SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is dated as of March __,
2006, among Ortec International, Inc., a Delaware corporation (the “Company”),
and each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:

ARTICLE I

DEFINITIONS

1.1        Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Certificate of Designation (as defined
herein), and (b) the following terms have the meanings indicated in this Section
1.1:

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

“Actual Minimum” means, as of any date, the maximum aggregate number of shares
of Common Stock then issued or potentially issuable in the future pursuant to
the Transaction Documents, including any Underlying Shares issuable upon
exercise or conversion in full of all Warrants and shares of Preferred Stock,
ignoring any conversion or exercise limits set forth therein, and assuming that
any previously unconverted shares of Preferred Stock are held until the third
anniversary of the Closing Date and all dividends are paid in shares of Common
Stock until such third anniversary.

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144 under the
Securities Act. With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.

“Authorized Share Approval” means (i) the vote by the shareholders of the
company to approve an amendment to the Company’s articles or certificate of
incorporation that retains the number of authorized shares of Common Stock at
200,000,000 and authorizing the board of directors of the Company to effect the
Reverse

 

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Split (the “Amendment”) and (ii) the filing by the Company of the Amendment with
the Secretary of State of the State of Delaware and the acceptance of the
Amendment by the Secretary of State of the State of Delaware.

“Business Day” means any day except Saturday, Sunday, any day which shall be a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.

“Certificate of Designation” means the Certificate of Designation to be filed
prior to the Closing by the Company with the Secretary of State of Delaware, in
the form of Exhibit A attached hereto.

“Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.

“Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all
conditions precedent to (i) the Purchasers’ obligations to pay the Subscription
Amount and (ii) the Company’s obligations to deliver the Securities have been
satisfied or waived.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value $0.001 per
share, and any other class of securities into which such securities may
hereafter be reclassified or changed into.

“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.

“Company Counsel” means Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine,
LLP.

“Conversion Price” shall have the meaning ascribed to such term in the
Certificate of Designation.

“Disclosure Schedules” shall have the meaning ascribed to such term in Section
3.1.

“Effective Date” means the date that the initial Registration Statement filed by
the Company pursuant to the Registration Rights Agreement is first declared
effective by the Commission.

“Escrow Agent” means Signature Bank, a New York State chartered bank, having an
office at 261 Madison Avenue, New York, New York 10016.

 

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“Escrow Agreement” means the Escrow Deposit Agreement, dated March __, 2006,
between the Company, Rodman & Renshaw, LLC and the Escrow Agent, in the form of
Exhibit F hereto.

“Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of the Company pursuant to any stock or option
plan duly adopted by (i) a majority of the non-employee members of the Board of
Directors of the Company or (ii) a majority of the members of a committee of
non-employee directors established for such purpose or (iii) an affirmative vote
of the shareholders of the Company pursuant to Delaware law, (b) securities upon
the exercise or exchange of or conversion of any Securities issued hereunder
and/or other securities exercisable or exchangeable for or convertible into
shares of Common Stock issued and outstanding on the date of this Agreement,
provided that such securities have not been amended since the date of this
Agreement to increase the number of such securities or to decrease the exercise,
exchange or conversion price of any such securities, and (c) securities issued
pursuant to acquisitions or strategic transactions approved by a majority of the
disinterested directors, provided any such issuance shall only be to a Person
which is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities.

 

“FW” means Feldman Weinstein LLP with offices located at 420 Lexington Avenue,
Suite 2620, New York, New York 10170-0002.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Hapto Merger” means the merger between the Company and Hapto Biotech, Inc.
pursuant to the Hapto Merger Agreement and the timely submission of all
applicable filings with state and regulatory authorities in connection with such
purchase.

 

“Hapto Merger Agreement” means the Agreement among Ortec International, Inc.,
ORTN Acquisition Corp., Hapto Biotech, Inc. and certain shareholders and option
holders of Hapto Biotech, Inc. for the merger of Hapto Biotech, Inc. with and
into ORTN Acquisition Corp., dated on or about March 29, 2006, and documents
referred to therein and related thereto.

 

“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).

 

 

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“Legend Removal Date” shall have the meaning ascribed to such term in Section
4.1(c).

 

“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.

 

“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).

 

“Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).

 

“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.

 

“Participation Maximum” shall have the meaning ascribed to such term in Section
4.13.

 

“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

“Preferred Stock” means the up to 8,000 shares of the Company’s 6% Series E
Convertible Preferred Stock issued hereunder having the rights, preferences and
privileges set forth in the Certificate of Designation, in the form of Exhibit A
hereto.

 

“Pre-Notice” shall have the meaning ascribed to such term in Section 4.13.

 

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

 

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.11.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated
the date hereof, among the Company and the Purchasers, in the form of Exhibit B
attached hereto.

 

“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by each Purchaser as provided for in the Registration Rights
Agreement.

 

“Required Approvals” shall have the meaning ascribed to such term in Section
3.1(e).

 

“Reverse Split” shall mean a reverse stock split of the Common Stock effected
after the Closing Date in a ratio of not less than 1:5 in accordance with
Delaware law.

 

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“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Securities” means the Preferred Stock, the Warrants, the Warrant Shares and the
Underlying Shares.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Short Sales” shall include all “short sales” as defined in Rule 200 of
Regulation SHO under the Exchange Act (but shall not be deemed to include the
location and/or reservation of borrowable shares of Common Stock).

 

“Stated Value” means $1,000 per share of Preferred Stock.

 

“Subscription Amount” shall mean, as to each Purchaser, the aggregate amount to
be paid for the Preferred Stock purchased hereunder as specified below such
Purchaser’s name on the signature page of this Agreement and next to the heading
“Subscription Amount”, in United States Dollars and in immediately available
funds.

 

“Subsequent Financing” shall have the meaning ascribed to such term in Section
4.13.

 

“Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.13.

 

“Subsidiary” means any subsidiary of the Company as set forth on Schedule
3.1(a).

 

“Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

 

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq
Capital Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.

 

“Transaction Documents” means this Agreement, the Certificate of Designation,
the Warrants, the Registration Rights Agreement, the Lock-up Agreements and any
other documents or agreements executed in connection with the transactions
contemplated hereunder.

 

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“Underlying Shares” means the shares of Common Stock issued and issuable upon
conversion of the Preferred Stock, upon exercise of the Warrants and issued and
issuable in lieu of the cash payment of dividends on the Preferred Stock in
accordance with the terms of the Certificate of Designation.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted for trading as reported by Bloomberg L.P.
(based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time); (b)  if the OTC Bulletin Board is not a Trading Market, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or (d) in
all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.

“Warrants” means collectively the Common Stock purchase warrants, in the form of
Exhibit C delivered to the Purchasers at the Closing in accordance with Section
2.2(a) hereof, which Warrants shall be exercisable immediately and have a term
of exercise equal to five years.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.

 

ARTICLE II

PURCHASE AND SALE

2.1         Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, substantially concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser agrees to purchase in the aggregate, severally and not
jointly, a minimum of $6,000,000 and up to $8,000,000 of shares of Preferred
Stock with an aggregated Stated Value equal to such Purchaser’s Subscription
Amount and Warrants as determined by pursuant to Section 2.2(a). The aggregate
number of shares of Preferred Stock sold hereunder shall be up to 8,000. Each
Purchaser shall deliver to the Escrow Agent via wire transfer or a certified
check of immediately available funds equal to their Subscription Amount (except
that SDS Capital Group SPC, Ltd. may deliver to the Company the promissory note
dated March 15, 2006 in the original principal amount of $250,000 in full
payment of its $300,000 Subscription Amount) and the Company shall deliver to
each Purchaser their respective shares of Preferred Stock and Warrants as
determined pursuant to Section 2.2(a) and the other items set forth in Section
2.2 issuable at the Closing. Upon satisfaction of the

 

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conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of FW, or such other location as the parties shall mutually agree.

 

 

2.2

Deliveries.

 

(a)          On the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser the following:

 

 

(i)

this Agreement duly executed by the Company;

 

(ii)         a legal opinion of Company Counsel, in the form of Exhibit D
attached hereto;

(iii)       a certificate evidencing a number of shares of Preferred Stock equal
to such Purchaser’s Subscription Amount divided by the Stated Value, registered
in the name of such Purchaser;

(iv)        a Warrant registered in the name of such Purchaser to purchase up to
a number of shares of Common Stock equal to 100% of such Purchaser’s
Subscription Amount divided by $0.20, with an exercise price equal to $0.50,
subject to adjustment therein;

(v)          the written agreement, in the form of Exhibit E attached hereto, of
all of the executive officers, directors and shareholders holding more than 10%
of the issued and outstanding shares of Common Stock on the date hereof to not
dispose of any Common Stock or Common Stock Equivalents held by them as set
forth therein (the “Lock-up Agreements”);

(vi)        the Registration Rights Agreement duly executed by the Company; and

(vii)

the Escrow Agreement duly executed by the Company.

 

(b)          On the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Company the following:

 

 

(i)

this Agreement duly executed by such Purchaser;

 

(ii)         such Purchaser’s Subscription Amount by wire transfer to the
Company; and

(iii)       the Registration Rights Agreement duly executed by such Purchaser.

 

 

2.3

Closing Conditions.

 

(a)          The obligations of the Company hereunder in connection with the
Closing are subject to the following conditions being met:

 

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(i)           the accuracy in all material respects when made and on the Closing
Date of the representations and warranties of the Purchasers contained herein;

(ii)         all obligations, covenants and agreements of the Purchasers
required to be performed at or prior to the Closing Date shall have been
performed;

(iii)       the delivery by the Purchasers of the items set forth in Section
2.2(b) of this Agreement; and

(iv)          the delivery of the Escrow Agreement duly executed by Rodman &
Renshaw, LLC and Signature Bank.

 

(b)          The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions being met:

(i)           the accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained herein;

(ii)         all obligations, covenants and agreements of the Company required
to be performed at or prior to the Closing Date shall have been performed;

(iii)          the closing of the Hapto Merger on or before April 17, 2006 and
the delivery by the Company to Rodman & Renshaw, LLC of a Certificate of Merger
certified by the Delaware Secretary of State evidencing the closing of the Hapto
Merger.

 

(iii)       the delivery by the Company of the items set forth in Section 2.2(a)
of this Agreement;

(iv)        there shall have been no Material Adverse Effect with respect to the
Company since the date hereof; and

(v)          from the date hereof to the Closing Date, trading in the Common
Stock shall not have been suspended by the Commission or the Company’s principal
Trading Market (except for any suspension of trading of limited duration agreed
to by the Company, which suspension shall be terminated prior to the Closing),
and, at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg L.P. shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are reported
by such service, or on any Trading Market, nor shall a banking moratorium have
been declared either by the United States or New York State authorities nor
shall there have occurred any material outbreak or escalation of hostilities or
other national or international calamity of such magnitude in its effect on, or
any material adverse change in, any financial market which, in each case, in the
reasonable judgment of each Purchaser, makes it impracticable or inadvisable to
purchase the Preferred Stock at the Closing.

 

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1         Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the “Disclosure Schedules”) which Disclosure
Schedules shall be deemed a part hereof and to qualify any representation or
warranty otherwise made herein to the extent of such disclosure, the Company
hereby makes the representations and warranties set forth below to each
Purchaser.

(a)          Subsidiaries. All of the direct and indirect subsidiaries of the
Company are set forth on Schedule 3.1(a). The Company owns, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are fully
paid, non-assessable and free of preemptive and similar rights to subscribe for
or purchase securities. If the Company has no subsidiaries, then all other
references in the Transaction Documents to the Subsidiaries or any of them will
be disregarded.

(b)          Organization and Qualification. The Company and each of the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.

(c)          Authorization; Enforcement. Subject to Authorized Share Approval,
the Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by each of the Transaction Documents
and otherwise to carry out its obligations hereunder and thereunder. The
execution and delivery of each of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company, its board of directors or its
stockholders in connection therewith other than in

 

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connection with the Required Approvals and the Authorized Share Approval. Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms hereof and thereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to Authorized Share
Approval, except (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

(d)          No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated hereby and thereby do not and will not: (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, subject to Authorized Share Approval, or (ii) conflict with,
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, result in the creation of any Lien upon any of
the properties or assets of the Company or any Subsidiary, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.

(e)          Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) filings required pursuant to Section 4.6, (ii) the filing with
the Commission of the Registration Statement, (iii) the notice and/or
application(s) to each applicable Trading Market for the issuance and sale of
the Securities and the listing of the Underlying Shares for trading thereon in
the time and manner required thereby, (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws and (v) the Authorized Share Approval (collectively, the
“Required Approvals”).

(f)          Issuance of the Securities. The Securities are duly authorized and,
when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction

 

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Documents. The Underlying Shares, when issued in accordance with the terms of
the Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Company. As of the date hereof, the
Company has reserved from its duly authorized capital stock an aggregate of
30,000,000 shares of Common Stock for issuance of the Underlying Shares.

(g)          Capitalization. The capitalization of the Company is as set forth
on Schedule 3.1(g). The Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to
the exercise of employee stock options under the Company’s stock option plans,
the issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plan and pursuant to the conversion or exercise of
Common Stock Equivalents outstanding as of the date of the most recently filed
periodic report under the Exchange Act. No Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents.
Except as a result of the purchase and sale of the Securities, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common Stock
or Common Stock Equivalents. The issuance and sale of the Securities will not
obligate the Company to issue shares of Common Stock or other securities to any
Person (other than the Purchasers) and will not result in a right of any holder
of Company securities to adjust the exercise, conversion, exchange or reset
price under any of such securities. All of the outstanding shares of capital
stock of the Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.

(h)          SEC Reports; Financial Statements. The Company has filed all
reports, schedules, forms, statements and other documents required to be filed
by it under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) and Section 15(d), for the two years preceding the date hereof (or
such shorter period as the Company was required by law or regulation to file
such material) (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, together with all reports filed by
Company shareholders pursuant to Section 16(a) of the Exchange Act, being
collectively referred to herein as the “SEC Reports”) on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension. As of their respective
dates, the SEC Reports complied in all material respects with the requirements
of the Securities Act and the

 

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Exchange Act and the rules and regulations of the Commission promulgated
thereunder, as applicable, and none of the SEC Reports, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may be otherwise specified
in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

(i)           Material Changes; Undisclosed Events, Liabilities or Developments.
Since the date of the latest audited financial statements included within the
SEC Reports, except as specifically disclosed in a subsequent SEC Report, (i)
there has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s financial statements pursuant to GAAP or disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans.
The Company does not have pending before the Commission any request for
confidential treatment of information. Except for the issuance of the Securities
contemplated by this Agreement or as set forth on Schedule 3.1(i), no event,
liability or development has occurred or exists with respect to the Company or
its Subsidiaries or their respective business, properties, operations or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws at the time this representation is made that has not
been publicly disclosed at least 1 Trading Day prior to the date that this
representation is made.

(j)           Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company nor

 

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any Subsidiary, nor any director or officer thereof, is or has been the subject
of any Action involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty. There has not
been, and to the knowledge of the Company, there is not pending or contemplated,
any investigation by the Commission involving the Company or any current or
former director or officer of the Company. The Commission has not issued any
stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.

(k)          Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect. None of the Company’s or its Subsidiaries’ employees is a member of a
union that relates to such employee’s relationship with the Company, and neither
the Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relationships
with their employees are good. No executive officer, to the knowledge of the
Company, is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement or non-competition agreement, or any other contract or agreement or
any restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any liability
with respect to any of the foregoing matters. The Company and its Subsidiaries
are in compliance with all U.S. federal, state, local and foreign laws and
regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in
compliance could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.

(l)           Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect.

(m)        Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not have or reasonably be expected to result in a
Material Adverse Effect (“Material Permits”), and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any Material Permit.

 

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(n)          Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases with which the Company and the Subsidiaries are in
compliance.

(o)         Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the “Intellectual Property Rights”). Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

(p)          Insurance. The Company and the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged, including, but not limited to, directors and
officers insurance coverage at least equal to the aggregate Subscription Amount.
Neither the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business without a significant increase in cost.

(q)          Transactions With Affiliates and Employees. Except as set forth in
the SEC Reports, none of the officers or directors of the Company and, to the
knowledge of the Company, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or

 

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partner, in each case in excess of $60,000 other than (i) for payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) for other employee benefits,
including stock option agreements under any stock option plan of the Company.

(r)          Sarbanes-Oxley; Internal Accounting Controls. The Company is in
material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which
are applicable to it as of the Closing Date. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management’s general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms. The Company’s
certifying officers have evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by the Company’s
most recently filed periodic report under the Exchange Act (such date, the
“Evaluation Date”). The Company presented in its most recently filed periodic
report under the Exchange Act the conclusions of the certifying officers about
the effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as
such term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.

(s)          Certain Fees. Other than fees payable to Rodman & Renshaw, LLC, no
brokerage or finder’s fees or commissions are or will be payable by the Company
to any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by the Transaction Documents. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by the Transaction
Documents.

(t)           Private Placement. Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Trading Market.

 

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(u)          Investment Company. The Company is not, and is not an Affiliate of,
and immediately after receipt of payment for the Securities, will not be or be
an Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act.

(v)          Registration Rights. Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.

(w)         Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration. The Company has not, in the 12
months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.

(x)          Application of Takeover Protections. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchasers’ ownership of the Securities.

(y)          Disclosure. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that it believes constitutes or might constitute material, nonpublic
information. The Company understands and confirms that the Purchasers will rely
on the foregoing representation in effecting transactions in securities of the
Company. All disclosure furnished by or on behalf of the Company to the
Purchasers regarding the Company, its business and the transactions contemplated
hereby, including the Disclosure Schedules to this Agreement, with respect to
the representations and warranties made herein are true and correct with respect
to such representations and warranties and do not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or

 

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warranties with respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.2 hereof.

(z)          No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable shareholder approval
provisions of any Trading Market on which any of the securities of the Company
are listed or designated.  

(aa)        Solvency. Based on the financial condition of the Company as of the
Closing Date after giving effect to the receipt by the Company of the proceeds
from the sale of the Securities hereunder, (i) the fair saleable value of the
Company’s assets exceeds the amount that will be required to be paid on or in
respect of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature; (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on or
in respect of its liabilities when such amounts are required to be paid. The
Company does not intend to incur debts beyond its ability to pay such debts as
they mature (taking into account the timing and amounts of cash to be payable on
or in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. Schedule 3.1(aa) sets forth as of the
dates thereof all outstanding secured and unsecured Indebtedness of the Company
or any Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, “Indebtedness” shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is
in default with respect to any Indebtedness.

(bb)       Tax Status. Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the

 

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Company has no knowledge of a tax deficiency which has been asserted or
threatened against the Company or any Subsidiary.

(cc)       No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising. The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

(dd)       Foreign Corrupt Practices. Neither the Company, nor to the knowledge
of the Company, any agent or other person acting on behalf of the Company, has
(i) directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended.

(ee)       Accountants. The Company’s accountants are set forth on Schedule
3.1(ee) of the Disclosure Schedule. To the knowledge of the Company, such
accountants, who the Company expects will express their opinion with respect to
the financial statements to be included in the Company’s Annual Report on Form
10-KSB for the year ending December 31, 2005 are a registered public accounting
firm as required by the Securities Act.

(ff)        Seniority. As of the Closing Date, no Indebtedness or other equity
of the Company is senior to the Preferred Stock in right of payment, whether
with respect to interest or upon liquidation or dissolution, or otherwise, other
than indebtedness secured by purchase money security interests (which is senior
only as to underlying assets covered thereby) and capital lease obligations
(which is senior only as to the property covered thereby) other than
Indebtedness to Paul Capital Royalty Acquisition Fund, L.P.

(gg)       No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company and the Company is current with respect to
any fees owed to its accountants and lawyers.

(hh)       Acknowledgment Regarding Purchasers’ Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Purchaser or any of their respective representatives

 

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or agents in connection with the Transaction Documents and the transactions
contemplated thereby is merely incidental to the Purchasers’ purchase of the
Securities. The Company further represents to each Purchaser that the Company’s
decision to enter into this Agreement and the other Transaction Documents has
been based solely on the independent evaluation of the transactions contemplated
hereby by the Company and its representatives.

(ii)         Acknowledgement Regarding Purchasers’ Trading Activity. Anything in
this Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(g) and 4.16 hereof), it is understood and acknowledged by the
Company (i) that none of the Purchasers have been asked to agree, nor has any
Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities issued
by the Company or to hold the Securities for any specified term; (ii) that past
or future open market or other transactions by any Purchaser, including Short
Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Purchaser, and counter-parties in
“derivative” transactions to which any such Purchaser is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and (iv)
that each Purchaser shall not be deemed to have any affiliation with or control
over any arm’s length counter-party in any “derivative” transaction. The Company
further understands and acknowledges that (a) one or more Purchasers may engage
in hedging activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value of
the Underlying Shares deliverable with respect to Securities are being
determined and (b) such hedging activities (if any) could reduce the value of
the existing stockholders' equity interests in the Company at and after the time
that the hedging activities are being conducted.  The Company acknowledges that
such aforementioned hedging activities do not constitute a breach of any of the
Transaction Documents.

(jj)         Regulation M Compliance.  The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of each of clauses (ii) and
(iii), compensation paid to the Company’s placement agent in connection with the
placement of the Securities.

3.2         Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:

(a)          Organization; Authority. Such Purchaser, if an entity, is an entity
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its

 

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organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate or similar action on the part of such Purchaser. Each Transaction
Document to which it is a party has been duly executed by such Purchaser, and
when delivered by such Purchaser in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

(b)          Own Account. Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.

(c)      Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
converts any shares of Preferred Stock or exercises any Warrants, it will be
either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
institutional buyer” as defined in Rule 144A(a) under the Securities Act. Such
Purchaser is not required to be registered as a broker-dealer under Section 15
of the Exchange Act.

(d)          Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment. Such Purchaser is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment

(e)          Access to Information. The Purchaser has reviewed the SEC Reports.
The Purchaser has also been afforded the opportunity to ask questions of, and
receive answers from, the officers and/or directors of the Company concerning
the terms and

 

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conditions of this offering and to obtain any additional information, to the
extent that the Company possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information furnished; and has availed himself or itself of such opportunity to
the extent he or it considers appropriate in order to permit his or its
evaluation of the merits and risks of an investment in the Securities;
including, without limitation, information about the Hapto Merger. It is
understood that all documents, records and books pertaining to this investment
have been made available for inspection by the Purchaser during reasonable
business hours at the Company’s principal place of business. Notwithstanding the
foregoing, it is understood that the Purchaser is purchasing the Securities
without being furnished any prospectus setting forth all of the information that
would be required to be furnished under the Securities Act and this offering has
not been passed upon or the merits thereof endorsed or approved by any state or
federal authorities.

(f)          General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.

(g)          Short Sales and Confidentiality Prior To The Date Hereof. Other
than the transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, executed any disposition, including Short
Sales, in the securities of the Company during the period commencing from the
time that such Purchaser first received a term sheet (written or oral) from the
Company or any other Person setting forth the material terms of the transactions
contemplated hereunder until the date hereof (“Discussion Time”).
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's assets, the representation set forth
above shall only apply with respect to the portion of assets managed by the
portfolio manager that made the investment decision to purchase the Securities
covered by this Agreement. Other than to other Persons party to this Agreement,
such Purchaser has maintained the confidentiality of all disclosures made to it
in connection with this transaction (including the existence and terms of this
transaction).

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

4.1

Transfer Restrictions.

(a)          The Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the Company
or to an affiliate of a Purchaser or in connection with a pledge as contemplated
in Section 4.1(b), the Company

 

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may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor and reasonably acceptable to the Company, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of transfer, any
such transferee shall agree in writing to be bound by the terms of this
Agreement and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.

(b)          The Purchasers agree to the imprinting, so long as is required by
this Section 4.1(b), of a legend on any of the Securities in the following form:

[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON
[EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are subject
to registration pursuant to the Registration Rights Agreement, the preparation
and filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.

 

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(c)          Certificates evidencing the Underlying Shares shall not contain any
legend (including the legend set forth in Section 4.1(b) hereof): (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii) following
any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such
Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). The Company shall cause its counsel to issue a legal opinion to
the Company’s transfer agent promptly after the Effective Date if required by
the Company’s transfer agent to effect the removal of the legend hereunder. If
all or any shares of Preferred Stock or any portion of a Warrant is converted or
exercised (as applicable) at a time when there is an effective registration
statement to cover the resale of the Underlying Shares, or if such Underlying
Shares may be sold under Rule 144(k) or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission) then
such Underlying Shares shall be issued free of all legends. The Company agrees
that following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Company’s transfer
agent of a certificate representing Underlying Shares, as applicable, issued
with a restrictive legend (such third Trading Day, the “Legend Removal Date”),
deliver or cause to be delivered to such Purchaser a certificate representing
such shares that is free from all restrictive and other legends. The Company may
not make any notation on its records or give instructions to any transfer agent
of the Company that enlarge the restrictions on transfer set forth in this
Section. Certificates for Underlying Shares subject to legend removal hereunder
shall be transmitted by the transfer agent of the Company to the Purchasers by
crediting the account of the Purchaser’s prime broker with the Depository Trust
Company System.

 

(d)          In addition to such Purchaser’s other available remedies, the
Company shall pay to a Purchaser, in cash, as partial liquidated damages and not
as a penalty, for each $1,000 of Underlying Shares (based on the VWAP of the
Common Stock on the date such Securities are submitted to the Company’s transfer
agent) delivered for removal of the restrictive legend and subject to Section
4.1(c), $10 per Trading Day (increasing to $20 per Trading Day 5 Trading Days
after such damages have begun to accrue) for each Trading Day commencing two
Trading Days after the Legend Removal Date until such certificate is delivered
without a legend. Nothing herein shall limit such Purchaser’s right to pursue
actual damages for the Company’s failure to deliver certificates representing
any Securities as required by the Transaction Documents, and such Purchaser
shall have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.

 

(e)           Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 4.1 is predicated upon the
Company’s reliance that the Purchaser will sell any Securities pursuant to
either the registration requirements of the

 

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Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.

 

4.2         Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.

4.3         Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, to the extent required from time to time to
enable such Person to sell such Securities without registration under the
Securities Act within the requirements of the exemption provided by Rule 144.

4.4         Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.

4.5         Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Certificate of Designation set forth the totality of the procedures required of
the Purchasers in order to exercise the Warrants or convert the Preferred Stock.
No additional legal opinion or other information or instructions shall be
required of the Purchasers to exercise their Warrants or convert their Preferred
Stock. The Company shall honor exercises of the Warrants and conversions of the
Preferred Stock and shall deliver Underlying Shares in accordance with the
terms, conditions and time periods set forth in the Transaction Documents.

4.6         Securities Laws Disclosure; Publicity. The Company shall (i) by 8:30
a.m. (New York City time) on the Trading Day immediately following the date
hereof, issue a press release, disclosing the material terms of the transactions
contemplated hereby and (ii) by 8:30 a.m. (New York City time) on the third
Trading Day immediately following the date hereof, issue a Current Report on
Form 8-K, disclosing the material terms of the transactions contemplated hereby
and

 

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attaching the Transaction Documents thereto. The Company shall consult with FW,
on behalf of the placement agent, in issuing any press releases with respect to
the transactions contemplated hereby. Neither the Company nor any Purchaser
shall issue any other press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld or delayed, except if such disclosure is required by law, in which case
the disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law in connection with (A) any
registration statement contemplated by the Registration Rights Agreement and (B)
the filing of final Transaction Documents (including signature pages thereto)
with the Commission and (ii) to the extent such disclosure is required by law or
Trading Market regulations, in which case the Company shall provide the
Purchasers with prior notice of such disclosure permitted under this subclause
(ii).

4.7         Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or that any Purchaser could be deemed to trigger the provisions of
any such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.

4.8         Non-Public Information. Except with respect to the material terms
and conditions of the transactions contemplated by the Transaction Documents,
the Company covenants and agrees that neither it nor any other Person acting on
its behalf will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Purchaser shall be relying on the foregoing
representations in effecting transactions in securities of the Company.

4.9         Use of Proceeds. Except as set forth on Schedule 4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder to finance the Hapto Acquisition and for working capital, and not for
the satisfaction of any portion of the Company’s debt (other than payment of
trade payables in the ordinary course of the Company’s business and prior
practices), to redeem Common Stock or Common Stock Equivalents or to settle any
outstanding litigation.

4.10      Reimbursement. If any Purchaser becomes involved in any capacity in
any Proceeding by or against any Person who is a stockholder of the Company
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any other stockholder), solely as a result of such
Purchaser’s acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)

 

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incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement, except if such claim arises primarily from a breach of such
Purchaser’s representations, warranties or covenants under the Transaction
Documents or any agreements or understandings such Purchaser may have with any
such stockholder or any violations by the Purchaser of state or federal
securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance.

4.11      Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents,
members, shareholders, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser’s representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing reasonably
acceptable to the Purchaser Party. Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material

 

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issue between the position of the Company and the position of such Purchaser
Party, in which case the Company shall be responsible for the reasonable fees
and expenses of no more than on such separate counsel. The Company will not be
liable to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants or
agreements made by such Purchaser in this Agreement or in the other Transaction
Documents.

4.12

Reservation and Listing of Securities.

(a)          On the date hereof, the Company shall maintain a reserve from its
duly authorized shares of Common Stock for issuance pursuant to the Transaction
Documents an aggregate of 30,000,000 shares of Common Stock.

(b)          On the business day immediately following the date on which
Authorized Share Approval is obtained, the Company shall maintain a reserve from
its duly authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in an amount equal to the Required Minimum on such date.

(c)          If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than 130% of (i) the Actual
Minimum on such date, minus (ii) the number of shares of Common Stock previously
issued pursuant to the Transaction Documents, then the Board of Directors of the
Company shall use commercially reasonable efforts to amend the Company’s
certificate or articles of incorporation to increase the number of authorized
but unissued shares of Common Stock to at least the Actual Minimum at such time
(minus the number of shares of Common Stock previously issued pursuant to the
Transaction Documents), as soon as possible and in any event not later than the
75th day after such date; provided that the Company will not be required at any
time to authorize a number of shares of Common Stock greater than the maximum
remaining number of shares of Common Stock that could possibly be issued after
such time pursuant to the Transaction Documents.

(d)          The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such Trading
Market an additional shares listing application covering a number of shares of
Common Stock at least equal to the Actual Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common Stock
to be approved for listing on such Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv)
maintain the listing of such Common Stock on any date at least equal to the
Actual Minimum on such date on such Trading Market or another Trading Market.

In addition, the Company shall hold a special meeting of shareholders (which may
also be at the annual meeting of shareholders) within 60 calendar days of the
date hereof for the purpose of obtaining Authorized Share Approval, with the
recommendation of the Company’s Board of Directors that such proposal is
approved, and the Company shall solicit proxies from its shareholders in
connection therewith in the same manner as all

 

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other management proposals in such proxy statement and all management-appointed
proxyholders shall vote their proxies in favor of such proposal. If the Company
does not obtain Authorized Share Approval at the first meeting, the Company
shall call a meeting every 4 months thereafter to seek Authorized Share Approval
until the earlier of the date Authorized Share Approval is obtained or the date
on which no shares of Preferred Stock remain outstanding. Each Purchaser hereby
agrees with the Company that it shall vote its shares of Preferred Stock which
are eligible to vote at any such shareholder meeting in favor of Authorized
Share Approval.

4.13

Participation in Future Financing.

(a)          From the date hereof until the date that is the later of (i) the
effective date of the Reverse Split or (ii) the one year anniversary of the
Effective Date, upon any issuance by the Company or any of its Subsidiaries of
Common Stock or Common Stock Equivalents (a “Subsequent Financing”), each
Purchaser shall have the right to participate in up to an amount of the
Subsequent Financing equal to 100% of the Subsequent Financing (or such lesser
percentage which would not violate any applicable Nasdaq or Amex shareholder
approval requirement if the Company is then so listed) (the “Participation
Maximum”) on the same terms, conditions and price provided for in the Subsequent
Financing.

 

(b)          At least 5 Trading Days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Purchaser a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice
shall ask such Purchaser if it wants to review the details of such financing
(such additional notice, a “Subsequent Financing Notice”). Upon the request of a
Purchaser, and only upon a request by such Purchaser, for a Subsequent Financing
Notice, the Company shall promptly, but no later than 1 Trading Day after such
request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the Person or Persons through or with whom such Subsequent Financing is proposed
to be effected, and attached to which shall be a term sheet or similar document
relating thereto.

 

(c)          Any Purchaser desiring to participate in such Subsequent Financing
must provide written notice to the Company by not later than 5:30 p.m. (New York
City time) on the 5th Trading Day after all of the Purchasers have received the
Pre-Notice that the Purchaser is willing to participate in the Subsequent
Financing, the amount of the Purchaser’s participation, and that the Purchaser
has such funds ready, willing, and available for investment on the terms set
forth in the Subsequent Financing Notice. If the Company receives no notice from
a Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to have
notified the Company that it does not elect to participate.

 

(d)          If by 5:30 p.m. (New York City time) on the 5th Trading Day after
all of the Purchasers have received the Pre-Notice, notifications by the
Purchasers of their willingness to participate in the Subsequent Financing (or
to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing,

 

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then the Company may effect the remaining portion of such Subsequent Financing
on the terms and with the Persons set forth in the Subsequent Financing Notice.

 

(e)          If by 5:30 p.m. (New York City time) on the 5th Trading Day after
all of the Purchasers have received the Pre-Notice, the Company receives
responses to a Subsequent Financing Notice from Purchasers seeking to purchase
more than the aggregate amount of the Participation Maximum, each such Purchaser
shall have the right to purchase the greater of (a) their Pro Rata Portion (as
defined below) of the Participation Maximum and (b) the difference between the
Participation Maximum and the aggregate amount of participation by all other
Purchasers. “Pro Rata Portion” is the ratio of (x) the Subscription Amount of
Securities purchased on the Closing Date by a Purchaser participating under this
Section 4.13 and (y) the sum of the aggregate Subscription Amounts of Securities
purchased on the Closing Date by all Purchasers participating under this Section
4.13.

 

(f)          The Company must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of participation
set forth above in this Section 4.13, if the Subsequent Financing subject to the
initial Subsequent Financing Notice is not consummated for any reason on the
terms set forth in such Subsequent Financing Notice within 60 Trading Days after
the date of the initial Subsequent Financing Notice.

 

(g)          Notwithstanding the foregoing, this Section 4.13 shall not apply in
respect of an Exempt Issuance.

 

4.14

Subsequent Equity Sales.

 

(a)          From the date hereof until the date that is the later of (i) 90
days after the Effective Date or (ii) the effective date of the Reverse Split,
neither the Company nor any Subsidiary shall file any registration statement
with the Commission other than the Registration Statement as set forth in the
Registration Rights Agreement; provided, however, the period set forth in this
Section 4.14 shall be extended for the number of Trading Days during such period
in which (i) trading in the Common Stock is suspended by any Trading Market, or
(ii) following the Effective Date, the Registration Statement is not effective
or the prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Underlying Shares.

 

(b)          From the date hereof until such time as no Purchaser holds any of
the Securities, the Company shall be prohibited from effecting or entering into
an agreement to effect any Subsequent Financing involving a “Variable Rate
Transaction”. The term “Variable Rate Transaction” shall mean a transaction in
which the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion,

 

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exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock or (ii) enters
into any agreement, including, but not limited to, an equity line of credit,
whereby the Company may sell securities at a future determined price.

 

(c)           Any Purchaser shall be entitled to obtain injunctive relief
against the Company to preclude any such issuance, which remedy shall be in
addition to any right to collect damages.

 

(d)          Notwithstanding the foregoing, this Section 4.14 shall not apply in
respect of an Exempt Issuance, except that no Variable Rate Transaction shall be
an Exempt Issuance.

 

4.15      Equal Treatment of Purchasers. No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended for the Company to treat the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.

4.16      Short Sales and Confidentiality After The Date Hereof. Each Purchaser
severally and not jointly with the other Purchasers covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6. Each Purchaser, severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.6, such Purchaser will maintain the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock “against the box” prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding the foregoing, no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in Short Sales in the securities of
the Company after the time that the transactions contemplated by this Agreement
are first publicly announced as described in Section 4.6. Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser's
assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such
Purchaser's assets, the covenant set forth above shall only apply with respect
to the portion of assets managed by the portfolio manager

 

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that made the investment decision to purchase the Securities covered by this
Agreement. Further, each Purchaser agrees that it shall not enter into any
transactions with respect to the Common Stock during the 20 Trading Days
immediately following the effective date of the Reverse Split provided that they
have received prior notice from the Company of such effective date.

4.17      Form D; Blue Sky Filings. The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closing under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.

4.18      Capital Change. Until the one year anniversary of the Effective Date,
the Company shall not undertake a reverse or forward stock split or
reclassification of the Common Stock, other than the Reverse Split, without the
prior written consent of the Purchasers holding a majority in interest of the
shares of Preferred Stock.

4.19      Most Favored Nation Provision. Prior to the effective date of the
Reverse Split, at any time the Company effects a Subsequent Financing, each
Purchaser may elect, in its sole discretion, to exchange all or some of its
Preferred Stock or any Conversion Shares then held by it for any securities
issued in a Subsequent Financing based on the Stated Value of the Preferred
Stock plus accrued but unpaid dividends and other fees owed; and the effective
price at which such securities were sold in such Subsequent Financing.

4.20      Enforcement of Lockup Agreements. On the Closing Date, the Company
shall provide its transfer agent with copies of each Lockup Agreement, and shall
identify to the transfer agent all securities covered thereby, with
stop-transfer orders. The Company shall maintain a log of all transfers of
Excluded Shares, and shall not authorize or acquiesce in the transfer of any
shares subject to the Lockup Agreements which are not Excluded Shares.

4.21      Non-Liability of Placement Agent for Escrow Release.Each Purchaser and
the Company acknowledge and agree that Rodman & Renshaw, LLC (“Rodman”) has
acted as placement agent for the transactions contemplated by this Agreement.
Each Purchaser hereby appoints Rodman as its agent for the sole purpose of
confirming the closing of the Hapto Merger for purposes of releasing the
Subscription Amounts from the escrow account pursuant to the Escrow Agreement.
Each Purchaser acknowledges and agrees that in making such determination, Rodman
will be relying solely and exclusively on its receipt of the Certificate of
Merger among the parties to the Hapto Merger certified as filed by the Delaware
Secretary of State. Such certification may be by fax or .pdf file, and Rodman
may rely on any such copy in making its determination. Rodman shall have no
liability to any Person for any good faith failure of such document to be
genuine or to be effective to effect the Hapto Merger. Each Purchaser and the
Company acknowledge and agree that Rodman has made no representation or warranty
of any kind as to the merits of Hapto or the Hapto Merger, and no Purchaser or
the Company shall make any claim against Rodman or any of its controlling
Persons in respect of the same.

 

 

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ARTICLE V

MISCELLANEOUS

5.1         Termination.  This Agreement may be terminated by any Purchaser, as
to such Purchaser’s obligations hereunder only and without any effect whatsoever
on the obligations between the Company and the other Purchasers, by written
notice to the other parties, if the Closing has not been consummated on or
before April 19, 2006; provided, however, that no such termination will affect
the right of any party to sue for any breach by the other party (or parties).

5.2         Fees and Expenses. At the Closing, the Company has agreed to
reimburse Rodman the non-accountable sum of $30,000, for its legal fees and
expenses. Except as expressly set forth in the Transaction Documents to the
contrary, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all transfer agent fees,
stamp taxes and other taxes and duties levied in connection with the delivery of
any Securities to the Purchasers.

5.3         Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

5.4         Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

5.5         Amendments; Waivers. No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed by the
Company and the Holders of 67% of the outstanding shares of Registrable
Securities. No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such
right.

5.6         Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.

5.7

Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit

 

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of the parties and their successors and permitted assigns. The Company may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of each Purchaser (other than by merger). Any Purchaser may
assign any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions of the Transaction Documents that apply to the “Purchasers”.

5.8         No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.

5.9         Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or is an inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys’ fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

5.10      Survival. The representations, warranties, covenants and other
agreements contained herein shall survive the Closing and the delivery, exercise
and/or conversion of the Securities, as applicable for the applicable statue of
limitations.

5.11      Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file,

 

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such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile or “.pdf” signature page were an original
thereof.

5.12      Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

5.13      Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other Transaction Documents, whenever any Purchaser exercises a right,
election, demand or option under a Transaction Document and the Company does not
timely perform its related obligations within the periods therein provided, then
such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of the Preferred Stock or
exercise of a Warrant, the Purchaser shall be required to return any shares of
Common Stock subject to any such rescinded conversion or exercise notice.

5.14      Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs (including customary indemnity) associated with the
issuance of such replacement Securities.

5.15      Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described and hereby agrees to waive and not to assert in any action
for specific performance of any such obligation the defense that a remedy at law
would be adequate.

5.16      Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any

 

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law (including, without limitation, any bankruptcy law, state or federal law,
common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.

5.17      Usury. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser’s election.

5.18      Independent Nature of Purchasers’ Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance or non-performance of the obligations
of any other Purchaser under any Transaction Document. Nothing contained herein
or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including without limitation, the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FW. FW
does not represent any of the Purchasers but only Rodman. The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.

 

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5.19      Liquidated Damages. The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.

5.20      Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.

 

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

 

Ortec International, Inc.

 

Address for Notice:

By:__________________________________________

Name:

Title:

 

3960 Broadway

New York, NY 10032

Facsimile:

Attention:

With a copy to (which shall not constitute notice):

Gabriel Kaszovitz

Feder, Kaszovitz, Isaacson, Weber,

Skala, Bass & Rhine, LLP

750 Lexington Avenue, 23rd Floor

New York, NY 10022

 

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

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[PURCHASER SIGNATURE PAGES TO ORTN SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

Name of Purchaser: __________________________

Signature of Authorized Signatory of Purchaser: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

Email Address of Purchaser: ________________________________

Fax Number of Purchaser: ______________________________

 

Address for Notice of Purchaser:

 

 

Address for Delivery of Securities for Purchaser (if not same as above):

 

 

 

Subscription Amount:

Shares of Preferred Stock:

Warrant Shares:

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

 

EXHIBIT A

 

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ORTEC INTERNATIONAL, INC.

 

CERTIFICATE OF DESIGNATION OF PREFERENCES,

RIGHTS AND LIMITATIONS

OF

SERIES E 6% CONVERTIBLE PREFERRED STOCK

 

PURSUANT TO SECTION 151 OF THE

DELAWARE GENERAL CORPORATION LAW

 

The undersigned, __________ and ____________, do hereby certify that:

 

1. They are the President and Secretary, respectively, of Ortec International,
Inc., a Delaware corporation (the “Corporation”).

 

2. The Corporation is authorized to issue 1,000,000 shares of preferred stock,
6,272.0156 of which have been issued.

 

3. The following resolutions were duly adopted by the Board of Directors:

 

WHEREAS, the Certificate of Incorporation of the Corporation provides for a
class of its authorized stock known as preferred stock, comprised of 1,000,000
shares, $0.001 par value per share, issuable from time to time in one or more
series;

 

WHEREAS, the Board of Directors of the Corporation is authorized to fix the
dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and

 

WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant
to its authority as aforesaid, to fix the rights, preferences, restrictions and
other matters relating to a series of the preferred stock, which shall consist
of, except as otherwise set forth in the Purchase Agreement, up to 8,000 shares
of the preferred stock which the corporation has the authority to issue, as
follows:

 

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide
for the issuance of a series of preferred stock for cash or exchange of other
securities, rights or property and does hereby fix and determine the rights,
preferences, restrictions and other matters relating to such series of preferred
stock as follows:

 

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TERMS OF PREFERRED STOCK

 

Section 1.           Definitions. Capitalized terms used and not otherwise
defined herein that are defined in the Purchase Agreement shall have the
meanings given such terms in the Purchase Agreement. For the purposes hereof,
the following terms shall have the following meanings:

 

“Alternate Consideration” shall have the meaning set forth in Section 7(e).

 

“Bankruptcy Event” means any of the following events: (a) the Corporation or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Corporation or any Significant Subsidiary thereof; (b) there is commenced
against the Corporation or any Significant Subsidiary thereof any such case or
proceeding that is not dismissed within 60 days after commencement; (c) the
Corporation or any Significant Subsidiary thereof is adjudicated insolvent or
bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Corporation or any Significant Subsidiary thereof
suffers any appointment of any custodian or the like for it or any substantial
part of its property that is not discharged or stayed within 60 calendar days
after such appointment; (e) the Corporation or any Significant Subsidiary
thereof makes a general assignment for the benefit of creditors; (f) the
Corporation or any Significant Subsidiary thereof calls a meeting of its
creditors with a view to arranging a composition, adjustment or restructuring of
its debts; or (g) the Corporation or any Significant Subsidiary thereof, by any
act or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.

 

“Base Conversion Price” shall have the meaning set forth in Section 7(b).

 

“Business Day” means any day except Saturday, Sunday, any day which shall be a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.

 

“Buy-In” shall have the meaning set forth in Section 6(e)(iii).

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual, legal entity
or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of the Corporation, by contract or otherwise) of in excess of 33% of the
voting securities of the Corporation (other than by means of conversion or
exercise of Preferred Stock and the Securities issued together with the
Preferred Stock), or (ii) the Corporation merges into or

 

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consolidates with any other Person, or any Person merges into or consolidates
with the Corporation and, after giving effect to such transaction, the
stockholders of the Corporation immediately prior to such transaction own less
than 66% of the aggregate voting power of the Corporation or the successor
entity of such transaction, or (iii) the Corporation sells or transfers all or
substantially all of its assets to another Person and the stockholders of the
Corporation immediately prior to such transaction own less than 66% of the
aggregate voting power of the acquiring entity immediately after the
transaction, or (iv) a replacement at one time or within a one year period of
more than one-half of the members of the Corporation’s board of directors which
is not approved by a majority of those individuals who are members of the board
of directors on the date hereof (or by those individuals who are serving as
members of the board of directors on any date whose nomination to the board of
directors was approved by a majority of the members of the board of directors
who are members on the date hereof), or (v) the execution by the Corporation of
an agreement to which the Corporation is a party or by which it is bound,
providing for any of the events set forth in clauses (i) through (iv) above;
provided, however, that the Corporation’s issuance of shares of its Common Stock
in connection with the Hapto Merger shall not be deemed to constitute a Change
of Control Transaction.

 

“Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto and all conditions
precedent to (i) the Holders’ obligations to pay the Subscription Amount and
(ii) the Corporation’s obligations to deliver the Securities have been satisfied
or waived.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the Corporation’s common stock, par value $.001 per share,
and stock of any other class of securities into which such securities may
hereafter be reclassified or changed into.

 

“Common Stock Equivalents” means any securities of the Corporation or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

 

“Conversion Amount” means the sum of the Stated Value at issue.

 

“Conversion Date” shall have the meaning set forth in Section 6(a).

 

“Conversion Price” shall have the meaning set forth in Section 6(b).

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of the shares of Preferred Stock in accordance with the terms
hereof.

 

 

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“Conversion Shares Registration Statement” means a registration statement that
registers the resale of all Conversion Shares of the Holder, who shall be named
as a “selling stockholder” therein and meets the requirements of the
Registration Rights Agreement.

 

“Dilutive Issuance” shall have the meaning set forth in Section 7(b).

 

“Dilutive Issuance Notice” shall have the meaning set forth in Section 7(b).

 

“Dividend Payment Date” shall have the meaning set forth in Section 3(a).

 

“Dividend Share Amount” shall have the meaning set forth in Section 3(a).

 

“Effective Date” means the date that the Conversion Shares Registration
Statement is declared effective by the Commission.

 

“Equity Conditions” means, during the period in question, (i) the Corporation
shall have duly honored all conversions scheduled to occur or occurring by
virtue of one or more Notices of Conversion of the Holder on or prior to the
dates so requested or required, if any, (ii) the Corporation shall have paid all
liquidated damages and other amounts owing to the Holder in respect of the
Preferred Stock, (iii) there is an effective Conversion Shares Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares of Common Stock issuable pursuant to the
Transaction Documents (and the Corporation believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (iv) the
Common Stock is trading on a Trading Market and all of the shares issuable
pursuant to the Transaction Documents are listed for trading on such Trading
Market (and the Corporation believes, in good faith, that trading of the Common
Stock on a Trading Market will continue uninterrupted for the foreseeable
future), (v) there is a sufficient number of authorized, but unissued and
otherwise unreserved, shares of Common Stock for the issuance of all of the
shares of Common Stock issuable pursuant to the Transaction Documents, (vi)
there is no existing Triggering Event or no existing event which, with the
passage of time or the giving of notice, would constitute a Triggering Event,
(vii) the issuance of the shares in question to the Holder would not violate the
limitations set forth in Section 6(c) herein, (viii) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of
Control Transaction that has not been consummated, (ix) no Holder is in
possession of any information that constitutes, or may constitute, material
non-public information and (x) the Corporation shall have received Authorized
Share Approval.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of the Corporation pursuant to any stock or
option plan duly adopted by (i) a majority of the non-employee members of the
Board of Directors of the Corporation, (ii) a majority of the members of a
committee of non-employee directors

 

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established for such purpose or (iii) an affirmative vote of the shareholders of
the Corporation pursuant to Delaware law, (b) securities upon the exercise of or
conversion of any securities issued hereunder and/or other securities
exercisable or exchangeable for or convertible into shares of Common Stock
issued and outstanding on the date of the Purchase Agreement, provided that such
securities have not been amended since the date of the Purchase Agreement to
increase the number of such securities or to decrease the exercise or conversion
price of any such securities, and (c) securities issued pursuant to acquisitions
or strategic transactions approved by a majority of the disinterested directors,
provided that any such issuance shall only be to a Person which is, itself or
through its subsidiaries, an operating company in a business synergistic with
the business of the Corporation and shall provide to the Corporation additional
benefits in addition to the investment of funds, but shall not include a
transaction in which the Corporation is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities.

“Forced Conversion” shall mean the automatic conversion of the Preferred Stock
pursuant to Section 8(a).

 

“Fundamental Transaction” shall have the meaning set forth in Section 7(e).

 

“Holder” shall have the meaning given such term in Section 2.

 

“Junior Securities” means the Common Stock and all other Common Stock
Equivalents of the Corporation other than those securities which are explicitly
senior or pari passu to the Preferred Stock in dividend rights or liquidation
preference.

 

“Liquidation” shall have the meaning set forth in Section 5.

 

“New York Courts” shall have the meaning set forth in Section 11(d).

 

“Notice of Conversion” shall have the meaning set forth in Section 6(a).

 

“Original Issue Date” means the date of the first issuance of any shares of the
Preferred Stock regardless of the number of transfers of any particular shares
of Preferred Stock and regardless of the number of certificates which may be
issued to evidence such Preferred Stock.

 

<R>

“Permitted Indebtedness” means the Indebtedness existing on the Original Issue
Date and set forth on Schedule 3.1(ff) attached to the Purchase Agreement and
(b) any other Indebtedness incurred with the prior written consent of the
Holders of 75% of the outstanding Preferred Stock at the time such additional
Indebtedness is incurred, which consent may be granted or withheld in the
absolute discretion of each Holder.

</R>

 

“Permitted Lien” means the individual and collective reference to the following:
(a) Liens for taxes, assessments and other governmental charges or levies not
yet due or Liens for taxes, assessments and other governmental charges or levies
being contested in good faith and by appropriate proceedings for which adequate
reserves (in the good faith judgment of the management of the Corporation) have
been established in accordance with GAAP; (b) Liens imposed by law which were
incurred in the ordinary course of the Corporation’s business, such as
carriers’, warehousemen’s and mechanics’ Liens, statutory

 

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landlords’ Liens, and other similar Liens arising in the ordinary course of the
Corporation’s business, and which (x) do not individually or in the aggregate
materially detract from the value of such property or assets or materially
impair the use thereof in the operation of the business of the Corporation and
its consolidated Subsidiaries or (y) which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for the
foreseeable future the forfeiture or sale of the property or asset subject to
such Lien; and (c) Liens incurred in connection with Permitted Indebtedness
under clause (b) thereunder, provided that such Liens are not secured by assets
of the Corporation or its Subsidiaries other than the assets so acquired or
leased.

 

“Preferred Stock” shall have the meaning set forth in Section 2.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of the
Original Issue Date, to which the Corporation and the original Holders are
parties, as amended, modified or supplemented from time to time in accordance
with its terms.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date of the Purchase Agreement, to which the Corporation and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Share Delivery Date” shall have the meaning set forth in Section 6(e).

 

“Stated Value” shall have the meaning set forth in Section 2.

 

“Subscription Amount” means, as to each Purchaser, the amount in United States
Dollars and in immediately available funds to be paid for the Preferred Stock
purchased pursuant to the Purchase Agreement as specified below such Purchaser’s
name on the signature page of the Purchase Agreement and next to the heading
“Subscription Amount.”

 

“Subsidiary” shall have the meaning set forth in the Purchase Agreement.

 

“Trading Day” means a day on which the principal Trading Market is open for
business.

 

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American
Stock Exchange, the Nasdaq Capital Market, the Nasdaq National Market, the New
York Stock Exchange or the OTC Bulletin Board.

 

“Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.

 

“Triggering Event” shall have the meaning set forth in Section 9(a).

 

 

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“Triggering Redemption Amount” means, for each share of Preferred Stock, the sum
of (i) the greater of (A) 130% of the Stated Value and (B) the product of (a)
the VWAP on the Trading Day immediately preceding the date of the Triggering
Event and (b) the Stated Value divided by the then Conversion Price, (ii) all
accrued but unpaid dividends thereon and (iii) all liquidated damages and other
costs, expenses or amounts due in respect of the Preferred Stock.

 

“Triggering Redemption Payment Date” shall have the meaning set forth in Section
9(b).

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted for trading as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to
4:02 p.m. (New York City time)); (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock
is not then quoted for trading on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the “Pink Sheets” published by Pink Sheets,
LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers and reasonably acceptable to the Corporation.

 

Section 2.           Designation, Amount and Par Value. The series of preferred
stock shall be designated as its Series E 6% Convertible Preferred Stock (the
“Preferred Stock”) and the number of shares so designated shall be up to 8,000
(which shall not be subject to increase without the written consent of all of
the holders of the Preferred Stock (each, a “Holder” and collectively, the
“Holders”)). Each share of Preferred Stock shall have a par value of $.001 per
share and a stated value equal to $1,000, subject to increase set forth in
Section 3(a) below (the “Stated Value”).

 

Section 3.

Dividends.

 

a)                                     Dividends in Cash or in Kind. Holders
shall be entitled to receive, and the Corporation shall pay, cumulative
dividends at the rate per share (as a percentage of the Stated Value per share)
of 6% per annum (subject to increase pursuant to Section 9(b)), payable
quarterly on January 1, April 1, July 1 and October 1, beginning on July 1,
2006, and on each Conversion Date (except that, if such date is not a Trading
Day, the payment date shall be the next succeeding Trading Day) (each such date,
a “Dividend Payment Date”) in cash or duly authorized, validly issued, fully
paid and non-assessable shares of Common Stock as set forth in this Section
3(a), or a combination thereof (the amount to be paid in shares of Common Stock,
the “Dividend Share Amount”). The form of dividend payments to each Holder shall
be determined in the following order of priority: (i) if funds are legally
available for the payment of dividends and the Equity Conditions have not been
met during the 20 consecutive Trading Days immediately prior to the applicable
Dividend Payment Date, in cash only; (ii) if funds are legally available for the
payment of dividends and the Equity Conditions have been met during the 20
consecutive Trading Days immediately prior to the applicable Dividend Payment
Date, at the sole election of the Corporation, in cash or shares of

 

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Common Stock which shall be valued solely for such purpose at 90% of the average
of the VWAPs for the 10 consecutive Trading Days ending on the Trading Day that
is immediately prior to the Dividend Payment Date; (iii) if funds are not
legally available for the payment of dividends and the Equity Conditions have
been met during the 20 consecutive Trading Days immediately prior to the
applicable Dividend Payment Date, in shares of Common Stock which shall be
valued solely for such purpose at 90% of the average of the VWAPs for the 10
consecutive Trading Days ending on the Trading Day that is immediately prior to
the Dividend Payment Date; (iv) if funds are not legally available for the
payment of dividends and the Equity Condition relating to an effective
Conversion Shares Registration Statement has been waived by such Holder, as to
such Holder only, in unregistered shares of Common Stock which shall be valued
solely for such purpose at 90% of the average of the VWAPs for the 10
consecutive Trading Days ending on the Trading Day that is immediately prior to
the Dividend Payment Date; and (v) if funds are not legally available for the
payment of dividends and the Equity Conditions have not been met during the 20
consecutive Trading Days immediately prior to the applicable Dividend Payment
Date, then, at the election of such Holder, such dividends shall accrue to the
next Dividend Payment Date or shall be accreted to, and increase, the
outstanding Stated Value. The Holders shall have the same rights and remedies
with respect to the delivery of any such shares as if such shares were being
issued pursuant to Section 6. On the Closing Date the Corporation shall have
notified the Holders whether or not it may legally pay cash dividends as of the
Closing Date. The Corporation shall promptly notify the Holders at any time the
Corporation shall become able or unable, as the case may be, to legally pay cash
dividends. If at any time the Corporation has the right to pay dividends in cash
or Common Stock, the Corporation must provide the Holder with at least 20
Trading Days’ notice of its election to pay a regularly scheduled dividend in
Common Stock (the Corporation may indicate in such notice that the election
contained in such notice shall continue for later periods until revised by a
subsequent notice). Dividends on the Preferred Stock shall be calculated on the
basis of a 360-day year, shall accrue daily commencing on the Original Issue
Date, and shall be deemed to accrue from such date whether or not earned or
declared and whether or not there are profits, surplus or other funds of the
Corporation legally available for the payment of dividends. Except as otherwise
provided herein, if at any time the Corporation pays dividends partially in cash
and partially in shares, then such payment shall be distributed ratably among
the Holders based upon the number of shares of Preferred Stock held by each
Holder on such Dividend Payment Date. Any dividends, whether paid in cash or
shares of Common Stock, that are not paid within three Trading Days following a
Dividend Payment Date shall continue to accrue and shall entail a late fee,
which must be paid in cash, at the rate of 18% per annum or the lesser rate
permitted by applicable law (such fees to accrue daily, from the Dividend
Payment Date through and including the date of payment). If at any time the
Corporation delivers a notice to the Holders of its election to pay the
dividends in shares of Common Stock, the Corporation shall timely file a
prospectus supplement pursuant to Rule 424 disclosing such election.

 

b)                                     So long as any Preferred Stock shall
remain outstanding, neither the Corporation nor any Subsidiary thereof shall
redeem, purchase or otherwise acquire directly or indirectly any Junior
Securities except as expressly permitted by Section 9(a)(viii). So long as any
Preferred Stock shall remain outstanding, neither the Corporation nor any
Subsidiary thereof shall directly or indirectly pay or declare any dividend or
make any distribution upon (other than a dividend or distribution described in
Section 6 or dividends due and paid in the ordinary course on preferred stock of
the Corporation at such times when the Corporation is in compliance with its
payment and other obligations hereunder), nor shall any distribution be made in
respect of, any Junior Securities as long as any dividends due on the Preferred
Stock remain unpaid, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.

 

c)                                     The Corporation acknowledges and agrees
that the capital of the Corporation (as such term is used in Section 154 of the
Delaware General Corporation Law) in respect of the Preferred Stock and any
future issuances of the Corporation’s capital stock shall be equal to the
aggregate par value of such Preferred Stock or capital stock, as the case may
be, and that, on or after the date of the Purchase Agreement, it shall not
increase the capital of the Corporation with respect to any shares of the
Corporation’s capital stock issued and outstanding on such date. The Corporation
also acknowledges and agrees that it shall not create any special reserves under
Section 171 of the Delaware General Corporation Law without the prior written
consent of each Holder.

 

 

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Section 4.           Voting Rights. Subject to the limitations set forth in
Section 6(c), the Preferred Stock shall vote on an “as converted” basis on all
matters submitted to the holders of the Common Stock, and as otherwise required
by law. In addition, as long as any shares of Preferred Stock are outstanding,
the Corporation shall not, without the affirmative vote of the Holders of 67% of
the then outstanding shares of the Preferred Stock, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
alter or amend this Certificate of Designation, (b) authorize or create any
class of stock ranking as to dividends, redemption or distribution of assets
upon a Liquidation (as defined in Section 5) senior to or otherwise pari passu
with the Preferred Stock, (c) amend its certificate of incorporation or other
charter documents in any manner that adversely affects any rights of the
Holders, (d) increase the authorized number of shares of Preferred Stock, (e)
enter into a Fundamental Transaction or Change of Control Transaction or (f)
enter into any agreement with respect to any of the foregoing.

 

Section 5.           Liquidation. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a
“Liquidation”), the Holders shall be entitled to receive out of the assets,
whether capital or surplus, of the Corporation an amount equal to the Stated
Value, plus any accrued and unpaid dividends thereon and any other fees or
liquidated damages owing thereon, for each share of Preferred Stock before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Corporation shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders shall be
ratably distributed among the Holders in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A Fundamental Transaction or Change of Control Transaction shall be deemed
a Liquidation. The Corporation shall mail written notice of any such
Liquidation, not less than 45 days prior to the payment date stated therein, to
each Holder.

 

Section 6.

Conversion.

 

a)                                     Conversions at Option of Holder. Each
share of Preferred Stock shall be convertible at the option of the Holder, at
any time and from time to time from and after the Original Issue Date into that
number of shares of Common Stock (subject to the limitations set forth in
Section 6(c) determined by dividing the Stated Value of such share of Preferred
Stock by the Conversion Price. Prior to Authorized Share Approval, each Holder
shall only be entitled to convert up to that number of shares of Preferred Stock
as shall constitute such Holder’s pro-rata portion of the total number of shares
of Preferred Stock outstanding on the Original Issue Date in respect of the
30,000,000 authorized but unissued shares of Common Stock reserved for issuance
upon conversion of the Preferred Stock. Holders shall effect conversions by
providing the Corporation with the form of conversion notice attached hereto as
Annex A (a “Notice of Conversion”). Each Notice of Conversion shall specify the
number of shares of Preferred Stock to be converted, the number of shares of
Preferred Stock owned prior to the conversion at issue, the number of shares of
Preferred Stock owned subsequent to the conversion at issue and the date on
which such conversion is to be effected, which date may not be prior to the date
the Holder delivers by facsimile such Notice of Conversion to the Corporation
(the “Conversion Date”). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
to the Corporation is deemed delivered hereunder. The calculations and entries
set forth in the Notice of Conversion shall control in the absence of manifest
or mathematical error. To effect conversions, as the case may be, of shares of
Preferred Stock, a Holder shall not be required to surrender the certificate(s)
representing such shares of Preferred Stock to the Corporation unless all of the
shares of Preferred Stock represented thereby are so converted, in which case
the Holder shall deliver the certificate representing such shares of Preferred
Stock promptly following the Conversion Date at issue. Shares of Preferred Stock

 

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converted into Common Stock or redeemed in accordance with the terms hereof
shall be canceled and shall not be reissued.

 

b)                                     Conversion Price. The conversion price
for the Preferred Stock shall equal $0.20, subject to adjustment herein (the
“Conversion Price”).

 

c)                                     Beneficial Ownership Limitation. The
Corporation shall not effect any conversion of the Preferred Stock, and a Holder
shall not have the right to convert any portion of the Preferred Stock, to the
extent that, after giving effect to the conversion set forth on the applicable
Notice of Conversion, such Holder (together with such Holder’s Affiliates, and
any other person or entity acting as a group together with such Holder or any of
such Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below).  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by such Holder
and its Affiliates shall include the number of shares of Common Stock issuable
upon conversion of the Preferred Stock with respect to which such determination
is being made, but shall exclude the number of shares of Common Stock which are
issuable upon (A) conversion of the remaining, unconverted Stated Value of
Preferred Stock beneficially owned by such Holder or any of its Affiliates and
(B) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Corporation subject to a limitation on conversion or
exercise analogous to the limitation contained herein (including the Warrants)
beneficially owned by such Holder or any of its Affiliates.  Except as set forth
in the preceding sentence, for purposes of this Section 6(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. To the extent that the
limitation contained in this Section 6(c) applies, the determination of whether
the Preferred Stock is convertible (in relation to other securities owned by
such Holder together with any Affiliates) and of how many shares of Preferred
Stock are convertible shall be in the sole discretion of such Holder, and the
submission of a Notice of Conversion shall be deemed to be such Holder’s
determination of whether the shares of Preferred Stock may be converted (in
relation to other securities owned by such Holder together with any Affiliates)
and how many shares of the Preferred Stock are convertible, in each case subject
to such aggregate percentage limitations. To ensure compliance with this
restriction, each Holder will be deemed to represent to the Corporation each
time it delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Corporation shall
have no obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. For purposes of this Section 6(c), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as stated in the most recent
of the following: (A) the Corporation’s most recent Form 10-QSB or Form 10-KSB,
as the case may be, (B) a more recent public announcement by the Corporation or
(C) a more recent notice by the Corporation or the Corporation’s transfer agent
setting forth the number of shares of Common Stock outstanding.  Upon the
written or oral request of a Holder, the Corporation shall within two Trading
Days confirm orally and in writing to such Holder the number of shares of Common
Stock then outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Corporation, including the Preferred Stock, by such Holder or
its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99%
of the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon conversion of
Preferred Stock held by the Holder. The Beneficial Ownership Limitation
provisions of this Section 6(c) may be waived by such Holder, at the election of
such Holder, upon not less than 61 days’ prior notice to the Corporation, to
change the Beneficial Ownership Limitation to 9.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock upon conversion of Preferred Stock held by the Holder and
the provisions of this Section 6(c) shall continue to apply. Upon such a change
by a Holder of the Beneficial Ownership Limitation from such 4.99% limitation to
such 9.99% limitation, the Beneficial Ownership Limitation shall not be further
waived by such Holder. The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 6(c) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to

 

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properly give effect to such limitation. The limitations contained in this
paragraph shall apply to a successor holder of Preferred Stock.

 

d)

[RESERVED].

 

e)

Mechanics of Conversion

 

i.       Delivery of Certificate Upon Conversion. Not later than three Trading
Days after each Conversion Date (the “Share Delivery Date”), the Corporation
shall deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates which, on or after the Effective Date, shall be free of restrictive
legends and trading restrictions (other than those which may then be required by
the Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of shares of Preferred Stock, and (B) a bank check
in the amount of accrued and unpaid dividends (if the Corporation has elected or
is required to pay accrued dividends in cash). On or after the Effective Date,
the Corporation shall, upon request of the Holder, use its best efforts to
deliver any certificate or certificates required to be delivered by the
Corporation under this Section 6 electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions. If in the case of any Notice of Conversion such certificate or
certificates are not delivered to or as directed by the applicable Holder by the
third Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Corporation at any time on or before its receipt
of such certificate or certificates, to rescind such Conversion Notice by
written notice to the Corporation, in which event the Corporation shall promptly
return to the Holder any original Preferred Stock certificate delivered to the
Corporation and the Holder shall promptly return any Common Stock certificates
representing the shares of Preferred Stock tendered for conversion to the
Corporation.

 

ii.      Obligation Absolute; Partial Liquidated Damages. The Corporation’s
obligation to issue and deliver the Conversion Shares upon conversion of
Preferred Stock in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Corporation or any violation or alleged violation of law by the Holder or
any other person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to the Holder in connection
with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Corporation of any such action
that the Corporation may have against the Holder. In the event a Holder shall
elect to convert any or all of the Stated Value of its Preferred Stock, the
Corporation may not refuse conversion based on any claim that such Holder or any
one associated or affiliated with the Holder has been engaged in any violation
of law, agreement or for any other reason, unless an injunction from a court, on
notice to Holder, restraining and/or enjoining conversion of all or part of the
Preferred Stock of the Holder shall have been sought and obtained, and the
Corporation posts a surety bond for the benefit of the Holder in the amount of
150% of the Stated Value of Preferred Stock which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the underlying dispute and the proceeds of which shall be payable to such
Holder to the extent it obtains judgment. In the absence of such injunction, the
Corporation shall issue Conversion Shares and, if applicable, cash, upon a
properly noticed conversion. If the Corporation fails to deliver to the Holder
such certificate or certificates pursuant to Section 6(e)(i) on the second
Trading Day after the Share Delivery Date applicable to such conversion, the
Corporation shall pay to such Holder, in cash, as liquidated damages and not as
a penalty, for each $5,000 of Stated Value of Preferred Stock being converted,
$50 per Trading Day (increasing to $100 per Trading Day on the third Trading Day
and increasing to $200 per Trading Day on the sixth Trading Day after such
damages begin to accrue) for each Trading Day after such second Trading Day
after the Share Delivery Date until such certificates are delivered. Nothing
herein shall limit a Holder’s right to pursue actual damages or declare a
Triggering Event pursuant to Section 9 for the Corporation’s failure to deliver
Conversion Shares within the period specified

 

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herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The Exercise of any such rights
shall not prohibit the Holder from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.

 

iii.     Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. If the Corporation fails to deliver to the Holder such certificate
or certificates by the Share Delivery Date pursuant to Section 6(e)(i), and if
after such Share Delivery Date the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such Holder of the Conversion Shares which
the Holder was entitled to receive upon the conversion relating to such Share
Delivery Date (a “Buy-In”), then the Corporation shall (A) pay in cash to the
Holder (in addition to any other remedies available to or elected by the Holder)
the amount by which (x) the Holder’s total purchase price (including any
brokerage commissions) for the shares of Common Stock so purchased exceeds (y)
the product of (1) the aggregate number of shares of Common Stock that such
Holder was entitled to receive from the conversion at issue multiplied by (2)
the actual sale price at which the sell order giving rise to such purchase
obligation was executed (including any brokerage commissions) and (B) at the
option of the Holder, either reissue (if surrendered) the shares of Preferred
Stock equal to the number of shares of Preferred Stock submitted for conversion
or deliver to the Holder the number of shares of Common Stock that would have
been issued if the Corporation had timely complied with its delivery
requirements under Section 6(e)(i). For example, if the Holder purchases shares
of Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of shares of Preferred Stock with respect to
which the actual sale price (including any brokerage commissions) giving rise to
such purchase obligation was a total of $10,000 under clause (A) of the
immediately preceding sentence, the Corporation shall be required to pay the
Holder $1,000. The Holder shall provide the Corporation written notice
indicating the amounts payable to the Holder in respect of the Buy-In and, upon
request of the Corporation, evidence of the amount of such loss. Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Corporation’s
failure to timely deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required pursuant to the terms
hereof.

 

iv.     Reservation of Shares Issuable Upon Conversion. The Corporation
covenants that it has reserved 30,000,000 shares of Common Stock as of the
Original Issue Date, and upon receipt of Authorized Share Approval, will at all
times thereafter, reserve and keep available out of its authorized and unissued
shares of Common Stock for the sole purpose of issuance upon conversion of the
Preferred Stock and payment of dividends on the Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of Persons other than the Holders of the Preferred Stock, not less than
such aggregate number of shares of the Common Stock as shall (subject to the
terms and conditions in the Purchase Agreement) be issuable (taking into account
the adjustments and restrictions of Section 7) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder. The
Corporation covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Conversion Shares Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Conversion Shares Registration Statement.

 

v.      Fractional Shares. Upon a conversion hereunder, the Corporation shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the VWAP at such time. If the Corporation
elects not, or is unable, to make such a cash payment, the Holder shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.

 

vi.

Transfer Taxes. The issuance of certificates for shares of the Common Stock on

 

 

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conversion of this Preferred Stock shall be made without charge to the Holder
hereof for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificates, provided that the Corporation
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Corporation shall not be required to issue or deliver
such certificates unless or until the Person or Persons requesting the issuance
thereof shall have paid to the Corporation the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax has been paid.

 

Section 7.

Certain Adjustments.

 

a)                                     Stock Dividends and Stock Splits. If the
Corporation, at any time while this Preferred Stock is outstanding: (A) pays a
stock dividend or otherwise makes a distribution or distributions payable in
shares of Common Stock on shares of Common Stock or any other Common Stock
Equivalents (which, for avoidance of doubt, shall not include any shares of
Common Stock issued by the Corporation upon conversion of, or payment of a
dividend on, this Preferred Stock); (B) subdivides outstanding shares of Common
Stock into a larger number of shares; (C) combines (including by way of a
reverse stock split) outstanding shares of Common Stock into a smaller number of
shares; or (D) issues, in the event of a reclassification of shares of the
Common Stock, any shares of capital stock of the Corporation, then the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding any treasury shares of the
Corporation) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to this Section 7(a)
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.

 

b)                                     Subsequent Equity Sales. If the
Corporation or any Subsidiary thereof, at any time while this Preferred Stock is
outstanding, sells or grants any option to purchase or sells or grants any right
to reprice its securities, or otherwise disposes of or issues (or announces any
sale, grant or any option to purchase or other disposition) any Common Stock or
Common Stock Equivalents entitling any Person to acquire shares of Common Stock
at an effective price per share that is lower than the then Conversion Price
(such lower price, the “Base Conversion Price” and such issuances collectively,
a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share which are issued
in connection with such issuance, be entitled to receive shares of Common Stock
at an effective price per share that is lower than the Conversion Price, such
issuance shall be deemed to have occurred for less than the Conversion Price on
such date of the Dilutive Issuance), then the Conversion Price shall be reduced
to equal the Base Conversion Price. Notwithstanding the foregoing, no adjustment
will be made under this Section 7(b) in respect of an Exempt Issuance. The
Corporation shall notify the Holder in writing, no later than the Business Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this Section 7(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing terms
(such notice, the “Dilutive Issuance Notice”). For purposes of clarification,
whether or not the Corporation provides a Dilutive Issuance Notice pursuant to
this Section 7(b), upon the occurrence of any Dilutive Issuance, the Holder is
entitled to receive a number of Conversion Shares based upon the Base Conversion
Price on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.

 

c)                                     Subsequent Rights Offerings. If the
Corporation, at any time while this Preferred Stock is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share that is lower than the VWAP on the record date referenced below, then
the Conversion Price shall be multiplied by a fraction of which the denominator
shall be the number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for

 

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subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered (assuming delivery to the Corporation in full
of all consideration payable upon exercise of such rights, options or warrants)
would purchase at such VWAP. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights,
options or warrants.

 

d)                                     Pro Rata Distributions. If the
Corporation, at any time while this Preferred Stock is outstanding, distributes
to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or warrants
to subscribe for or purchase any security (other than Common Stock, which shall
be subject to Section 7(b)), then in each such case the Conversion Price shall
be adjusted by multiplying such Conversion Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined
as of the record date mentioned above, and of which the numerator shall be such
VWAP on such record date less the then fair market value at such record date of
the portion of such assets, evidence of indebtedness or rights or warrants so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors of the Corporation in good faith. In either
case the adjustments shall be described in a statement delivered to the Holder
describing the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.

 

e)                                     Fundamental Transaction. If, at any time
while this Preferred Stock is outstanding, (A) the Corporation effects any
merger or consolidation of the Corporation with or into another Person, (B) the
Corporation effects any sale of all or substantially all of its assets in one
transaction or a series of related transactions, (C) any tender offer or
exchange offer (whether by the Corporation or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the Corporation
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then, upon any subsequent conversion of this
Preferred Stock, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion immediately prior to
the occurrence of such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of one share of Common Stock (the
“Alternate Consideration”). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Corporation shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Preferred
Stock following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Corporation or
surviving entity in such Fundamental Transaction shall file a new Certificate of
Designation with the same terms and conditions and issue to the Holder new
preferred stock consistent with the foregoing provisions and evidencing the
Holder’s right to convert such preferred stock into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this Section 7(e) and insuring that this Preferred Stock
(or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.

 

f)                                      Calculations. All calculations under
this Section 7 shall be made to the nearest cent or the nearest 1/100th of a
share, as the case may be. For purposes of this Section 7, the number of shares
of Common Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of

 

--------------------------------------------------------------------------------

shares of Common Stock (excluding any treasury shares of the Corporation) issued
and outstanding.

 

g)

Notice to the Holders.

 

i.       Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 7, the Corporation shall
promptly mail to each Holder a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Corporation issues a variable rate security, despite the
prohibition thereon in the Purchase Agreement, the Corporation shall be deemed
to have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement).

 

ii.      Notice to Allow Conversion by Holder. If (A) the Corporation shall
declare a dividend (or any other distribution in whatever form) on the Common
Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on
or a redemption of the Common Stock, (C) the Corporation shall authorize the
granting to all holders of the Common Stock of rights or warrants to subscribe
for or purchase any shares of capital stock of any class or of any rights, (D)
the approval of any stockholders of the Corporation shall be required in
connection with any reclassification of the Common Stock, any consolidation or
merger to which the Corporation is a party, any sale or transfer of all or
substantially all of the assets of the Corporation, of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
property or (E) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Corporation, then,
in each case, the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion of this Preferred Stock, and shall
cause to be delivered to the Holder at its last address as it shall appear upon
the stock books of the Corporation, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the
failure to deliver such notice or any defect therein or in the delivery thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert the Conversion Amount of this
Preferred Stock (or any part hereof) during the 20-day period commencing on the
date of such notice through the effective date of the event triggering such
notice.

 

Section 8.

Forced Conversion.

 

a)                                     Forced Conversion. Notwithstanding
anything herein to the contrary, on the 21st Trading Day (the “Automatic
Conversion Date”) following the later of the effective date of the Reverse Split
and the Effective Date, the Preferred Stock plus all accrued but unpaid
dividends thereon and all liquidated damages and other amounts due in respect of
the Preferred Stock shall automatically convert into Common Stock pursuant to
Section 6, at a conversion price equal to the lesser of (i) $0.20 (subject to
adjustment for the Reverse Split) or (ii) 90% of the average of the VWAPs for
the 20 Trading Days immediately following the effective date of the Reverse
Split. All Forced Conversions shall occur automatically without any action on
the part of the Holders; provided, however, that a Holder may voluntarily
convert its Preferred Stock prior to the Automatic Conversion Date.
Notwithstanding anything herein to the contrary, the limitations on conversion
set forth in Section 6(c) hereof shall not apply to any Forced Conversion.

 

Section 9.

Redemption Upon Triggering Events.

 

 

--------------------------------------------------------------------------------

 

a)                                     “Triggering Event” means any one or more
of the following events (whatever the reason and whether it shall be voluntary
or involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):

 

i.       the failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 270th day after the
Original Issue Date;

 

ii.      if, during the Effectiveness Period, the effectiveness of the
Conversion Shares Registration Statement lapses for more than an aggregate of 75
calendar days (which need not be consecutive calendar days) during any 12 month
period, or the Holder shall not otherwise be permitted to resell Registrable
Securities under the Conversion Shares Registration Statement for more than an
aggregate of 75 calendar days (which need not be consecutive calendar days)
during any 12 month period;

 

iii.     the Corporation shall fail to deliver certificates representing
Conversion Shares issuable upon a conversion hereunder that comply with the
provisions hereof prior to the tenth Trading Day after such shares are required
to be delivered hereunder, or the Corporation shall provide written notice to
any Holder, including by way of public announcement, at any time, of its
intention not to comply with requests for conversion of any shares of Preferred
Stock in accordance with the terms hereof;

 

iv.     one of the Events (as defined in the Registration Rights Agreement)
described in subsections (i), (ii) or (iii) of Section 2(b) of the Registration
Rights Agreement shall not have been cured to the satisfaction of the Holders
prior to the expiration of 30 calendar days from the Event Date (as defined in
the Registration Rights Agreement) relating thereto (other than an Event
resulting from a failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 270th day after the
Original Issue Date, which shall be covered by Section 9(a)(i));

 

v.      the Corporation shall fail for any reason to pay in full the amount of
cash due pursuant to a Buy-In within fifteen calendar days after notice therefor
is delivered hereunder or shall fail to pay all amounts owed on account of any
Event (as defined in the Registration Rights Agreement) within fifteen days of
the date due;

 

vi.     the Corporation shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder upon a
conversion hereunder;

 

vii.    unless specifically addressed elsewhere in this Certificate of
Designation as a Triggering Event, the Corporation shall fail to observe or
perform any other covenant, agreement or warranty contained in, or otherwise
commit any breach of the Transaction Documents, and such failure or breach shall
not, if subject to the possibility of a cure by the Corporation, have been cured
within 30 calendar days after the date on which written notice of such failure
or breach shall have been delivered;

 

viii.   the Corporation shall redeem more than a de minimis number of Junior
Securities other than as to repurchases of Common Stock or Common Stock
Equivalents from departing officers and directors of the

 

--------------------------------------------------------------------------------

Corporation, provided that, while any of the Preferred Stock remains
outstanding, such repurchases shall not exceed an aggregate of $100,000 from all
officers and directors;

 

ix.     the Corporation shall be party to a Change of Control Transaction;

 

x.

there shall have occurred a Bankruptcy Event;

 

xi.     the Common Stock shall fail to be listed or quoted for trading on a
Trading Market for more than ten Trading Days, which need not be consecutive
Trading Days; or

 

xii.    any monetary judgment, writ or similar final process shall be entered or
filed against the Corporation, any Subsidiary or any of their respective
property or other assets for greater than $50,000, and such judgment, writ or
similar final process shall remain unvacated, unbonded or unstayed for a period
of 45 calendar days.

 

b)                                     Upon the occurrence of a Triggering
Event, each Holder shall (in addition to all other rights it may have hereunder
or under applicable law) have the right, exercisable at the sole option of such
Holder, to require the Corporation to, (A) with respect to the Triggering Events
set forth in Sections 9(a)(iii), (v), (vi), (vii), (viii), (ix) (as to Changes
of Control approved by the Board of Directors of the Corporation) and (x) (as to
voluntary filings only), redeem all of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the Triggering Redemption
Amount or (B) at the option of the Holder and with respect to the Triggering
Events set forth in Sections 9(a)(i), (ii), (iv), (ix) (as to Changes of Control
not approved by the Board of Directors of the Corporation), (x) (as to
involuntary filings only), (xi) and (xii), either (a) redeem all of the
Preferred Stock then held by such Holder for a redemption price, in shares of
Common Stock, equal to a number of shares of Common Stock equal to the
Triggering Redemption Amount divided by 75% of the average of the 10 VWAPs
immediately prior to the date of election hereunder or (b) increase the dividend
rate on all of the outstanding Preferred Stock held by such Holder to 18% per
annum thereafter. The Triggering Redemption Amount, in cash or in shares, shall
be due and payable or issuable, as the case may be, within five Trading Days of
the date on which the notice for the payment therefor is provided by a Holder
(the “Triggering Redemption Payment Date”). If the Corporation fails to pay in
full the Triggering Redemption Amount hereunder on the date such amount is due
in accordance with this Section (whether in cash or shares of Common Stock), the
Corporation will pay interest thereon at a rate equal to the lesser of 18% per
annum or the maximum rate permitted by applicable law, accruing daily from such
date until the Triggering Redemption Amount, plus all such interest thereon, is
paid in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Conversion Shares
upon a conversion (or attempted conversion) thereof that meets the requirements
hereof or has been paid the Triggering Redemption Amount in cash.

 

Section 10.       Negative Covenants. So long as any shares of Preferred Stock
are outstanding, the Corporation shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, without the prior written consent of
the Holders of 67% of the shares of Preferred Stock then outstanding:

 

a)      other than Permitted Indebtedness, enter into, create, incur, assume,
guarantee or suffer to exist any indebtedness for borrowed money of any kind,
including but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;

 

b)      other than Permitted Liens, enter into, create, incur, assume or suffer
to exist any Liens of any kind, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest

 

--------------------------------------------------------------------------------

therein or any income or profits therefrom;

 

c)      amend its certificate of incorporation, bylaws or other charter
documents so as to materially and adversely affect any rights of any Holder;

 

d)      repay, repurchase or offer to repay, repurchase or otherwise acquire
more than a de minimis number of shares of its Common Stock, Common Stock
Equivalents or Junior Securities, except for the Conversion Shares to the extent
permitted or required under the Transaction Documents or as otherwise permitted
by the Transaction Documents;

 

e)

enter into any agreement or understanding with respect to any of the foregoing;
or

 

f)

pay cash dividends or distributions on Junior Securities of the Corporation.

 

Section 11.

Miscellaneous.

 

a)      Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, or sent
by a nationally recognized overnight courier service, addressed to the
Corporation, at the address set forth above, facsimile number 646-218-1885,
Attn: Alan Schoenbart or such other facsimile number or address as the
Corporation may specify for such purposes by notice to the Holders delivered in
accordance with this Section 11. Any and all notices or other communications or
deliveries to be provided by the Corporation hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of
such Holder appearing on the books of the Corporation, or if no such facsimile
number or address appears on the books of the Corporation, at the principal
place of business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 11 prior to 5:30 p.m. (New York City
time) on any date, (ii) the date immediately following the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section 11 between 5:30 p.m. and 11:59 p.m. (New York
City time) on any date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.

 

b)      Absolute Obligation. Except as expressly provided herein, no provision
of this Certificate of Designation shall alter or impair the obligation of the
Corporation, which is absolute and unconditional, to pay liquidated damages,
accrued dividends and accrued interest, as applicable, on the shares of
Preferred Stock at the time, place, and rate, and in the coin or currency,
herein prescribed.

 

c)      Lost or Mutilated Preferred Stock Certificate. If a Holder’s Preferred
Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt
of evidence of such loss, theft or destruction of such certificate, and of the
ownership hereof reasonably satisfactory to the Corporation.

 

d)      Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Certificate of Designation shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Delaware, without regard to the principles of conflict of laws
thereof. Each party agrees that all legal proceedings concerning the
interpretation, enforcement and defense of the transactions contemplated by any
of the Transaction Documents (whether brought against a party hereto or its
respective Affiliates, directors, officers, shareholders, employees or agents)
shall be commenced in the state and federal courts sitting in the City of New
York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the

 

--------------------------------------------------------------------------------

New York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
such New York Courts, or such New York Courts are improper or inconvenient venue
for such proceeding. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Certificate of Designation and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by applicable law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of
or relating to this Certificate of Designation or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of this Certificate of Designation, then the prevailing party in such
action or proceeding shall be reimbursed by the other party for its attorneys’
fees and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.

 

e)      Waiver. Any waiver by the Corporation or the Holder of a breach of any
provision of this Certificate of Designation shall not operate as or be
construed to be a waiver of any other breach of such provision or of any breach
of any other provision of this Certificate of Designation. The failure of the
Corporation or the Holder to insist upon strict adherence to any term of this
Certificate of Designation on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Certificate of Designation. Any
waiver by the Corporation or the Holder must be in writing.

 

f)      Severability. If any provision of this Certificate of Designation is
invalid, illegal or unenforceable, the balance of this Certificate of
Designation shall remain in effect, and if any provision is inapplicable to any
Person or circumstance, it shall nevertheless remain applicable to all other
Persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder violates the applicable law governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable law.

 

g)      Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.

 

h)      Headings. The headings contained herein are for convenience only, do not
constitute a part of this Certificate of Designation and shall not be deemed to
limit or affect any of the provisions hereof.

 

i)       Status of Converted or Redeemed Preferred Stock. Shares of Preferred
Stock may only be issued pursuant to the Purchase Agreement. If any shares of
Preferred Stock shall be converted, redeemed or reacquired by the Corporation,
such shares shall resume the status of authorized but unissued shares of
preferred stock and shall no longer be designated as Series E 6% Convertible
Preferred Stock.

 

*********************

 

--------------------------------------------------------------------------------

 

RESOLVED, FURTHER, that the Chairman, the president or any vice-president, and
the secretary or any assistant secretary, of the Corporation be and they hereby
are authorized and directed to prepare and file a Certificate of Designation of
Preferences, Rights and Limitations in accordance with the foregoing resolution
and the provisions of Delaware law.

 

IN WITNESS WHEREOF, the undersigned have executed this Certificate this ___ day
of March __ 2006.

 

__________________________________________

Name:

Title:

 

__________________________________________

Name:

Title:

 

 

 

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ANNEX A

 

NOTICE OF CONVERSION

 

(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED
STOCK)

 

The undersigned hereby elects to convert the number of shares of Series E 6%
Convertible Preferred Stock indicated below into shares of common stock, par
value $.001 per share (the “Common Stock”), of Ortec International, Inc., a
Delaware corporation (the “Corporation”), according to the conditions hereof, as
of the date written below. If shares are to be issued in the name of a Person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as may be required by the Corporation in accordance with the Purchase Agreement.
No fee will be charged to the Holder for any conversion, except for any such
transfer taxes.

 

Conversion calculations:

 

Date to Effect Conversion: _____________________________________________

 

Number of shares of Preferred Stock owned prior to Conversion: _______________

 

Number of shares of Preferred Stock to be Converted: ________________________

 

Stated Value of shares of Preferred Stock to be Converted: ____________________

 

Number of shares of Common Stock to be Issued: ___________________________

 

Applicable Conversion Price:____________________________________________

 

Number of shares of Preferred Stock subsequent to Conversion: ________________

 

 

 

[HOLDER]

 

By:___________________________________

Name:

Title:

 

 

 

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SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG
ORTEC INTERNATIONAL, INC. AND EACH PURCHASER

 

 

Schedule 3.1(a)

Subsidiaries

 

 

 

1.

Orcel, LLC, a Delaware limited liability company.

   

 

2.

A new corporation to be incorporated under the laws of the State of Delaware
into which Hapto Biotech, Inc. will be merged.

 

 

Schedule 3.1(c)

Authorized Shares

 

The Company is currently authorized to issue 200,000,000 shares of Common Stock
and 1,000,000 shares of preferred stock. The Common Stock which the Company has
issued and may be required to issue upon conversion or exercise of other
securities are the following:

 

52,892,275 shares of Common Stock outstanding

 

The following shares required to be issued:

 

3,240,199

Shares to Cambrex BioScience Walkersville, Inc., in lieu of suite fees, per
agreement

25,088,062

shares upon conversion of Series D Convertible Preferred Stock

176,198

shares upon exercise of Series B-1 Warrants at $4.00 per share

112,798

shares upon exercise of Series B-2 Warrants at $5.00 per share

102,000

shares upon exercise of Series C Warrants at $3.60 per share

3,184,189

shares upon exercise of Series E Warrants at $1.80 per share

717,600

shares upon exercise of Series E Warrants at $1.50 per share

14,266,001

shares upon exercise of Series E Warrants at $0.001 per share

2,746,376

shares upon exercise of EPA Warrants at $0.35 per share

16,595,292

shares upon exercise of Series F Warrants at $0.50 per share

3,179,619

shares upon exercise of Series FPA Warrants at $0.30 per share

239,052

shares upon exercise of other Warrants at prices ranging from $0.50 to $3.25 per
share

434,542

shares upon exercise of stock options granted under Ortec’s Stock Option Plan at
prices ranging from $0.26 to $127.50 per share

7,733,638

shares upon exercise of stock options granted outside the Stock Option Plan, of
which 6,359,238 are exercisable at $0.26 per share and the remainder of
1,374,400 shares at prices ranging from $1.80 to $3.60 per share

 

 

 

 

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SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG
ORTEC INTERNATIONAL, INC. AND EACH PURCHASER

 

 

 

However, holders of all of the Company’s Series D Convertible Preferred Stock
convertible into 25,088,062 shares of the Company’s Common Stock, and holders of
warrants exercisable to acquire 7,911,938 shares of the Company’s Common Stock,
have agreed not to convert their Series D Convertible Preferred Stock, or
exercise such warrants, that would require the Company to issue shares of the
Company’s Common Stock in excess of the number of shares of its Common stock the
Company is authorized to issue until the Company’s stockholders adopt an
amendment to the Company’s certificate of incorporation to increase the number
of shares of its Common Stock the Company is authorized to issue, or take any
other action (such as enacting a reverse stock split), which will enable the
Company to have a sufficient number of shares of Common Stock it is authorized
to issue, to issue in the private placement transaction provided for in the
Securities Purchase Agreement and in the other Transaction Documents. Provided,
however, that such restraint agreed to by such holders in converting those
Series D preferred shares and in exercising those warrants expires on April 30,
2006 if the private placement of Ortec’s securities provided for in the
Securities Purchase Agreement and the other Transaction Documents is not closed
by that date.

In addition, upon closing the Hapto acquisition the Company will issue to
Hapto’s shareholders and option holders: (a) 30,860,000 shares of its Common
Stock, and (b) warrants to purchase an additional 3,000,000 shares of the
Company’s Common Stock at $0.50 per share, and will issue to Rodman & Renshaw as
a fee (c) three-year warrants to purchase 4,000,000 shares of the Company’s
Common Stock at $0.30 per share.

Schedule 3.1(g)

 

1.

The Company issued 1,697,200 shares to designees of Burnham Hill Partners, a
division of Pali Capital, Inc., for services in securing financing for the
Company.

   

2.

The Company has issued warrants and options which are still outstanding other
than as a result of the purchase and sale of securities as follows:

 

(a)

Options under the Company’s Stock Option Plan;

(b)    Options to executive employees outside the Company’s Stock Option Plan;

(c)    Warrants to placement agents as part of their compensation for arranging
private placements of the Company’s securities in the period between May 2002
and October 2005;

(d)

Warrants to a vendor in settlement of its claim; and

 

 

(e)

Warrants to investor relations firms as part of their compensation for services
rendered to the Company.

 

 

 

--------------------------------------------------------------------------------

 

 

SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG
ORTEC INTERNATIONAL, INC. AND EACH PURCHASER

 

 

3.

The issuance of the Securities will result in the right of holders of the
Company’s warrants who acquired their warrants in connection with their
purchases of the Company’s securities, or who acquired their warrants for
services rendered to the Company as placement agents in the sale of those
securities, to adjust the exercise prices of their warrants. The formula for
such adjustment of the exercise price for warrants to purchase an aggregate of
23,845,509 shares of the Company’s Common Stock, is a weighted average formula,
and for warrants to purchase an aggregate of 288,996 shares of the Company’s
Common Stock, is a full ratchet adjustment.

 

Schedule 3.1(l)

 

The Company is late in its payments of rent owed to its landlord and late in
payments owed to some of its suppliers of goods and services. Approximately
$1,000,000 of the proceeds to be received by the Company from this private
placement of the Company’s securities will be used to make such payments.

Schedule 3.1(m)

At December 31, 2005 the Company owes approximately $30,000 on equipment leases.

Schedule 3.1(o)

Paul Royalty Fund LP has been given a security interest in the Company’s United
States patents, patent applications and trademarks as security for any
obligations owed by the Company to Paul Royalty Fund pursuant to the Revenue
Interest Assignment Agreement, and other agreements related to the Revenue
Interest Assignment Agreement, between the Company and Paul Royalty Fund LP.

Schedule 3.1(p)

The Company’s workmen’s compensation policy has lapsed for non-payment of
premium.

Schedule 3.1(q)

One of the Company’s directors, Dr. Gregory B. Brown, serves as the designee of
Paul Royalty Fund LP pursuant to the provisions of the Royalty Interest
Assignment Agreement between the Company and Paul Royalty Fund. The Company may
be obligated to make payments in excess of $60,000 per annum to Paul Royalty
Fund under the terms of the Royalty Interest Assignment Agreement. We have been
advised that Dr. Brown is a partner in an entity which is an affiliate of Paul
Royalty Fund.

Schedule 3.1(s)

The Company is required to pay fees to Burnham Hill Partners, a division of Pali
Capital, Inc., on purchases of Securities pursuant to this Securities Purchase
Agreement, by investors who purchased the Company’s securities from the Company
in earlier private placements in which Burnham Hill Partners or its principal
served as placement agent.

The Company may also have to pay fees to a finder, M.R.C. Investment Ltd., which
is securing purchaser(s) in Israel.

 

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SCHEDULES TO SECURITIES PURCHASE AGREEMENT DATED AS OF MARCH ____, 2006, AMONG
ORTEC INTERNATIONAL, INC. AND EACH PURCHASER

 

Schedule 3.1(x)

The Company does not have any poison pill or other similar anti-takeover
provision in the Company’s certificate of incorporation.

Schedule 3.1(aa)

Since the Company is still in the development stage and has no revenues, the
proceeds from this private placement will not be sufficient to meet the cash
needs of the Company for the next twelve months and the Company anticipates that
it will need to raise additional capital, or borrow money, at some time before
the expiration of the next twelve months in order to continue its business
operations for the next twelve months.

Indebtedness of the Company

Paul Royalty Fund, LP - Although the Company is not currently indebted to Paul
Royalty Fund, LP, the potential liability of approximately $30,000,000 to Paul
Royalty Fund is carried as a liability on the Company’s financial statements in
accordance with GAAP requirements.

Two bridge loans recently borrowed by the Company for which the Company owes
$130,000 and $300,000 plus interest.

Schedule 3.1(ff)

The Company has recently borrowed an aggregate of $380,000 from two lenders as
bridge loans to be repaid from the proceeds of this private placement.

Schedule 4.9

The Company will use $130,000 of the proceeds for repayment of Indebtedness
recently borrowed by the Company as one of two bridge loans used to fund its
operations in the past few weeks. The Company will also use not more than
$500,000 to repay another bridge loan the Company expects to secure after March
27, 2006. The Company will also use some of the proceeds for payment of amounts
owed to vendors (of goods and services, including the Company’s landlord) which
are past due. In addition, $50,000 of such proceeds will be paid pursuant to an
agreement to which the Company is a party and which is not for working capital.

 

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SCHEDULES TO REGISTRATION RIGHTS AGREEMENT DATED AS OF MARCH ____, 2006, AMONG
ORTEC INTERNATIONAL, INC. AND EACH PURCHASER

 

Schedule 6(b)

 

The following shares of the Company’s Common stock owned by security holders, or
issuable to holders of the Company’s other securities which are convertible to,
or exercisable for, shares of the Company’s Common Stock, will be included in
the initial Registration Statement.

 

1.

Securities sold in the private placement of the Company’s securities in October,
2005:

 

 

 

a)

Shares of Common Stock                                           
                                          
                                           20,937,689

   

 

b)

Issuable upon conversion of the Company’s Series D

 

Convertible Preferred Stock

10,858,496

 

 

c)

Issuable upon exercise of the Company’s Series F
Warrants                                          
                     16,595,292

 

 

2.

Issuable upon exercise of the Company’s Series FPA Warrants issued to

 

the designees of the placement agent in such October 2005 private placement

3,179,619

 

3.

Shares to Cambrex BioScience Walkersville, Inc. for suite
fees                                          
                             5,450,398

   

4.

Shares issued to designees of Burnham Hill Partners, a division of

 

Pali Capital, Inc., in lieu of consulting fee and portion of fee for

placement of promissory notes

1,697,200

 

 

5.

Issuable upon exercise of warrant granted to Quality ReSolve, Inc., as

 

part of settlement of a vendor claim

285,000

 

 

6.

Issuable upon exercise of warrants granted to Elite Financial as part of

 

compensation for services

100,000

 

The prospectus in the initial Registration Statement will be a “combined
prospectus” which will also include the shares of the Company’s Common Stock
(all held by security holders) listed in the Company’s prospectus dated May 19,
2005 which (a) have not already been sold in the public securities markets and
(b) which cannot be sold pursuant to Rule 144-k promulgated under the Securities
Act of 1933, as amended.

 

Schedule 6(i)

 

There is a registration statement required to be filed by the Company for the
Common Stock issued, and issuable upon exercise of warrants and conversion of
Series D Convertible Preferred stock, which common stock, preferred stock and
warrants were sold by the Company in its October 2005 private placement. That
registration obligation was recited in the registration rights agreement that
was part of the transaction documents in that financing. The Company has not yet
fulfilled that obligation but plans to fulfill it by including those registrable
securities in the Registration Statement which is the subject of this
Registration Rights Agreement.

 

 

 

 

 

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EXHIBIT B

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made and entered into
as of March __, 2006 among Ortec International, Inc., a Delaware corporation
(the “Company”), and the several purchasers signatory hereto (each such
purchaser is a “Purchaser” and collectively, the “Purchasers”).

 

This Agreement is made pursuant to the Securities Purchase Agreement, dated as
of the date hereof between the Company and each Purchaser (the “Purchase
Agreement”).

 

The Company and each Purchaser hereby agrees as follows:

 

1.           Definitions.Capitalized terms used and not otherwise defined herein
that are defined in the Purchase Agreement shall have the meanings given such
terms in the Purchase Agreement. As used in this Agreement, the following terms
shall have the following meanings:

 

“Advice” shall have the meaning set forth in Section 6(d).

 

“Effectiveness Date” means, with respect to the initial Registration Statement
required to be filed hereunder, the 135th calendar day following the date hereof
and, with respect to any additional Registration Statements which may be
required pursuant to Section 3(c), the 75th calendar day following the date on
which the Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder; provided, however, in
the event the Company is notified by the Commission that one of the above
Registration Statements will not be reviewed or is no longer subject to further
review and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth Trading Day following the date on which the Company is so
notified if such date precedes the dates required above.

 

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

 

“Event” shall have the meaning set forth in Section 2(b).

 

“Event Date” shall have the meaning set forth in Section 2(b).

 

“Filing Date” means, with respect to the initial Registration Statement required
hereunder, the 75th calendar day following the date hereof and, with respect to
any additional Registration Statements which may be required pursuant to Section
3(c), the 30th day following the date on which the Company first knows, or
reasonably should have known that such additional Registration Statement is
required hereunder.

 

“Holder” or “Holders” means the holder or holders, as the case may be, from time
to time of Registrable Securities.

 

“Indemnified Party” shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

 

“Losses” shall have the meaning set forth in Section 5(a).

 

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

 

“Prospectus” means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as

 

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amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by a
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.

 

“Registrable Securities” means, as of the date in question, (i) all of the
shares of Common Stock issuable upon conversion in full of the shares of
Preferred Stock, (ii) all shares of Common Stock issuable as dividends or
principal on the Preferred Stock assuming all dividend and principal payments
are made in shares of Common Stock and the Preferred Stock is held for at least
3 years, (iii) all Warrant Shares, (iv) any additional shares issuable in
connection with any anti-dilution provisions associated with the Preferred Stock
and Warrants (in each case, without giving effect to any limitations on
conversion set forth in the Certificate of Designation or limitations on
exercise set forth in the Warrant) and (v) any securities issued or issuable
upon any stock split, dividend or other distribution, recapitalization or
similar event with respect to the foregoing.

 

“Registration Statement” means the registration statements required to be filed
hereunder and any additional registration statements contemplated by Section
3(c), including (in each case) the Prospectus, amendments and supplements to
such registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.

 

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same purpose and effect as such Rule.

 

“Rule 424” means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same purpose and effect as such Rule.

 

“Selling Shareholder Questionnaire” shall have the meaning set forth in Section
3(a).

 

2.

Shelf Registration

 

(a)     On or prior to each Filing Date, the Company shall prepare and file with
the Commission a “Shelf” Registration Statement covering the resale of 125% of
the Registrable Securities on such Filing Date for an offering to be made on a
continuous basis pursuant to Rule 415. The Registration Statement shall be on
Form S-3 (except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith) and shall contain (unless
otherwise directed by at least an 85% majority in interest of the Holders)
substantially the “Plan of Distribution” attached hereto as Annex A. Subject to
the terms of this Agreement, the Company shall use its best efforts to cause a
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
applicable Effectiveness Date, and shall use its best efforts to keep such
Registration Statement continuously effective under the Securities Act until all
Registrable Securities covered by such Registration Statement have been sold, or
may be sold without volume restrictions pursuant to Rule 144(k), as determined
by the counsel to the Company pursuant to a written opinion letter to such
effect, addressed and acceptable to the Company’s transfer agent and the
affected Holders (the “Effectiveness Period”). The Company shall telephonically
request effectiveness of a Registration Statement as of 5:00 pm Eastern Time on
a Trading Day. The Company shall immediately notify the Holders via facsimile of
the effectiveness of a Registration Statement on the same Trading Day that the
Company telephonically confirms effectiveness with the Commission, which shall
be the date requested for effectiveness of a Registration Statement. The Company
shall, by 9:30 am Eastern Time on the Trading Day after the Effective Date (as
defined in the Purchase Agreement), file a final Prospectus with the Commission
as required by Rule 424. Failure to so notify the Holder within 1 Trading Day of
such notification of effectiveness or failure to file a final Prospectus as
aforesaid shall be deemed an Event under Section 2(b).

 

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(b)     If: (i) a Registration Statement is not filed on or prior to its Filing
Date (if the Company files a Registration Statement without affording the
Holders the opportunity to review and comment on the same as required by Section
3(a), the Company shall not be deemed to have satisfied this clause (i)), or
(ii) the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be “reviewed,” or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 10 calendar days after the receipt of
comments by or notice from the Commission that such amendment is required in
order for a Registration Statement to be declared effective, or (iv) a
Registration Statement filed or required to be filed hereunder is not declared
effective by the Commission by its Effectiveness Date, or (v) after the
Effectiveness Date, a Registration Statement ceases for any reason to remain
continuously effective as to all Registrable Securities for which it is required
to be effective, or the Holders are otherwise not permitted to utilize the
Prospectus therein to resell such Registrable Securities for more than 10
consecutive calendar days or more than an aggregate of 15 calendar days during
any 12-month period (which need not be consecutive calendar days) (any such
failure or breach being referred to as an “Event”, and for purposes of clause
(i) or (iv) the date on which such Event occurs, or for purposes of clause (ii)
the date on which such five Trading Day period is exceeded, or for purposes of
clause (iii) the date which such 10 calendar day period is exceeded, or for
purposes of clause (v) the date on which such 10 or 15 calendar day period, as
applicable, is exceeded being referred to as “Event Date”), then in addition to
any other rights the Holders may have hereunder or under applicable law, on each
such Event Date and on each monthly anniversary of each such Event Date (if the
applicable Event shall not have been cured by such date) until the applicable
Event is cured, the Company shall pay to each Holder an amount in cash, as
partial liquidated damages and not as a penalty, equal to 2% of the aggregate
purchase price paid by such Holder pursuant to the Purchase Agreement for any
Registrable Securities then held by such Holder, subject to an overall cap of 24
months (48%). If the Company fails to pay any partial liquidated damages
pursuant to this Section in full within seven days after the date payable, the
Company will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the Holder,
accruing daily from the date such partial liquidated damages are due until such
amounts, plus all such interest thereon, are paid in full. The partial
liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata
basis for any portion of a month prior to the cure of an Event.

 

3.

Registration Procedures.

 

In connection with the Company’s registration obligations hereunder, the Company
shall:

 

(a)    Not less than 5 Trading Days prior to the filing of each Registration
Statement and not less than one 1 Trading Day prior to the filing of any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference), the
Company shall, (i) furnish to each Holder copies of all such documents proposed
to be filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders, and
(ii) cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of respective counsel to each Holder to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file a Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities shall reasonably object in good faith, provided that, the Company is
notified of such objection in writing no later than 5 Trading Days after the
Holders have been so furnished copies of a Registration Statement or 1 Trading
Day after the Holders have been so furnished copies of any related Prospectus or
amendment or supplement thereto. Each Holder agrees to furnish to the Company a
completed Questionnaire in the form attached to this Agreement as Annex B (a
“Selling Shareholder Questionnaire”) not less than two Trading Days prior to the
Filing Date or by the end of the fourth Trading Day following the date on which
such

 

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Holder receives draft materials in accordance with this Section.

 

(b)    (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to a Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep a Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible to any comments
received from the Commission with respect to a Registration Statement or any
amendment thereto and as promptly as reasonably possible provide the Holders
true and complete copies of all correspondence from and to the Commission
relating to a Registration Statement (provided that the Company may excise any
information contained therein which would constitute material non-public
information as to any Holder which has not executed a confidentiality agreement
with the Company); and (iv) comply in all material respects with the provisions
of the Securities Act and the Exchange Act with respect to the disposition of
all Registrable Securities covered by a Registration Statement during the
applicable period in accordance (subject to the terms of this Agreement) with
the intended methods of disposition by the Holders thereof set forth in such
Registration Statement as so amended or in such Prospectus as so supplemented.

 

(c)    If during the Effectiveness Period, the number of Registrable Securities
at any time exceeds 100% of the number of shares of Common Stock then registered
in a Registration Statement, then the Company shall file as soon as reasonably
practicable but in any case prior to the applicable Filing Date, an additional
Registration Statement covering the resale by the Holders of not less than 125%
of the number of such Registrable Securities.

 

(d)    Notify the Holders of Registrable Securities to be sold (which notice
shall, pursuant to clauses (iii) through (vi) hereof, be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made) as promptly as reasonably possible (and, in the case of (i)(A)
below, not less than 1 Trading Day prior to such filing) and (if requested by
any such Person) confirm such notice in writing no later than one Trading Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to a Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a “review” of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement; and (C) with respect to a Registration Statement or
any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a Registration Statement covering any or all of the Registrable
Securities or the initiation of any Proceedings for that purpose; (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; (v) of the occurrence of any event or passage of
time that makes the financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in a Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interest of the Company to allow continued availability of a Registration
Statement or Prospectus; provided that any and all of such information shall
remain confidential to each Holder until such information otherwise becomes
public, unless disclosure by a Holder is required by law; provided, further,
notwithstanding each Holder’s agreement to keep such information confidential,
the Holders make no acknowledgement that any such information is material,
non-public information.

 

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(e)    Use its best efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.

 

(f)     Furnish to each Holder, without charge, at least one conformed copy of
each such Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference to the extent requested by such Person, and
all exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.

 

(g)    Subject to the terms of this Agreement, the Company hereby consents to
the use of such Prospectus and each amendment or supplement thereto by each of
the selling Holders in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto,
except after the giving of any notice pursuant to Section 3(d).

 

(h)    If NASDR Rule 2710 requires any broker-dealer to make a filing prior to
executing a sale by a Holder, the Company shall (i) make an Issuer Filing with
the NASDR, Inc. Corporate Financing Department pursuant to proposed NASDR Rule
2710(b)(10)(A)(i), (ii) respond within five Trading Days to any comments
received from NASDR in connection therewith, and (iii) pay the filing fee
required in connection therewith.

 

(i)     Prior to any resale of Registrable Securities by a Holder, use its
commercially reasonable efforts to register or qualify or cooperate with the
selling Holders in connection with the registration or qualification (or
exemption from the Registration or qualification) of such Registrable Securities
for the resale by the Holder under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably requests in
writing, to keep each registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things reasonably necessary to enable the disposition in such jurisdictions of
the Registrable Securities covered by each Registration Statement; provided,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.

 

(j)     If requested by the Holders, cooperate with the Holders to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be delivered to a transferee pursuant to a Registration Statement,
which certificates shall be free, to the extent permitted by the Purchase
Agreement, of all restrictive legends, and to enable such Registrable Securities
to be in such denominations and registered in such names as any such Holders may
request.

 

(k)    Upon the occurrence of any event contemplated by this Section 3, as
promptly as reasonably possible under the circumstances taking into account the
Company’s good faith assessment of any adverse consequences to the Company and
its stockholders of the premature disclosure of such event, prepare a supplement
or amendment, including a post-effective amendment, to a Registration Statement
or a supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither a Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Company notifies the Holders in accordance with clauses
(iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus
until the requisite changes to such Prospectus have been made, then the Holders
shall suspend use of such Prospectus. The Company will use its best efforts to
ensure that the use of the Prospectus may be resumed as promptly as is
practicable. The Company shall be entitled to exercise its right under this
Section 3(k) to suspend the availability of a Registration Statement and
Prospectus, subject to the payment of partial liquidated damages pursuant to
Section 2(b), for a period not to exceed 60 calendar days (which need not be

 

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consecutive days) in any 12 month period.

 

(l)

Comply with all applicable rules and regulations of the Commission.

 

(m)   The Company may require each selling Holder to furnish to the Company a
certified statement as to the number of shares of Common Stock beneficially
owned by such Holder and, if required by the Commission, the natural persons
thereof that have voting and dispositive control over the Shares. During any
periods that the Company is unable to meet its obligations hereunder with
respect to the registration of the Registrable Securities solely because any
Holder fails to furnish such information within three Trading Days of the
Company’s request, any liquidated damages that are accruing at such time as to
such Holder only shall be tolled and any Event that may otherwise occur solely
because of such delay shall be suspended as to such Holder only, until such
information is delivered to the Company.

 

4.           Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with any Trading Market on which the Common Stock is then
listed for trading, (B) in compliance with applicable state securities or Blue
Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities) and (C) if
not previously paid by the Company in connection with an Issuer Filing, with
respect to any filing that may be required to be made by any broker through
which a Holder intends to make sales of Registrable Securities with NASD
Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is
receiving no more than a customary brokerage commission in connection with such
sale, (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable Securities included in a Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions of any Holder or, except to
the extent provided for in the Transaction Documents, any legal fees or other
costs of the Holders.

 

5.

Indemnification

 

(a)    Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, members, partners, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees (and any other Persons with a functionally equivalent role of a
Person holding such titles, notwithstanding a lack of such title or any other
title) of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, members, shareholders, partners, agents and
employees (and any other Persons with a functionally equivalent role of a Person
holding such titles, notwithstanding a lack of such title or any other title) of
each such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys’ fees) and expenses
(collectively, “Losses”), as incurred, arising out of or relating to (1) any
untrue or alleged untrue statement of a material fact contained in a
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of or relating to any omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements therein (in the case of
any Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, or (2) any

 

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violation or alleged violation by the Company of the Securities Act, Exchange
Act or any state securities law, or any rule or regulation thereunder, in
connection with the performance of its obligations under this Agreement, except
to the extent, but only to the extent, that (i) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in a Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose) or (ii) in the case of an occurrence of an event of the
type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated
or defective Prospectus after the Company has notified such Holder in writing
that the Prospectus is outdated or defective and prior to the receipt by such
Holder of the Advice contemplated in Section 6(d). The Company shall notify the
Holders promptly of the institution, threat or assertion of any Proceeding
arising from or in connection with the transactions contemplated by this
Agreement of which the Company is aware.

 

(b)    Indemnification by Holders. Absent any negligence or misconduct by the
Company, each Holder shall, severally and not jointly, indemnify and hold
harmless the Company, its directors, officers, agents and employees, each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted by
applicable law, from and against all Losses, as incurred, to the extent arising
out of or based solely upon: (x) such Holder’s failure to comply with the
prospectus delivery requirements of the Securities Act or (y) any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, any Prospectus, or any form of prospectus, or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading (i) to
the extent, but only to the extent, that such untrue statement or omission is
contained in any information so furnished in writing by such Holder to the
Company specifically for inclusion in such Registration Statement or such
Prospectus or (ii) to the extent that such information relates to such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in a Registration
Statement (it being understood that the Holder has approved Annex A hereto for
this purpose), such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (ii) in the case of an occurrence of an event of the type
specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or
defective Prospectus after the Company has notified such Holder in writing that
the Prospectus is outdated or defective and prior to the receipt by such Holder
of the Advice contemplated in Section 6(d). In no event shall the liability of
any selling Holder hereunder be greater in amount than the dollar amount of the
net proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.

 

(c)    Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
“Indemnified Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such notice
shall not relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it shall be
finally determined by a court of competent jurisdiction (which determination is
not subject to appeal or further review) that such failure shall have prejudiced
the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both

 

--------------------------------------------------------------------------------

such Indemnified Party and the Indemnifying Party, and counsel to the
Indemnified Party shall reasonably believe that a material conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and the reasonable fees and expenses of no
more than one separate counsel shall be at the expense of the Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.

 

Subject to the terms of this Agreement, all reasonable fees and expenses of the
Indemnified Party (including reasonable fees and expenses to the extent incurred
in connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party; provided, that the Indemnified Party shall promptly
reimburse the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is judicially
determined to be not entitled to indemnification hereunder.

 

(d)    Contribution. If the indemnification under Section 5(a) or 5(b) is
unavailable to an Indemnified Party or insufficient to hold an Indemnified Party
harmless for any Losses, then each Indemnifying Party shall contribute to the
amount paid or payable by such Indemnified Party, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in this Agreement, any reasonable attorneys’ or
other fees or expenses incurred by such party in connection with any Proceeding
to the extent such party would have been indemnified for such fees or expenses
if the indemnification provided for in this Section was available to such party
in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, except in the case of fraud by
such Holder.

 

The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

 

6.

Miscellaneous

 

(a)    Remedies. In the event of a breach by the Company or by a Holder, of any
of their respective obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses

 

--------------------------------------------------------------------------------

incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specific
performance in respect of such breach, it shall not assert or shall waive the
defense that a remedy at law would be adequate.

 

(b)    No Piggyback on Registrations. Except as set forth on Schedule 6(b)
attached hereto, neither the Company nor any of its security holders (other than
the Holders in such capacity pursuant hereto) may include securities of the
Company in the initial Registration Statement other than the Registrable
Securities. The Company shall not file any other registration statements until
the date that is the later of (i) 90 days after the Effective Date or (ii) the
effective date of the Reverse Split, provided that this Section 6(b) shall not
prohibit the Company from filing amendments to registration statements already
filed.

 

(c)    Compliance. Each Holder covenants and agrees that it will comply with the
prospectus delivery requirements of the Securities Act as applicable to it in
connection with sales of Registrable Securities pursuant to a Registration
Statement.

 

(d)    Discontinued Disposition. Each Holder agrees by its acquisition of
Registrable Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(d)(iii) through (vi),
such Holder will forthwith discontinue disposition of such Registrable
Securities under a Registration Statement until it is advised in writing (the
“Advice”) by the Company that the use of the applicable Prospectus (as it may
have been supplemented or amended) may be resumed. The Company will use its best
efforts to ensure that the use of the Prospectus may be resumed as promptly as
it practicable. The Company agrees and acknowledges that any periods during
which the Holder is required to discontinue the disposition of the Registrable
Securities hereunder shall be subject to the provisions of Section 2(b).

 

(e)    Piggy-Back Registrations. If at any time during the Effectiveness Period
there is not an effective Registration Statement covering all of the Registrable
Securities and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
Holder requests to be registered; provided, however, that, the Company shall not
be required to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.

 

(f)     Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the same shall be in writing and signed by the Company and the Holders of
at least 67% of the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.

 

(g)    Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be delivered as set forth
in the Purchase Agreement.

 

(h)    Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors and permitted assigns of each of the parties and
shall inure to the benefit of each Holder. The Company may not assign (except by
merger) its rights or obligations hereunder without the prior written

 

--------------------------------------------------------------------------------

consent of all of the Holders of the then-outstanding Registrable Securities.
Each Holder may assign their respective rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.

 

(i)     No Inconsistent Agreements. Neither the Company nor any of its
Subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its Subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as set forth on Schedule 6(i),
neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person that have not been satisfied in full.

 

(j)     Execution and Counterparts. This Agreement may be executed in two or
more counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an original
thereof.

 

(k)    Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined in
accordance with the provisions of the Purchase Agreement.

 

(l)     Cumulative Remedies. The remedies provided herein are cumulative and not
exclusive of any other remedies provided by law.

 

(m)   Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

 

(n)    Headings. The headings in this Agreement are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.

 

(o)    Independent Nature of Holders’ Obligations and Rights. The obligations of
each Holder hereunder are several and not joint with the obligations of any
other Holder hereunder, and no Holder shall be responsible in any way for the
performance of the obligations of any other Holder hereunder. Nothing contained
herein or in any other agreement or document delivered at any closing, and no
action taken by any Holder pursuant hereto or thereto, shall be deemed to
constitute the Holders as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Holders are in any way
acting in concert with respect to such obligations or the transactions
contemplated by this Agreement. Each Holder shall be entitled to protect and
enforce its rights, including without limitation the rights arising out of this
Agreement, and it shall not be necessary for any other Holder to be joined as an
additional party in any proceeding for such purpose.

 

********************

 

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as of the date first written above.

 

                

ORTEC INTERNATIONAL, INC.

 

By:__________________________________________

 

Name:

Title:

 

 

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

 

 

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[SIGNATURE PAGE OF HOLDERS TO ORTN RRA]

 

Name of Holder: __________________________

Signature of Authorized Signatory of Holder: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

 

 

[SIGNATURE PAGES CONTINUE]

 

 

 

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ANNEX A

 

Plan of Distribution

Each Selling Stockholder (the “Selling Stockholders”) of the common stock and
any of their pledgees, assignees and successors-in-interest may, from time to
time, sell any or all of their shares of common stock on the Over the Counter
Bulletin Board or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:

 

 

•

ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

   

 

•

block trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction;

   

 

•

purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

   

 

•

an exchange distribution in accordance with the rules of the applicable
exchange;

   

 

•

privately negotiated transactions;

   

 

•

settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;

   

 

•

broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;

   

 

•

through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;

   

 

•

a combination of any such methods of sale; or

   

 

•

any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the “Securities Act”), if available, rather
than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage

 

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commission in compliance with NASDR Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with NASDR IM-2440.

In connection with the sale of the common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In no
event shall any broker-dealer receive fees, commissions and markups which, in
the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

Because Selling Stockholders may be deemed to be “underwriters” within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act including Rule 172 thereunder. In addition,
any securities covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than under
this prospectus. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the Selling
Stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.

 

--------------------------------------------------------------------------------

 

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the common stock for the applicable
restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).

 

 

 

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Annex B

ORTEC INTERNATIONAL, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock, par value $0.001 per share
(the “Common Stock”), of Ortec International, Inc., a Delaware corporation (the
“Company”), (the “Registrable Securities”) understands that the Company has
filed or intends to file with the Securities and Exchange Commission (the
“Commission”) a registration statement on Form S-1 or SB-2 (the “Registration
Statement”) for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the “Securities Act”), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of
March ___, 2006, 2006 (the “Registration Rights Agreement”), among the Company
and the Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.

Certain legal consequences arise from being named as a selling securityholder in
the Registration Statement and the related prospectus. Accordingly, holders and
beneficial owners of Registrable Securities are advised to consult their own
securities law counsel regarding the consequences of being named or not being
named as a selling securityholder in the Registration Statement and the related
prospectus.

NOTICE

The undersigned beneficial owner (the “Selling Securityholder”) of Registrable
Securities hereby elects to include the Registrable Securities owned by it and
listed below in Item 3 (unless otherwise specified under such Item 3) in the
Registration Statement.

 

--------------------------------------------------------------------------------

 

The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:

QUESTIONNAIRE

 

1.

Name.

   

 

(a)

Full Legal Name of Selling Securityholder

 

 

 

 

 

 

(b)

Full Legal Name of Registered Holder (if not the same as (a) above) through
which Registrable Securities Listed in Item 3 below are held:

 

 

 

 

 

 

(c)

Full Legal Name of Natural Control Person (which means a natural person who
directly or indirectly alone or with others has power to vote or dispose of the
securities covered by the questionnaire):

 

 

 

 

2. Address for Notices to Selling Securityholder:

 

 

 

Telephone:

Fax:

Contact Person:

 

3. Beneficial Ownership of Registrable Securities:

 

 

(a)

Type and Number of Registrable Securities beneficially owned (not including the
Registrable Securities that are issuable pursuant to the Purchase Agreement):

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

4. Broker-Dealer Status:

 

 

(a)

Are you a broker-dealer?

 

Yes

o

No

o

 

 

(b)

If “yes” to Section 4(a), did you receive your Registrable Securities as
compensation for investment banking services to the Company.

 

Yes

o

No

o

 

 

Note:

If no, the Commission’s staff has indicated that you should be identified as an
underwriter in the Registration Statement.

   

 

(c)

Are you an affiliate of a broker-dealer?

 

Yes

o

No

o

 

 

(d)

If you are an affiliate of a broker-dealer, do you certify that you bought the
Registrable Securities in the ordinary course of business, and at the time of
the purchase of the Registrable Securities to be resold, you had no agreements
or understandings, directly or indirectly, with any person to distribute the
Registrable Securities?

 

Yes

o

No

o

 

 

Note:

If no, the Commission’s staff has indicated that you should be identified as an
underwriter in the Registration Statement.

 

5. Beneficial Ownership of Other Securities of the Company Owned by the Selling
Securityholder.

Except as set forth below in this Item 5, the undersigned is not the beneficial
or registered owner of any securities of the Company other than the Registrable
Securities listed above in Item 3.

 

 

(a)

Type and Amount of Other Securities beneficially owned by the Selling
Securityholder:

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

6. Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates,
officers, directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has had
any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.

State any exceptions here:

 

 

 

 

The undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the date
hereof at any time while the Registration Statement remains effective.

By signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus and any
amendments or supplements thereto. The undersigned understands that such
information will be relied upon by the Company in connection with the
preparation or amendment of the Registration Statement and the related
prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by its
duly authorized agent.

Dated:

Beneficial Owner:

 

By:

 

 

Name:

 

Title:

 

 

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

[Company counsel]

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

EXHIBIT C           

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

 

COMMON STOCK PURCHASE WARRANT

 

To Purchase __________ Shares of Common Stock of

[__________

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value
received, _____________ (the “Holder”), is entitled, upon the terms and subject
to the limitations on exercise and the conditions hereinafter set forth, at any
time on or after the date hereof (the “Initial Exercise Date”) and on or prior
to the close of business on the fifth anniversary of the Initial Exercise Date
(the “Termination Date”) but not thereafter, to subscribe for and purchase from
Ortec International, Inc., a Delaware corporation (the “Company”), up to ______
shares (the “Warrant Shares”) of Common Stock, par value $0.001 per share, of
the Company (the “Common Stock”). The purchase price of one share of Common
Stock under this Warrant shall be equal to the Exercise Price, as defined in
Section 2(b).

Section 1.                Definitions. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated March ___, 2006, among the
Company and the purchasers signatory thereto.

Section 2.

Exercise.

a)      Exercise of Warrant. Exercise of the purchase rights represented by this
Warrant may be made, in whole or in part, at any time or times on or after the
Initial Exercise Date and on or before the Termination Date by delivery to the
Company of a duly executed facsimile copy of the Notice of Exercise Form annexed
hereto (or such other office or agency of the Company as it may designate by
notice in writing to the registered Holder at the address of such Holder
appearing on the books of the Company); and, within 3 Trading Days of the date
said Notice of Exercise is delivered to the Company, the Company shall have
received payment of the aggregate Exercise Price of the shares thereby purchased
by wire transfer or cashier’s check drawn on a United States bank.
Notwithstanding anything herein to the contrary, the Holder shall not be
required to physically surrender this Warrant to the Company until the Holder
has purchased all of the Warrant Shares available hereunder and the Warrant has
been exercised in

 

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full, in which case, the Holder shall surrender this Warrant to the Company for
cancellation within 3 Trading Days of the date the final Notice of Exercise is
delivered to the Company. Partial exercises of this Warrant resulting in
purchases of a portion of the total number of Warrant Shares available hereunder
shall have the effect of lowering the outstanding number of Warrant Shares
purchasable hereunder in an amount equal to the applicable number of Warrant
Shares purchased. The Holder and the Company shall maintain records showing the
number of Warrant Shares purchased and the date of such purchases. The Company
shall deliver any objection to any Notice of Exercise Form within 1 Business Day
of receipt of such notice. In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative in the absence of
manifest error. The Holder and any assignee, by acceptance of this Warrant,
acknowledge and agree that, by reason of the provisions of this paragraph,
following the purchase of a portion of the Warrant Shares hereunder, the number
of Warrant Shares available for purchase hereunder at any given time may be less
than the amount stated on the face hereof.

b)      Exercise Price. The exercise price per share of the Common Stock under
this Warrant shall be $0.50, subject to adjustment hereunder (the “Exercise
Price”).

c)      Cashless Exercise. If at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the Warrant
Shares by the Holder, then this Warrant may also be exercised at such time by
means of a “cashless exercise” in which the Holder shall be entitled to receive
a certificate for the number of Warrant Shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:

(A) = the VWAP on the Trading Day immediately preceding the date of such
election;

 

(B) = the Exercise Price of this Warrant, as adjusted; and

 

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in
accordance with the terms of this Warrant by means of a cash exercise rather
than a cashless exercise.

 

 

d)

Exercise Limitations.

 

 

i.

Holder’s Restrictions. The Company shall not effect any exercise of this
Warrant, and a Holder shall not have the right to exercise any portion of this
Warrant, pursuant to Section 2(c) or otherwise, to the extent that after giving
effect to such issuance after exercise as set forth on the applicable Notice of
Exercise, such Holder (together with such Holder’s Affiliates, and any other
person or entity acting as a group together with such Holder or any of such
Holder’s Affiliates), as set forth on the applicable Notice of Exercise, would
beneficially own in excess of the Beneficial Ownership Limitation (as defined
below).  For purposes of the foregoing sentence, the number of shares of Common
Stock beneficially owned by such Holder and its Affiliates shall include the
number of shares of Common Stock issuable upon exercise of this Warrant with
respect to which such determination is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by such
Holder or any of its Affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Preferred Stock or Warrants) subject
to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by such Holder or any of its affiliates.  Except as
set forth in the preceding sentence, for purposes of this Section 2(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder, it being
acknowledged by a Holder that the Company is not representing to such Holder
that such calculation is in compliance with Section 13(d) of the Exchange Act
and such Holder is solely responsible for any schedules required to be filed in
accordance therewith. To the

 

 

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extent that the limitation contained in this Section 2(d) applies, the
determination of whether this Warrant is exercisable (in relation to other
securities owned by such Holder together with any Affiliates) and of which a
portion of this Warrant is exercisable shall be in the sole discretion of a
Holder, and the submission of a Notice of Exercise shall be deemed to be each
Holder’s determination of whether this Warrant is exercisable (in relation to
other securities owned by such Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination. In addition, a determination as to
any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 2(d), in determining the number of
outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Company’s Transfer Agent setting forth the number of shares of Common Stock
outstanding.  Upon the written or oral request of a Holder, the Company shall
within two Trading Days confirm orally and in writing to such Holder the number
of shares of Common Stock then outstanding.  In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this Warrant,
by such Holder or its Affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock issuable upon exercise of this Warrant. The Beneficial Ownership
Limitation provisions of this Section 2(d)(i) may be waived by such Holder, at
the election of such Holder, upon not less than 61 days’ prior notice to the
Company to change the Beneficial Ownership Limitation to 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon exercise of this Warrant, and the
provisions of this Section 2(d) shall continue to apply. Upon such a change by a
Holder of the Beneficial Ownership Limitation from such 4.99% limitation to such
9.99% limitation, the Beneficial Ownership Limitation may not be further waived
by such Holder. The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 2(d)(i) to correct this paragraph (or any portion hereof) which may
be defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained in this
paragraph shall apply to a successor holder of this Warrant.

e)

Mechanics of Exercise.

i.       Authorization of Warrant Shares. Subject to receipt of Authorized Share
Approval, the Company covenants that all Warrant Shares which may be issued upon
the exercise of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant, be duly authorized,
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges created by the Company in respect of the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue).

ii.      Delivery of Certificates Upon Exercise. Certificates for shares
purchased hereunder shall be transmitted by the transfer agent of the Company to
the Holder by crediting the account of the Holder’s prime broker with the
Depository Trust Company through its Deposit Withdrawal Agent Commission
(“DWAC”) system if the Company is a participant in such system, and otherwise by
physical delivery to the address specified by the Holder in the Notice of
Exercise within 3 Trading Days from the delivery to the

 

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Company of the Notice of Exercise Form, surrender of this Warrant (if required)
and payment of the aggregate Exercise Price as set forth above (“Warrant Share
Delivery Date”). This Warrant shall be deemed to have been exercised on the date
the Exercise Price is received by the Company. The Warrant Shares shall be
deemed to have been issued, and Holder or any other person so designated to be
named therein shall be deemed to have become a holder of record of such shares
for all purposes, as of the date the Warrant has been exercised by payment to
the Company of the Exercise Price (or by cashless exercise, if permitted) and
all taxes required to be paid by the Holder, if any, pursuant to Section
2(e)(vii) prior to the issuance of such shares, have been paid.

iii.     Delivery of New Warrants Upon Exercise. If this Warrant shall have been
exercised in part, the Company shall, at the request of a Holder and upon
surrender of this Warrant certificate, at the time of delivery of the
certificate or certificates representing Warrant Shares, deliver to Holder a new
Warrant evidencing the rights of Holder to purchase the unpurchased Warrant
Shares called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant.

iv.     Rescission Rights. If the Company fails to cause its transfer agent to
transmit to the Holder a certificate or certificates representing the Warrant
Shares pursuant to this Section 2(e)(iv) by the Warrant Share Delivery Date,
then the Holder will have the right to rescind such exercise.

v.       Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Exercise. In addition to any other rights available to the Holder, if the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to an
exercise on or before the Warrant Share Delivery Date, and if after such date
the Holder is required by its broker to purchase (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving upon such
exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the
amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the
amount obtained by multiplying (A) the number of Warrant Shares that the Company
was required to deliver to the Holder in connection with the exercise at issue
times (B) the price at which the sell order giving rise to such purchase
obligation was executed, and (2) at the option of the Holder, either reinstate
the portion of the Warrant and equivalent number of Warrant Shares for which
such exercise was not honored or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied with
its exercise and delivery obligations hereunder. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with an
aggregate sale price giving rise to such purchase obligation of $10,000, under
clause (1) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In and, upon
request of the Company, evidence of the amount of such loss. Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

vi.     No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall at its election, either pay a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price or round up

 

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to the next whole share.

vii.    Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares
shall be made without charge to the Holder for any issue or transfer tax or
other incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
Warrant Shares are to be issued in a name other than the name of the Holder,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.

viii.   Closing of Books. The Company will not close its stockholder books or
records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.

Section 3.

Certain Adjustments.

a)      Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding: (A) pays a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant), (B) subdivides outstanding shares of
Common Stock into a larger number of shares, (C) combines (including by way of
reverse stock split) outstanding shares of Common Stock into a smaller number of
shares, or (D) issues by reclassification of shares of the Common Stock any
shares of capital stock of the Company, then in each case the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event and the
number of shares issuable upon exercise of this Warrant shall be proportionately
adjusted. Any adjustment made pursuant to this Section 3(a) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

b)      Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Warrant is outstanding, shall sell or grant
any option to purchase or sell or grant any right to reprice its securities, or
otherwise dispose of or issue (or announce any offer, sale, grant or any option
to purchase or other disposition) any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at an effective price
per share less than the then Exercise Price (such lower price, the “Base Share
Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of
the Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
which is less than the Exercise Price, such issuance shall be deemed to have
occurred for less than the Exercise Price on such date of the Dilutive
Issuance), then the Exercise Price shall be reduced and only reduced to equal
the Base Share Price and the number of Warrant Shares issuable hereunder shall
be increased such that the aggregate Exercise Price payable hereunder, after
taking into account the decrease in the Exercise Price, shall be equal to the
aggregate Exercise Price prior to such adjustment. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued.
Notwithstanding the foregoing, no adjustments shall be made, paid or issued
under this Section 3(b) in respect of an Exempt Issuance. The Company shall
notify the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice the
“Dilutive Issuance Notice”). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance

 

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Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive
Issuance, after the date of such Dilutive Issuance the Holder is entitled to
receive a number of Warrant Shares based upon the Base Share Price regardless of
whether the Holder accurately refers to the Base Share Price in the Notice of
Exercise.

c)      Subsequent Rights Offerings. If the Company, at any time while the
Warrant is outstanding, shall issue rights, options or warrants to all holders
of Common Stock (and not to Holders) entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the VWAP at the record
date mentioned below, then the Exercise Price shall be multiplied by a fraction,
of which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered (assuming receipt by the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at such VWAP.
Such adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such rights, options or warrants.

d)      Pro Rata Distributions. If the Company, at any time prior to the
Termination Date, shall distribute to all holders of Common Stock (and not to
Holders of the Warrants) evidences of its indebtedness or assets (including cash
and cash dividends) or rights or warrants to subscribe for or purchase any
security other than the Common Stock (which shall be subject to Section 3(b)),
then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then per share fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith. In either case the adjustments shall be described in a
statement provided to the Holder of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.

e)      Fundamental Transaction. If, at any time while this Warrant is
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then, upon any subsequent exercise of this Warrant,
the Holder shall have the right to receive, for each Warrant Share that would
have been issuable upon such exercise immediately prior to the occurrence of
such Fundamental Transaction, at the option of the Holder, (a) upon exercise of
this Warrant, the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any
additional consideration (the “Alternate Consideration”) receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event or (b) if the
Company is acquired in an all cash transaction, cash equal to the value of this
Warrant as determined in accordance with the Black-Scholes option pricing
formula. For purposes of any such exercise, the determination of the Exercise
Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of one share
of Common Stock in such Fundamental Transaction, and the Company shall apportion
the Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any exercise of this Warrant following such Fundamental
Transaction. To the extent necessary to

 

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effectuate the foregoing provisions, any successor to the Company or surviving
entity in such Fundamental Transaction shall issue to the Holder a new warrant
consistent with the foregoing provisions and evidencing the Holder’s right to
exercise such warrant into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this Section 3(d) and insuring that this Warrant (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

f)       Calculations. All calculations under this Section 3 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. For
purposes of this Section 3, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and
outstanding.

g)      Voluntary Adjustment By Company. The Company may at any time during the
term of this Warrant reduce the then current Exercise Price to any amount and
for any period of time deemed appropriate by the Board of Directors of the
Company.

h)

Notice to Holders.

i.       Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 3, the Company shall promptly mail to
each Holder a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. [If the
Company issues a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock or
Common Stock Equivalents at the lowest possible conversion or exercise price at
which such securities may be converted or exercised in the case of a Variable
Rate Transaction (as defined in the Purchase Agreement).

ii.      Notice to Allow Exercise by Holder. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock; (B)
the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall authorize the granting to
all holders of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
mailed to the Holder at its last address as it shall appear upon the Warrant
Register of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. The Holder is
entitled to exercise this Warrant during the 20-day period commencing on the
date of such notice to the effective date of the event triggering such notice.

 

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Section 4.

Transfer of Warrant.

a)      Transferability. Subject to compliance with any applicable securities
laws and the conditions set forth in Section 4(d) hereof and to the provisions
of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder
(including, without limitation, any registration rights) are transferable, in
whole or in part, upon surrender of this Warrant at the principal office of the
Company or its designated agent, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by the Holder or
its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without having a
new Warrant issued.

b)      New Warrants. This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the Holder or its agent or attorney.
Subject to compliance with Section 4(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.

c)      Warrant Register. The Company shall register this Warrant, upon records
to be maintained by the Company for that purpose (the “Warrant Register”), in
the name of the record Holder hereof from time to time. The Company may deem and
treat the registered Holder of this Warrant as the absolute owner hereof for the
purpose of any exercise hereof or any distribution to the Holder, and for all
other purposes, absent actual notice to the contrary.

d)      Transfer Restrictions. If, at the time of the surrender of this Warrant
in connection with any transfer of this Warrant, the transfer of this Warrant
shall not be registered pursuant to an effective registration statement under
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the Securities
Act and under applicable state securities or blue sky laws, (ii) that the holder
or transferee execute and deliver to the Company an investment letter in form
and substance acceptable to the Company and (iii) that the transferee be an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or
(a)(8) promulgated under the Securities Act or a “qualified institutional buyer”
as defined in Rule 144A(a) under the Securities Act.

Section 5.

Miscellaneous.

a)      No Rights as Shareholder Until Exercise. This Warrant does not entitle
the Holder to any voting rights or other rights as a shareholder of the Company
prior to the exercise hereof as set forth in Section 2(e)(ii).

b)      Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants
that upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.

c)      Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall not be a Business Day, then such action may be

 

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taken or such right may be exercised on the next succeeding Business Day.

d)

Authorized Shares.

Subject to receipt of Authorized Share Approval, the Company covenants that
during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of the Warrant Shares upon the exercise of any purchase rights
under this Warrant. The Company further covenants that its issuance of this
Warrant shall constitute full authority to its officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for the Warrant Shares upon the exercise of the purchase rights
under this Warrant. The Company will take all such reasonable action as may be
necessary to assure that such Warrant Shares may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements of
the Trading Market upon which the Common Stock may be listed.

Except and to the extent as waived or consented to by the Holder, the Company
shall not by any action, including, without limitation, amending its certificate
of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares upon the exercise of this Warrant, and (c) use commercially
reasonable efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of
Warrant Shares for which this Warrant is exercisable or in the Exercise Price,
the Company shall obtain all such authorizations or exemptions thereof, or
consents thereto, as may be necessary from any public regulatory body or bodies
having jurisdiction thereof.

e)      Jurisdiction. All questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be determined in accordance
with the provisions of the Purchase Agreement.

f)       Restrictions. The Holder acknowledges that the Warrant Shares acquired
upon the exercise of this Warrant, if not registered, will have restrictions
upon resale imposed by state and federal securities laws.

g)      Nonwaiver and Expenses. No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of
such right or otherwise prejudice Holder’s rights, powers or remedies,
notwithstanding the fact that all rights hereunder terminate on the Termination
Date. If the Company willfully and knowingly fails to comply with any provision
of this Warrant, which results in any material damages to the Holder, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys’ fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.

h)      Notices. Any notice, request or other document required or permitted to
be given or delivered to the Holder by the Company shall be delivered in
accordance with the notice provisions of the Purchase Agreement.

 

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i)       Limitation of Liability. No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant to purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall
give rise to any liability of Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

j)       Remedies. Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Warrant. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Warrant and hereby agrees to waive and
not to assert the defense in any action for specific performance that a remedy
at law would be adequate.

k)      Successors and Assigns. Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder or holder of Warrant Shares.

l)       Amendment. This Warrant may be modified or amended or the provisions
hereof waived with the written consent of the Company and the Holder.

m)     Severability. Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions
or the remaining provisions of this Warrant.

n)      Headings. The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.

 

Dated: March ___, 2006

 

ORTEC INTERNATIONAL, INC.

 

 

By:__________________________________________

 

Name:

 

 

Title:

 

 

 

 

 

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NOTICE OF EXERCISE

 

To:

Ortec international, inc.

 

(1)         The undersigned hereby elects to purchase ________ Warrant Shares of
the Company pursuant to the terms of the attached Warrant (only if exercised in
full), and tenders herewith payment of the exercise price in full, together with
all applicable transfer taxes, if any.

(2)

Payment shall take the form of (check applicable box):

o in lawful money of the United States; or

o [if permitted] the cancellation of such number of Warrant Shares as is
necessary, in accordance with the formula set forth in subsection 2(c), to
exercise this Warrant with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise procedure set forth in subsection
2(c).

(3)         Please issue a certificate or certificates representing said Warrant
Shares in the name of the undersigned or in such other name as is specified
below:

_______________________________

 

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by
physical delivery of a certificate to:

 

_______________________________

 

_______________________________

 

_______________________________

 

(4) Accredited Investor. The undersigned is an “accredited investor” as defined
in Regulation D promulgated under the Securities Act of 1933, as amended.

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity:
________________________________________________________________________

Signature of Authorized Signatory of Investing Entity:
_________________________________________________

Name of Authorized Signatory:
___________________________________________________________________

Title of Authorized Signatory:
____________________________________________________________________

Date:
________________________________________________________________________________________

 

 

 

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ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

 

 

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant
and all rights evidenced thereby are hereby assigned to

 

_______________________________________________ whose address is

 

_______________________________________________________________.

 

 

_______________________________________________________________

 

Dated: ______________, _______

 

 

Holder’s Signature:

_____________________________

 

Holder’s Address:

_____________________________

 

_____________________________

 

 

Signature Guaranteed: ___________________________________________

 

NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.

 

 

 

 

 

 

 

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EXHIBIT D

 

FORM OF LEGAL OPINION

[List of Purchasers]

 

 

Ladies and Gentlemen:

 

We have acted as counsel to Ortec International, Inc., a Delaware corporation
(the “Company”), in connection with the execution and delivery by the Company of
the Securities Purchase Agreement dated as of March 16, 2006 (the “Agreement”),
by and among the Company and the purchasers identified on the signature pages
thereto (the “Purchasers”). This opinion is given to you pursuant to Section
2.2(a)(ii) of the Agreement. (Capitalized terms not otherwise defined herein are
defined as set forth in the Agreement.)

 

We have participated in the preparation and negotiation of the Agreement and the
Exhibits and Schedules thereto, and the other documents referred to therein. We
also have examined such certificates of public officials, corporate documents
and records and other certificates, opinions, agreements and instruments and
have made such other investigations as we have deemed necessary in connection
with the opinions hereinafter set forth.

 

We have assumed the genuineness of all signatures (other than those of officers
of the Company) and the authenticity of all items submitted to us as originals
and the conformity with originals of all items submitted to us as copies. In
making our examination of the Transaction Documents, we have assumed that you
each have authority to execute and deliver, and to perform and observe the
provisions of, the Transaction Documents, and have duly authorized, executed and
delivered the Transaction Documents to which each of you is a party, and that
the Transaction Documents to which each of you is a party constitute the legal,
valid and binding obligations of each of you enforceable against each of you in
accordance with their terms.

 

Whenever our opinion herein with respect to the existence or absence of facts is
indicated to be based on our knowledge, or of which we are aware, it is intended
to signify that, in the course of our representation of the Company and its
subsidiaries in connection with the Agreement, and numerous other matters, none
among Gabriel Kaszovitz, Saul Kaszovitz, Larry Miller or Irving Rothstein has
acquired actual knowledge of the existence or absence of such facts. Please be
advised that the above named persons are the only attorneys of this firm who
have been actively engaged in the representation of either the Company or its
subsidiaries in connection with this or other matters. While we have not
undertaken any independent investigation to determine the existence or absence
of such facts, and no inference as to our knowledge of the existence or absence
of such facts should be drawn from the fact of our representation of the Company
and its subsidiaries, whenever we refer to our knowledge with respect to the

 

--------------------------------------------------------------------------------

existence or absence of facts, it is after due inquiry, and based upon Gabriel
Kaszovitz's extensive familiarity with the Company’s and its subsidiaries’
business.

 

Based on the foregoing and upon such investigation as we have deemed necessary,
we give you our opinion as follows:

 

The Company is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. The Company has all requisite power and
authority, and to our knowledge all material governmental licenses,
authorizations, consents and approvals, required to own and operate its
properties and assets and to carry on its business as now conducted and as
proposed to be conducted (all as described in the Company’s Annual Report on
Form 10-KSB for its fiscal year ended December 31, 2004). The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to qualify could have a Material Adverse Effect on the
Company.

Each of the following subsidiaries of the Company (the “Subsidiaries”) is a
corporation, duly organized and in good standing under the laws of the state of
organization, as noted: Orcel LLC – Delaware; ORTN Acquisition Corp. - Delaware.

The Company has all requisite power and authority to execute, deliver and
perform the Transaction Documents, to issue, sell and deliver the Preferred
Stock, the Warrants and, after the Authorized Share Approval, the Underlying
Shares pursuant to the Transaction Documents and to carry out and perform its
obligations under, and to consummate the transactions contemplated by, the
Transaction Documents.

All action, on the part of the Company, its directors and its stockholders
necessary for the authorization, execution and delivery by the Company of the
Transaction Documents, the authorization, issuance, sale and delivery of the
Preferred Stock and the Warrants pursuant to the Agreement, and after the
Authorized Share Approval, the issuance and delivery of the Underlying Shares,
and the consummation by the Company of the transactions contemplated by the
Transaction Documents has been duly taken. The Transaction Documents have been
duly and validly executed and delivered by the Company and constitute the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with their terms, except (a) that such enforceability may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors’ rights in general and (b) that the remedies of specific performance
and injunctive and other forms of injunctive relief may be subject to equitable
defenses.

The schedule annexed hereto as Schedule 3.1(c) accurately sets forth:

 

 

(a)

the number of shares of Common Stock and preferred stock the Company is
authorized to issue.

 

 

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(b)

the number of shares of Common Stock outstanding. There are 6,272.0155 shares of
Series D Convertible Preferred Stock outstanding which are convertible into
25,088,062 shares of Common Stock.

   

 

(c)

the number of shares of Common Stock the Company is obligated to issue pursuant
to outstanding warrants, options and agreements.

   

 

(d)

the number of shares of Common Stock, and the number of shares of Common Stock
issuable upon exercise of warrants, the Company will deliver upon closing the
Hapto Acquisition.

 

All presently issued and outstanding shares of Common Stock and preferred stock
have been duly authorized and validly issued and are fully paid and
nonassessable and free of any preemptive or similar rights, and have been issued
in compliance with applicable securities laws and regulations. The Preferred
Stock and Warrants which are being issued on the date hereof pursuant to the
Agreement have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive or similar rights, and have been issued in
compliance with applicable securities laws, rules and regulations. After the
Authorized Share Approval the Underlying Shares will be duly and validly
authorized and reserved for issuance, and when issued in accordance with the
conversion of the Preferred Stock or the exercise of the Warrants in accordance
with their respective terms will be validly issued, fully paid and
nonassessable, and free of any preemptive or similar rights. To our knowledge,
except for rights described in Schedule 3.1(c), there are no other options,
warrants, conversion privileges or other rights presently outstanding to
purchase or otherwise acquire from the Company any capital stock or other
securities of the Company, or any other agreements to issue any such securities
or rights. The rights, privileges and preferences of the Common Stock and the
Preferred Stock are as stated in the Company’s Certificate of Incorporation and
the Certificate of Designation establishing each outstanding series of preferred
stock.

To our knowledge, the Company has filed all reports (the “SEC Reports”) required
to be filed by it under Sections 13(a) and 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). As of their respective filing dates,
the SEC Reports complied in all material respects as to form with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder.

Based in part upon the representations of the Purchasers contained in the
Agreement, the Preferred Stock, the Warrants and the Underlying Shares may be
issued to the Purchasers without registration under the Securities Act of 1933,
as amended.

The execution, delivery and performance by the Company of, and the compliance by
the Company with the terms of, the Transaction Documents and the issuance, sale
and delivery of the Preferred Stock, the Warrants and, after the Authorized
Share Approval, the Underlying Shares, pursuant to the Agreement do not (a)
conflict with or result in a violation of any provision of law, rule or
regulation having applicability to the Company or its Subsidiaries or of the
certificate of incorporation or by-laws or other similar organizational
documents of the Company or its Subsidiaries, (b) conflict with, result in a
breach of or constitute a default (or an

 

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event which with notice or lapse of time or both would become a default) under,
or result in or permit the termination or modification of, any agreement,
instrument, order, writ, judgment or decree known to us to which the Company or
its Subsidiaries is a party or is subject or (c) result in the creation or
imposition of any lien, claim or encumbrance on any of the Company’s or its
Subsidiaries’ assets or properties.

To our knowledge, there is no claim, action, suit, proceeding, arbitration,
investigation or inquiry, pending or threatened, before any court or
governmental or administrative body or agency, or any private arbitration
tribunal, against the Company or its Subsidiaries, or any of its officers,
directors or employees (in connection with the discharge of their duties as
officers, directors and employees), or affecting any of its properties or
assets.

No consent, license, permit, waiver, approval or authorization of, or
designation, declaration, registration or filing with, any court, governmental
or regulatory authority, or self-regulatory organization, is required in
connection with the valid execution, delivery and performance by the Company of
the Transaction Documents, or the offer, sale, issuance or delivery of the
Preferred Stock, the Warrants and, other than the Authorized Share Approval, the
Underlying Shares or the consummation of the transactions contemplated thereby.

The Company is not an Investment Company within the meaning of the Investment
Company Act of 1940, as amended.

 

 

Very truly yours,

 

 

 

 

 

 

 

 

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EXHIBIT E

 

FORM OF LOCK-UP AGREEMENT

March __, 2006

 

To: The Purchasers of the Company’s Series E Preferred Stock

 

 

 

 

Re:

Securities Purchase Agreement dated March __, 2006 (the “Agreement”) by and
among, Ortec International, Inc., a Delaware corporation (the “Company”) and the
purchasers signatory thereto (each, a “Purchaser” and collectively referred to
as the “Purchasers”)

 

Ladies and Gentlemen:

Defined terms not otherwise defined herein (the “Letter Agreement”) shall have
the meanings set forth in the Agreement. Pursuant to Section 2.2(a) of the
Agreement and in satisfaction of a condition of the Purchasers’ obligations
under the Agreement, the undersigned irrevocably agrees with the Purchasers
that, from the date hereof until the date that is the twelve month anniversary
of the Effective Date (such period, the “Restriction Period”), the undersigned
will not sell, offer, pledge, contract to sell, grant any option for the sale
of, transfer or otherwise dispose of any of the Common Stock beneficially owned
by, or issuable to, the undersigned (the “Securities”); provided, however, that
the undersigned shall have the right to sell, offer, pledge, contract to sell,
grant any option for the sale of, transfer or otherwise dispose of shares of the
Common Stock beneficially owned by, or issuable to, the undersigned (the
“Excluded Shares”) that together with all other shares of Common Stock sold,
transferred or otherwise disposed of by all persons who on the date hereof are
executive officers, directors or shareholders owning more than 10% of the issued
and outstanding shares of Common Stock, (together with the undersigned the
“Restricted Persons”), during the Restriction Period aggregate not more than
4,000,000 shares.

The Company hereby agrees to notify its transfer agent of the provisions of this
Letter Agreement. The undersigned acknowledges and agrees that the Company will
require the Company’s transfer agent to place a stop transfer instruction on all
Securities beneficially owned by the undersigned, reflecting this Letter
Agreement, until the end of the Restriction Period, so as to be able to enforce
the aggregate limit of shares which may be so sold. This Letter Agreement shall
be binding on successors and assigns of the undersigned with respect to the
Securities (other than the Excluded Shares) and any such successor or assign
shall enter into a similar agreement for the benefit of the Purchasers.

ORTEC LOCKUP LETTER SIGNATURE PAGE

 

Very truly yours,

 

By:

 

 

Name:

 

Acknowledged and agreed to:

Ortec International, Inc.

 

By:__________________________________________

Name:

 

Title:

 

 

 

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EXHIBIT F

ESCROW DEPOSIT AGREEMENT

THIS ESCROW AGREEMENT (the “Agreement”) dated this ___ day of _____ 2006, by and
between Rodman & Renshaw, LLC (“Rodman” or “Placement Agent”), having an address
at 1270 Avenue of the Americas, 16th Floor, New York, NY 10020, Ortec
International, Inc., a Delaware corporation (the “Company”), having an office at
3960 Broadway, New York, NY 10032 and SIGNATURE BANK (“Signature Bank” or the
“Escrow Agent”), a New York State chartered bank and having an office at, 261
Madison Avenue, New York, New York 10016. Capitalized terms used but not defined
herein shall have the meanings set forth in the Purchase Agreement referred to
in the first recital.

W I T N E S S E T H:

WHEREAS, pursuant to the terms of the Securities Purchase Agreement, dated on or
about March ____, 2006 (the “Purchase Agreement”) the Company desires to sell
(the “Offering”) a maximum of, in the aggregate, $8,000,000 of securities of the
Company; and

WHEREAS, unless the Company consummates the Offering by April 19, 2006 (the
“Termination Date”), the Offering will terminate and all funds will be returned
to the Purchasers (hereinafter defined); and

 

WHEREAS, the Company and Placement Agent desire to establish an escrow account
with the Escrow Agent into which the Company and Placement Agent shall instruct
purchasers introduced to the Company by Placement Agent (the “Purchasers”) to
deposit checks and other instruments for the payment of money made payable to
the order of “Signature Bank as Escrow Agent for Ortec International, Inc.” and
Escrow Agent is willing to accept said checks and other instruments for the
payment of money in accordance with the terms hereinafter set forth; and

WHEREAS, each of the Company and Placement Agent, severally and not jointly,
represents and warrants to the Escrow Agent that it has not stated to any
individual or entity that the Escrow Agent’s duties will include anything other
than those duties stated in this Agreement; and

WHEREAS, the Company and Placement Agent warrant to the Escrow Agent that a copy
of each document that has been delivered to Purchasers and third parties that
include Escrow Agent’s name and duties, has been attached hereto as Schedule I.

NOW, THEREFORE, IT IS AGREED as follows:

1.

Delivery of Escrow Funds.

(a) Placement Agent and the Company shall instruct Purchasers to deliver to
Escrow Agent checks made payable to the order of “Signature Bank, as Escrow
Agent for Ortec International, Inc.” or wire transfer to Signature Bank, 261
Madison Avenue, New York, New York 10016, ABA No. 026013576 for credit to
Signature Bank, as Escrow Agent for Ortec International, Inc., Account No.
_____________, in each case, with the name, address and social security number
or taxpayer identification number of the individual or entity making payment. In
the event any Purchaser’s address and/or social security number or taxpayer
identification number are not provided to Escrow Agent by the Purchaser, then
Placement Agent and/or the Company agree to promptly provide Escrow Agent with
such information in writing. The checks or wire transfers shall be deposited
into a non interest-bearing account at Signature Bank entitled “Signature Bank,
as Escrow Agent for Ortec International, Inc.” (the “Escrow Account”).

(b)

The collected funds deposited into the Escrow Account are referred to as the
“Escrow  

 

 

--------------------------------------------------------------------------------

Funds.”

(c)    The Escrow Agent shall have no duty or responsibility to enforce the
collection or demand payment of any funds deposited into the Escrow Account. If,
for any reason, any check deposited into the Escrow Account shall be returned
unpaid to the Escrow Agent, the sole duty of the Escrow Agent shall be to return
the check to the Purchaser and advise the Company and Placement Agent promptly
thereof.

2.      Release of Escrow Funds. The Escrow Funds shall be paid by the Escrow
Agent in accordance with the following:

(a)    In the event that the Company and Placement Agent advise the Escrow Agent
in writing that the Offering has been terminated (the “Termination Notice”), the
Escrow Agent shall promptly return the funds paid by each Purchaser to said
Purchaser without interest or offset.

(b)    The Escrow Agent shall, upon receipt of written instructions, in the form
of Exhibit A attached hereto or in form and substance satisfactory to the Escrow
Agent, received from the Company and Placement Agent, pay the Escrow Funds in
accordance with such written instructions, such payment or payments to be made
by wire transfer within one (1) business day of receipt of such written
instructions.

(c)    If by 3:00 P.M. Eastern time on the Termination Date, the Escrow Agent
has not received written instructions from the Company and Placement Agent
regarding the disbursement of the Escrow Funds, then the Escrow Agent shall
promptly return the Escrow Funds to the Purchasers without interest or offset.
The Escrow Funds returned to each Purchaser shall be free and clear of any and
all claims of the Escrow Agent.

(d)    Following the distribution of the Escrow Funds by the Escrow Agent in
accordance with (b) of this Section 2 through the Termination Date, the Escrow
Agent shall from time to time distribute any additional Escrow Funds, by wire
transfer or bank check, in accordance with written instructions received from
the Placement Agent and the Company in the form of Exhibit A or in form and
substance satisfactory to the Escrow Agent.

(e)    The Escrow Agent shall not be required to pay any uncollected funds or
any funds that are not available for withdrawal.

(f)     If the Termination Date or any date that is a deadline under this
Agreement for giving the Escrow Agent notice or instructions or for the Escrow
Agent to take action is not a Banking Day, then such date shall be the Banking
Day that immediately preceding that date. A Banking Day is any day other than a
Saturday, Sunday or a day that a New York State chartered bank is not legally
obligated to be opened.

3.      Acceptance by Escrow Agent. The Escrow Agent hereby accepts and agrees
to perform its obligations hereunder, provided that:

(a)     The Escrow Agent may act in reliance upon any signature believed by it
to be genuine, and may assume that any person who has been designated by
Placement Agent or the Company to give any written instructions, notice or
receipt, or make any statements in connection with the provisions hereof has
been duly authorized to do so. Escrow Agent shall have no duty to make inquiry
as to the genuineness, accuracy or validity of any statements or instructions or
any signatures on statements or instructions. The names and true signatures of
each individual authorized to act singly on behalf of the Company and Placement
Agent are stated in Schedule II, which is attached hereto and made a part
hereof. The Company and Placement Agent may each remove or add one or more of
its authorized signers stated on Schedule II by notifying the Escrow Agent of
such change in accordance with this Agreement, which notice shall include the
true signature for any new authorized signatories.

 

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(b)    The Escrow Agent may act relative hereto in reliance upon advice of
counsel in reference to any matter connected herewith. The Escrow Agent shall
not be liable for any mistake of fact or error of judgment or law, or for any
acts or omissions of any kind, unless caused by its willful misconduct or gross
negligence.

(c)    Placement Agent and the Company agree to indemnify and hold the Escrow
Agent harmless from and against any and all claims, losses, costs, liabilities,
damages, suits, demands, judgments or expenses (including but not limited to
reasonable attorney’s fees) claimed against or incurred by Escrow Agent arising
out of or related, directly or indirectly, to this Escrow Agreement unless
caused by the Escrow Agent’s gross negligence or willful misconduct.

(d)    In the event that the Escrow Agent shall be uncertain as to its duties or
rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking
any action other than to keep safely the Escrow Funds until it shall be directed
otherwise by a court of competent jurisdiction, or (ii) deliver the Escrow Funds
to a court of competent jurisdiction.

(e)    The Escrow Agent shall have no duty, responsibility or obligation to
interpret or enforce the terms of any agreement other than Escrow Agent’s
obligations hereunder, and the Escrow Agent shall not be required to make a
request that any monies be delivered to the Escrow Account, it being agreed that
the sole duties and responsibilities of the Escrow Agent shall be to the extent
not prohibited by applicable law (i) to accept checks or other instruments for
the payment of money and wire transfers delivered to the Escrow Agent for the
Escrow Account and deposit said checks and wire transfers into the non-interest
bearing Escrow Account, and (ii) to disburse or refrain from disbursing the
Escrow Funds as stated above, provided that the checks received by the Escrow
Agent have been collected and are available for withdrawal.

4.      Resignation and Termination of the Escrow Agent. The Escrow Agent may
resign at any time by giving 30 days’ prior written notice of such resignation
to Placement Agent and the Company. Upon providing such notice, the Escrow Agent
shall have no further obligation hereunder except to hold as depositary the
Escrow Funds that it receives until the end of such 30-day period. In such
event, the Escrow Agent shall not take any action, other than receiving and
depositing Purchasers checks and wire transfers in accordance with this
Agreement, until the Company has designated a banking corporation, trust
company, attorney or other person as successor. Upon receipt of such written
designation signed by Placement Agent and the Company, the Escrow Agent shall
promptly deliver the Escrow Funds to such successor and shall thereafter have no
further obligations hereunder. If such instructions are not received within 30
days following the effective date of such resignation, then the Escrow Agent may
deposit the Escrow Funds held by it pursuant to this Agreement with a clerk of a
court of competent jurisdiction pending the appointment of a successor. In
either case provided for in this paragraph, the Escrow Agent shall be relieved
of all further obligations and released from all liability thereafter arising
with respect to the Escrow Funds.

5.      Termination. The Company and Placement Agent may terminate the
appointment of the Escrow Agent hereunder upon written notice specifying the
date upon which such termination shall take effect, which date shall be at least
30 days from the date of such notice. In the event of such termination, the
Company and Placement Agent shall, within 30 days of such notice, appoint a
successor escrow agent and the Escrow Agent shall, upon receipt of written
instructions signed by the Company and Placement Agent, turn over to such
successor escrow agent all of the Escrow Funds; provided, however, that if the
Company and Placement Agent fail to appoint a successor escrow agent within such
30-day period, such termination notice shall be null and void and the Escrow
Agent shall continue to be bound by all of the provisions hereof. Upon receipt
of the Escrow Funds, the successor escrow agent shall become the escrow agent
hereunder and shall be bound by all of the provisions hereof and Signature Bank
shall be relieved of all further obligations and released from all liability
thereafter arising with respect to the Escrow Funds and under this Agreement.

6.

Investment. All funds received by the Escrow Agent shall be invested only in
non-interest bearing

 

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bank accounts at Signature Bank.

7.      Compensation. Escrow Agent shall be entitled, for the duties to be
performed by it hereunder, to a fee of $2,500, which fee shall be paid by the
Company upon the signing of this Agreement. In addition, the Company shall be
obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or
that become due in connection with this Agreement or the Escrow Account,
including reasonable attorney’s fees. Neither the modification, cancellation,
termination or rescission of this Agreement nor the resignation or termination
of the Escrow Agent shall affect the right of Escrow Agent to retain the amount
of any fee which has been paid, or to be reimbursed or paid any amount which has
been incurred or becomes due, prior to the effective date of any such
modification, cancellation, termination, resignation or rescission. To the
extent the Escrow Agent has incurred any such expenses, or any such fee becomes
due, prior to any closing, the Escrow Agent shall advise the Company and the
Company shall direct all such amounts to be paid directly at any such closing.

8.      Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if sent by hand-delivery, by facsimile (followed
by first-class mail), by nationally recognized overnight courier service or by
prepaid registered or certified mail, return receipt requested, to the addresses
set forth below:

If to Placement Agent:

Rodman & Renshaw, LLC

1270 Avenue of the Americas, 16th Floor

New York, NY 10020

Attention: ____________

Fax: ______________

 

If to the Company:

Ortec International, Inc.

3960 Broadway

New York, NY 10032

Attention: ____________

Fax: _______________

 

If to Escrow Agent:

Signature Bank

261 Madison Avenue

New York, New York 10016

Attention: Cliff Broder, Senior Vice President

Fax: (646) 822-1359

9.

General.

(a)    This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York applicable to agreements made
and to be entirely performed within such State, without regard to choice of law
principles.

(b)    This Agreement sets forth the entire agreement and understanding of the
parties with respect to the matters contained herein and supersedes all prior
agreements, arrangements and understandings relating thereto.

 

--------------------------------------------------------------------------------

 

(c)    All of the terms and conditions of this Agreement shall be binding upon,
and inure to the benefit of and be enforceable by, the parties hereto, as well
as their respective successors and assigns.

(d)    This Agreement may be amended, modified, superseded or canceled, and any
of the terms or conditions hereof may be waived, only by a written instrument
executed by each party hereto or, in the case of a waiver, by the party waiving
compliance. The failure of any party at any time or times to require performance
of any provision hereof shall in no manner affect its right at a later time to
enforce the same. No waiver of any party of any condition, or of the breach of
any term contained in this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term of this Agreement. No party may
assign any rights, duties or obligations hereunder unless all other parties have
given their prior written consent.

(e)    If any provision included in this Agreement proves to be invalid or
unenforceable, it shall not affect the validity of the remaining provisions.

(f)     This Agreement and any modification or amendment of this Agreement may
be executed in several counterparts or by separate instruments and all of such
counterparts and instruments shall constitute one agreement, binding on all of
the parties hereto.

10.    Form of Signature. The parties hereto agree to accept a facsimile
transmission copy of their respective actual signatures as evidence of their
actual signatures to this Agreement and any modification or amendment of this
Agreement; provided, however, that each party who produces a facsimile signature
agrees, by the express terms hereof, to place, promptly after transmission of
his or her signature by fax, a true and correct original copy of his or her
signature in overnight mail to the address of the other party.

******************************

 

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first set forth above.

ORTEC INTERNATIONAL, INC.

RODMAN & RENSHAW, LLC

 

 

By:

______________________________

By:

_______________________

 

 

Name:

Name:

   

 

Title:

Title:

 

Officer       

 

SIGNATURE BANK

By:

_____________________________

 

Name:

 

 

Title:

 

 

By:

_____________________________

 

Name:

 

 

Title:

 

 

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Schedule I

 

OFFERING DOCUMENTS

Purchase Agreement and all exhibits and schedules thereto.

 

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Schedule II

The Escrow Agent is authorized to accept instructions signed or believed by the
Escrow Agent to be signed by any one of the following on behalf of the Company
and Placement Agent.

Ortec International, Inc.

Name

True Signature

 

 

_______________________

_____________________

 

 

Rodman & Renshaw, LLC

Name

True Signature

 

________________________

_____________________

 

________________________

_____________________

 

 

 

 

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Exhibit A

 

INSTRUCTIONS TO DISBURSE ESCROW FUNDS

 

 

Date:

 

SIGNATURE BANK

261 Madison Avenue

New York, N.Y. 10016

Attn: Cliff Broder, Senior Vice President

 

Dear Mr. Broder:

 

In accordance with the terms of paragraph 2(b) of an Escrow Deposit Agreement
dated ___ _______, by and among Ortec International, Inc. (the “Company”),
Rodman & Renshaw, LLC (“Placement Agent”), and Signature Bank (the “Escrow
Agent”), the Company and Placement Agent hereby notifies the Escrow Agent that
the ________ closing will be held on ___________ for gross proceeds of
$_________.

 

PLEASE DISTRIBUTE FUNDS BY WIRE TRANSFER OR CHECK OR TRANSFER AS FOLLOWS (wire
instructions attached if applicable):

 

 

Ortec International, Inc.

$

 

 

Rodman & Renshaw, LLC

$

 

____________

$

 

 

Very truly yours,

 

Ortec International, Inc.

 

By:_____________

Name:__________

Title:____________

 

Rodman & Renshaw, LLC

 

By:_____________

Name:___________

Title:____________