insurance to Ortec and if Ortec deems the coverage to be inadequate then Ortec
shall have at its discretion the option of purchasing additional insurance at
Ortec's expense to cover the full replacement value of Ortec Equipment,
Materials and Finished Materials in the event of loss.



Section 11.     Notices

All notices required hereunder shall be given to the addresses specified below:

         If to Ortec:      Ortec International, Inc.

                           3960 Broadway

                           New York, NY 10032

                           Attention:  President

         If to LSNE:       Lyophilization Services of New England

                           One Sundial Avenue, Suite 112

                           Manchester, NH 03103

                           Attention:  President


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All notices shall in be writing and shall be considered delivered and the
service thereof complete when the notice is posted by U.S. certified mail or
delivery by private express service or in person to the addressee indicated
above.



Section 12.       General Terms

12.1 Set-Off. All claims for money past due between the parties shall be subject
to deduction by one party for any setoff or counterclaim arising out of this
Agreement or any other transaction with the other.

12.2 Publicity. Both parties acknowledge that either party reserves the right to
disclose the other parties name during the course of conducting ordinary
business.

12.3 Force Majeure. In the event of strikes, lock-outs or other industrial
disturbances, rebellions, mutinies, epidemics, landslides, lightning,
earthquakes, fires, hurricanes or other storms, floods, sinking, drought, civil
disturbances, explosions, acts or decisions of duly constituted municipal, state
or national governmental authorities or of courts of law, as well as
impossibility to obtain equipment, supplies, fuel or other required materials,
in spite of having acted with reasonable diligence, or by reason of any other
causes which are not under the control of the party requesting the abatement of
performance, or causes due to unexpected circumstances which are not possible to
eliminate or overcome with due diligence by such party ("Force Majeure"), the
parties agree that, if either LSNE or Ortec finds itself wholly or partially
unable to fulfill its respective obligations under this Agreement by reasons of
Force Majeure, the party affected shall advise such other party in writing of
its inability to perform, giving a detailed explanation of the occurrence of the
event which excuses performance as soon as possible after the cause or event has
occurred. If such notice is given, the performance of the party giving the
notification shall be abated, and any time deadlines shall be extended for so
long as performance may be prevented by Force Majeure; provided, however, that
in the event the suspension of performance continues for more than ninety (90)
days after the date of the occurrence of such Force Majeure, and such failure to
perform would constitute a material breach of this Agreement in the absence of
such Force Majeure, the unaffected party may terminate this Agreement
immediately by written notice to the other party. No party shall be required to
make up any performance that was prevented by Force Majeure


12.4 Governing Law. This Agreement will be governed by and construed in
accordance with the internal laws of the State of New Hampshire, without giving
effect to any conflicts of laws provisions thereof that would cause the
application of the laws of a different jurisdiction. All suits, disputes,
actions, and other legal proceedings (collectively, "Suits") related to or
arising out of this Agreement, will be brought in the state or federal courts
located in Manchester, New Hampshire, if the Suit is commenced by Client, or in
the state or federal courts located in New York City, New York, if the Suit is
commenced by LSNE.

12.5 Audit. Subject to Section 4.1, LSNE shall during regular business hours
permit Ortec's representatives to perform audits of LSNE's facilities and
equipment, and such other audits as may be necessary to comply with any
regulatory requirements and/or to ensure LSNE's


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compliance with the terms and conditions of the Agreement. Ortec shall be
entitled to two (2) consecutive workdays per year for purposes of conducting
Quality audits.

12.6 Record. LSNE will maintain all records required by this Agreement or
otherwise related to its performance of Processing Services hereunder according
to its record retention policy and will make the same available to Ortec upon
request and to various regulatory agencies upon written authorization of Ortec.

12.7 Survival. Any provisions, which by their nature extend beyond the Agreement
termination, remain in effect until fulfilled, including, without limitation,
Sections 6.2, 7, 8, 9 and 11 and apply to both parties' respective successors
and assignees.

12.8 Integration. This Agreement, including its Exhibits, constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
between the parties concerning the subject matter contained herein. The
Agreement may be amended only by an instrument entitled "Amendment to Agreement"
signed by Ortec and LSNE. Such Amendment must specifically reference this
Agreement.

12.9 Independent Contractor LSNE shall be an independent contractor and shall
not be deemed, expressly or by implication, to be an LSNE, employee,
representative or servant of ORTEC for any purpose whatsoever.

12.10 Headings The Article and Paragraph headings are included in this Agreement
for convenience only and are to be disregarded in any interpretation hereof.

12.11 Severability Each Article, Paragraph and provision of this Agreement is
severable from the entire Agreement, and if one provision is declared invalid,
the remaining provisions shall nevertheless remain in effect.

12.12 Good Faith/Fair Dealing Notwithstanding anything in this Agreement to the
contrary, the parties acknowledge and agree that they shall act in good faith
and deal fairly with each other in the performance of their respective rights
and obligations under this Agreement.




IN WITNESS WHEREOF, the parties hereto, through their duly authorized
representatives, have executed this Agreement as of the day and year first
written above.

                                                           
ORTEC INTERNATIONAL, INC.                                     LYOPHILIZATION SERVICES OF NEW ENGLAND, INC.

By:      /s/ Ron Lipstein                                     By:      /s/ Mathew Halvorsen
   -----------------------------------------                      -------------------------------
         Ron Lipstein                                                     Mathew Halvorsen

Title:   CEO                                                  Title:          President
       -------------------------------------                         ----------------------------




                                  p. 10 of 10







                      LSNE SUPPLY AGREEMENT DATED 30-DEC-04

                          EXHIBIT A - "ORTEC EQUIPMENT"




- -----------------------------------------------------------------------------------------------------------------------------

                                                                                                Ortec
  No.               Equipment                 Supplier        Model No.       Catalogue No.     Tag No.         Serial No.
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                          
   1    Revco -40C Freezer, Value Series    VWR (97/98)   ULT-2540-3            55702-095         575       X12J-4S8079-XJ
        Upright, Temperature Range -10C
        to -40C

- -----------------------------------------------------------------------------------------------------------------------------

   2    VWR brand                           VWR (97/98)         1450M           52201-650         576           0800799
        Microprocessor-Controlled Vacuum
        Oven, Digital

- -----------------------------------------------------------------------------------------------------------------------------

   3    RV Dual-Mode Vacuum Pump, Edwards   VWR (97/98)         RV12          EVR440-00-001       486          996206430

- -----------------------------------------------------------------------------------------------------------------------------

   4    Chart Strip Recorder (VWR Oven)                                                           613

- -----------------------------------------------------------------------------------------------------------------------------

   5    Laboratory Mill, Thomas-Wiley,      VWR (97/98)           -           TS1427XE10/SS       578
        Standard Bench Model No. 4, Motor
        Driven, Enclosed Housing,
        Material of Construction
        Stainless Steel

- -----------------------------------------------------------------------------------------------------------------------------

   6    Vertical Drum Storage Cabinet,      VWR (97/98)           -             71980-014         579
        2-door, Self-close, 55-Gallon
        Drum, Justrite

- -----------------------------------------------------------------------------------------------------------------------------

   7    Drum Craddle, Justrite              VWR (97/98)           -              56610-47         580

- -----------------------------------------------------------------------------------------------------------------------------

   8    Rotory Transfer Pump, Justrite w/   VWR (97/98)         7610            54809-546         581
        6ft. Hose w/o counter

- -----------------------------------------------------------------------------------------------------------------------------

   9    Mettler Toledo HR73 Prof. Halogen   VWR (97/98)         HR73            11276-785         485         1118260903
        Moisture Analyzer

- -----------------------------------------------------------------------------------------------------------------------------

   10   Printer to HR73 Mettler Toledo      VWR (97/98)        HA-P43           11278-026         485
        HR73 Prof. Halogen Moisture
        Analyzer

- -----------------------------------------------------------------------------------------------------------------------------

   11   Gyrotory Platform Shaker with 1"   New Brunswick        2350            M1191-0010        582
        Stroke, Innova                    Scientific Co.,
                                                Inc.

- -----------------------------------------------------------------------------------------------------------------------------

   12   Utility Tray for Gyrotory          New Brunswick          -              AG-21-00         585
        Platform Shaker with 1" Stroke,   Scientific Co.,
        Innova                                  Inc.

- -----------------------------------------------------------------------------------------------------------------------------

   13   Stephan Universal Machine, 12      Suburban Globe    VCM 12F R&D            -             586        1940181171004
        liter, Cabinet Model, variable      Corporation
        speed (150 to 3,000 rpm, jacketed
        bowl, vacuum pump, S.S. Cart,
        stainless steel cover and port,
        electric T.C., water heater,
        fully assembled turnkey.

- -----------------------------------------------------------------------------------------------------------------------------








                      LSNE SUPPLY AGREEMENT DATED 30-DEC-04

                          EXHIBIT A - "ORTEC EQUIPMENT"




- -----------------------------------------------------------------------------------------------------------------------------

                                                                                                Ortec
  No.               Equipment                 Supplier        Model No.       Catalogue No.     Tag No.         Serial No.
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                          
   14   Knife Shaft Stainless Steel w/     Suburban Globe         -                 -             587
        One Straight, Stephan Universal     Corporation
        Machine, VCM 12F R&D.

- -----------------------------------------------------------------------------------------------------------------------------

   15   Angle-Bent Wave-cut Knife,         Suburban Globe         -                 -             588      3D0002-06 A 0981
        Stephan Universal Machine, VCM      Corporation
        12F R&D.

- -----------------------------------------------------------------------------------------------------------------------------

   16   Vacuum Shelf Dryer Equipped with   Stokes Vacuum,       338F                -             589            73830
        6 Shelves and Provision for             Inc
        Adding 6 More (Constructed as per
        Quotation Dated 7/23/99)

- -----------------------------------------------------------------------------------------------------------------------------

   17   Heat Transfer System-electrically  Stokes Vacuum,     450-9-483             -             614
        heated hot oil                          Inc

- -----------------------------------------------------------------------------------------------------------------------------

   18   Oil Sealed Piston Pump, 80cfm      Stokes Vacuum,       149H                -             615
                                                Inc

- -----------------------------------------------------------------------------------------------------------------------------

   19   Portable Tachometer                    Shimpo          DT-105A                            583          A97A0042

- -----------------------------------------------------------------------------------------------------------------------------

   20   Sencor Heat Sealer                     Sencor          24-AS/2              -            01001          24-092

- -----------------------------------------------------------------------------------------------------------------------------

EX-23

                                                                      Exhibit 23

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Ortec International, Inc.
New York, New York

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-80799) of Ortec International, Inc. of our report
dated March 23, 2005, relating to the consolidated financial statements, which
appear in this Form 10-KSB. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.

/s/ BDO Seidman, LLP

New York, New York
March 30, 2005

EX-23

                                                                    Exhibit 23.1

CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

We have issued our report dated March 12, 2004, except for Note 14 to the 2003
consolidated financial statements as to which date is March 23, 2004,
accompanying the consolidated financial statements incorporated by reference in
the Annual Report of Ortec International, Inc. on Form 10-KSB for the year ended
December 31, 2004. We hereby consent to the incorporation by reference of said
report in the Registration Statement of Ortec International, Inc. on Form S-8
(File No. 333-80799, effective June 16, 1999).


/s/ GRANT THORNTON LLP
- ----------------------
New York, New York
March 30, 2005

EX-31

                                                                    Exhibit 31.1

CERTIFICATIONS

I, Ron Lipstein, certify that:

1. I have reviewed this annual report on Form 10-KSB of Ortec International,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
small business issuer as of, and for, the periods presented in this annual
report;

4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) for the small
business issuer and we have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the small
          business issuer, including its consolidated subsidiaries, is made
          known to us by others within those entities, particularly during the
          period in which this annual report is being prepared;

     (b)  Designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

     (c)  Evaluated the effectiveness of the small business issuer's disclosure
          controls and procedures and presented in this report our conclusions
          about the effectiveness of the disclosure controls and procedures, as
          of the end of the period covered by this report based on such
          evaluation; and

     (d)  Disclosed in this report any change in the small business issuer's
          internal control over financial reporting that occurred during the
          most recent fiscal quarter (the small business issuer's fourth fiscal
          quarter in the case of an annual report) that has materially affected,
          or is reasonably likely to materially affect, the small business
          issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):

     (a)  A1l significant deficiencies and material weaknesses in the design or
          operation in the design or operation of internal control over
          financial reporting which are reasonably likely to adversely affect
          the small business issuer's ability to record, process, summarize and
          report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the small business issuer's
          internal controls over financial reporting.

Date: March 31, 2005


                                      /s/ Ron Lipstein
                                      ------------------------------------------
                                      Ron Lipstein
                                      Principal Executive Officer

EX-31

                                                                    Exhibit 31.2

I, Alan W. Schoenbart, certify that:

1. I have reviewed this annual report on Form 10-KSB of Ortec International,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
small business issuer as of, and for, the periods presented in this annual
report;

4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) for the small
business issuer and we have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the small
          business issuer, including its consolidated subsidiaries, is made
          known to us by others within those entities, particularly during the
          period in which this annual report is being prepared;

     (b)  Designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

     (c)  Evaluated the effectiveness of the small business issuer's disclosure
          controls and procedures and presented in this report our conclusions
          about the effectiveness of the disclosure controls and procedures, as
          of the end of the period covered by this report based on such
          evaluation; and

     (d)  Disclosed in this report any change in the small business issuer's
          internal control over financial reporting that occurred during the
          most recent fiscal quarter (the small business issuer's fourth fiscal
          quarter in the case of an annual report) that has materially affected,
          or is reasonably likely to materially affect, the small business
          issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):

     (a)  A1l significant deficiencies and material weaknesses in the design or
          operation in the design or operation of internal control over
          financial reporting which are reasonably likely to adversely affect
          the small business issuer's ability to record, process, summarize and
          report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the small business issuer's
          internal controls over financial reporting.

Date: March 31, 2005


                                      /s/ Alan W. Schoenbart
                                      ------------------------------------------
                                      Alan W. Schoenbart
                                      Principal Financial and Accounting Officer

EX-32

                                                                    Exhibit 32.1

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec
International, Inc. ("Ortec"), hereby certifies that Ortec's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004 (the "Annual Report")
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information contained in the
Annual Report fairly presents, in all material respects, the financial condition
and results of operations of Ortec.

Dated: March 31, 2005


/s/ Ron Lipstein
- -----------------------------------------
Ron Lipstein
Principal Executive Officer

EX-32

                                                                    Exhibit 32.2

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Ortec
International, Inc. ("Ortec"), hereby certifies that Ortec's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004 (the "Annual Report")
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information contained in the
Annual Report fairly presents, in all material respects, the financial condition
and results of operations of Ortec.

Dated: March 31, 2005


/s/ Alan W. Schoenbart
- -------------------------------
Alan W. Schoenbart
Principal Financial Officer