<PAGE>

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

                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 2004

                                       OR

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

For the transition period from ______________ to ______________

Commission file number 0-27046

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

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

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

                    Issuer's telephone number (212) 740-6999

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

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

                          Common Stock, $.001 par value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None




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

                              ITEMS IN FORM 10-KSB

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

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

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

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

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

                                     PART I

Item 1. DESCRIPTION OF BUSINESS

Overview

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

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

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


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

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

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

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

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

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


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

The Product

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

Original Research

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

Government Regulation

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

The FDA Clearance Process

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

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

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

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


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

     o    The sponsor submits the protocol to the FDA.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

Regulatory Strategies

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

Sales Agency Agreement

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


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

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

Production and Supply

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

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


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

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

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

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

Competition

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

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

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

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


                                        7




<PAGE>

Patents and Proprietary Rights

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

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

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

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

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

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

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

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

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


                                        8




<PAGE>

Paul Royalty Fund Agreement

In August 2001 and in 2002, we entered into agreements with Paul Royalty Fund,
L.P. (PRF) pursuant to which we agreed in consideration of PRF paying us
$10,000,000, to pay to PRF 3.33% of the end user sales prices paid for our ORCEL
product in the United States, Canada and Mexico through the period ending in
2011. Such percentage interest in our revenues in those three countries may be
adjusted upward or downward based on the volume of sales to end users of ORCEL
in those three countries. As security for the performance of our obligations to
PRF, we have granted PRF a security interest in all of our U.S. patents, patent
applications and trademarks. Our agreement with PRF provides that in certain
events PRF may, at its option, compel us to repurchase the interest in our
revenues that we sold to PRF for a price equal to the $10,000,000 PRF paid us
plus an amount that would yield PRF a 30% per annum internal rate of return on
its $10,000,000 investment. Among the events that would entitle PRF to compel us
to repurchase its interest in our revenues at that price is if we are insolvent
or if we are unable to pay our debts as they become due. Our agreement with PRF
provides that in determining such insolvency any amount we owe to PRF is
excluded in calculating our net worth (or negative net worth). In addition,
although we are currently trying to manage our debt we are not paying our debts
as they become due. As defined in our agreement with PRF we are currently
insolvent. As a result of this insolvency our obligation under the revenue
interest assignment is stated at $22,738,110, the amount PRF could compel us to
repurchase their revenue interest at December 31, 2004. In December 2004, PRF
entered into a forbearance agreement with us agreeing that they cannot exercise
their right to compel us to repurchase their interest in our revenues because of
our insolvency prior to July 2006. If PRF exercised its right to compel us to
repurchase its interest in our revenues and we did not have the funds to pay the
purchase price, PRF could foreclose its security interest in our U.S. patents,
patent applications and trademarks and in such event we will have to discontinue
our business operations.

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

SFAS 15 allows debtors that can predict with certainty the absolute amounts of
future cash flow payments to record an immediate gain if the maximum future cash
payments are less than the carrying amount of the obligation. In the case where
the future cash payments are indeterminate, as ours are considered, the gain is
not recognized until the end of the term of the outstanding debt, December 31,
2011, or upon termination. We estimate that we would need to achieve a North
American sales level of approximately $750,000,000 during the approximate
remaining six years under the revenue interest assignment agreement to offset
the principal balance of the $22,738,110 revenue interest obligation. We are
prohibited by SFAS 15 from making a reasonable estimation of our future sales to
assess the amount of our future debt payments and therefore are precluded from
reducing the liability and recognizing a gain at this time. We believe we will
likely record a gain on the revenue interest assignment obligation to PRF in
2011 or upon termination, if sooner.

Research and Development Expenses

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

Compliance with Environmental Regulations

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

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


                                        9




<PAGE>

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

Employees

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

Available Information

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


                                       10




<PAGE>

                                  RISK FACTORS

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

Risks Related to Our Business

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

We anticipate that the proceeds we received from our private placement in
January 2005 will be sufficient to meet our cash requirements only through April
2005. We will need to secure additional financing for the approximately $830,000
of cash we are currently consuming per month. The amount of cash we consume each
month fluctuates, depending, among other things, on whether we are incurring
expenses from services provided by third party suppliers in connection with a
clinical trial and what payments we have to make on our outstanding debt.

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

Our capital funding requirements depend on numerous factors, including:

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

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

     o    the costs involved in filing and maintaining patent claims;

     o    technological advances;

     o    competitive and market conditions;

     o    our ability to establish and maintain collaborative arrangements;

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

     o    the cost and effectiveness of commercialization activities and
          arrangements.

Unless we obtain additional financing we will not be able to continue to operate
our business. We have no current commitments from any persons that they will
provide any additional financing.

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

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


                                       11




<PAGE>

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

As of December 31, 2004, payment of approximately $2,605,000 of the
approximately $3,203,000 we owed to our trade creditors was past due. We have
entered into agreements with creditors to whom we owe an aggregate of $961,000
(as of December 31, 2004) to pay $732,000 in 2005 and $229,000 in 2006.

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

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

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

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

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

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

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

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

     o    delays in obtaining regulatory approvals to commence a study;

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


                                       12




<PAGE>

     o    slower than expected rates of patient recruitment and enrollment;

     o    uncertain dosing issues;

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

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

     o    scheduling conflicts with participating clinicians and clinical
          institutions;

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

     o    unforeseen safety issues or side effects;

     o    lack of effectiveness during the clinical trials; or

     o    other regulatory delays.

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

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

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

     o    issuance of warning letters by the FDA;

     o    fines and other civil penalties;

     o    criminal prosecutions;

     o    injunctions, suspensions or revocations of marketing licenses;

     o    suspension of any ongoing clinical trials;

     o    suspension of manufacturing;

     o    delays in commercialization;

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

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

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

     o    product recalls or seizures.

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

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


                                       13




<PAGE>

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

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

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

See the description of our agreement with Paul Royalty Fund (PRF) in Part I,
Item 1 of this report on Form 10-KSB. If in the future PRF exercised its right
to compel us to repurchase its interest in our revenues and we did not have the
funds to do so, PRF could foreclose its security interest in our U.S. patents,
patent applications and trademarks and in such event we will have to discontinue
our business operations.

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

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

     o    Product marketing clearances or approvals;

     o    Product standards;

     o    Packaging requirements;

     o    Design requirements;

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

     o    Labeling;

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

     o    Import and export restrictions; and

     o    Tariffs and other tax requirements.

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

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

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

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

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

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

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


                                       14




<PAGE>

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

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

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

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

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

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

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

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


                                       15




<PAGE>

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

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

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

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

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

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

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

     o    our ability to develop other products for sale,

     o    our competitors' announcements concerning technological innovations,

     o    new commercial products or procedures,

     o    proposed government regulations,

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

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

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

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

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

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

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


                                       16




<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       17




<PAGE>

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

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

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

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

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

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

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

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

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


                                       18




<PAGE>

   New Accounting Pronouncements May Negatively Impact our Future Results of
                                   Operations

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

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

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

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

Item 2. DESCRIPTION OF PROPERTY

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

Item 3. LEGAL PROCEEDINGS

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

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

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


                                       19




<PAGE>

                                     PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

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

<TABLE>
<CAPTION>
                HIGH    LOW
               -----   -----
<S>            <C>     <C>
2004 Quarter
First          $3.55   $1.95
Second          2.95    2.05
Third           2.40    1.35
Fourth          2.30    0.89

2003 Quarter
First           5.00    1.50
Second          2.70    1.70
Third           2.25    1.25
Fourth          2.55    1.45
</TABLE>

Security Holders

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

Dividends

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

Recent Sales of Unregistered Securities

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

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

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


                                       20




<PAGE>

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

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


                                       21




<PAGE>

Item 6. MANAGEMENT'S PLAN OF OPERATION

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

Plan of Operation

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

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

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

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

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


                                       22




<PAGE>

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

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

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

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

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

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

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

Other Liquidity Matters

Our agreement with Paul Royalty Fund (PRF) provides that in certain events PRF
may, at its option, compel us to repurchase the interest in our revenues that we
sold to PRF for a price equal to the $10,000,000 PRF paid us plus an amount that
would yield PRF a 30% per annum internal rate of return on its $10,000,000
investment. Among the events that would entitle PRF to compel us to repurchase
its interest in our revenues at that price is if we are insolvent or if we are
unable to pay our debts as they become due. Our agreement with PRF provides that
in determining such insolvency any amount we owe to PRF is excluded in
calculating our net worth (or negative net worth). In addition, although we are
currently trying to manage our debt we are not paying our debts as they become
due. As defined in our agreement with PRF we are currently insolvent. As a
result of this insolvency our obligation under the revenue interest assignment
is stated at $22,738,110, the amount PRF could compel us to repurchase their
revenue interest at December 31, 2004. Although in December 2004 we entered into
an eighteen-month forbearance agreement providing that PRF would not prior to
July 1, 2006 compel us to repurchase its interest in our revenues because of our
insolvency, as of December 31, 2004 we were still considered insolvent and
therefore were required to record as an obligation we owe PRF the amount to
provide PRF with a 30% internal rate of return on its $10,000,000 investment. If
in the future PRF exercised its right to compel us to repurchase its interest in
our revenues and we did not have the funds to do so, PRF could foreclose its
security interest in our U.S. patents, patent applications and trademarks and in
such event we will have to discontinue our business operations. Outside of a
repurchase event, more fully explained in Note 11 of the consolidated financial
statements included in Item 7, PRF would be entitled to the applicable royalty
percentages of our future revenues in North America. We estimate that PRF will
need us to sell, over the remaining approximate six years under our agreement,
at least $300,000,000 of ORCEL to recoup an amount approximately equivalent to
their initia1 $10,000,000 investment.

Off-Balance Sheet Arrangements

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


                                       23




<PAGE>

Item 7. FINANCIAL STATEMENTS

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

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

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

Item 8A. CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures.

Our Principal Executive Officer and Principal Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15 (e) and 15-d-15 (e) of the Securities and Exchange Act
of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as
of December 31, 2004 ("Evaluation Date") have concluded that our disclosure
controls and procedures are effective in timely alerting us to material
information relating to us and our consolidated subsidiary, required to be
included in our periodic filings with the Securities and Exchange Commission.

(b)  Changes in internal controls.

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

Item 8B. OTHER INFORMATION

None.


                                       24




<PAGE>

                                    PART III

Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

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

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

Directors

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

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

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

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

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

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


                                       25




<PAGE>

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

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

Executive Officers

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

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

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

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

Significant Employees

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

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

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

The Committees

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

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


                                       26




<PAGE>

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

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

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

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

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

     o    an understanding of audit committee functions.

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

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

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

Attendance at Meetings

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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


                                       27




<PAGE>

Code of Ethics

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

Item 10. EXECUTIVE COMPENSATION

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

                           SUMMARY COMPENSATION TABLE

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

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

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

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

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

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

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

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


                                       28




<PAGE>

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

Option Grants in Last Fiscal Year

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

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

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

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

Compensation of Directors

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

Employment Contracts, Termination of Employment and Change in Control Agreements

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

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


                                       29




<PAGE>

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

<TABLE>
<CAPTION>
                                                                  Beneficial Ownership
                                                              ----------------------------
                                                               Number of        Percentage
Beneficial Owner                                                Shares           Ownership
-----------------------------------------------------------   ----------        ----------
<S>                                                            <C>                 <C>
Steven Katz                                                    1,082,098 (1)        4.0%

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

Costa Papastephanou                                               26,500 (3)         *

Melvin Silberklang                                                10,153 (4)         *

Steven Peltier                                                     8,450 (5)         *

Mark Eisenberg                                                   160,600 (6)         *

Steven Lilien                                                      7,640 (7)         *

Allen I. Schiff                                                    3,500 (8)         *

Gregory Brown                                                         -- (9)         *

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

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

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

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

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


                                       30




<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       31




<PAGE>

Securities authorized for issuance under equity compensation plans

                      Equity Compensation Plan Information

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

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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


                                       32




<PAGE>

Item 13. EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23 *      Consent of BDO Seidman, LLP

23.1*     Consent of Grant Thornton LLP
</TABLE>


                                       33




<PAGE>

<TABLE>
<S>       <C>
31.1*     Rule 13a-14(a) / 15d- 14 (a) Certification of Principal Executive
          Officer

31.2*     Rule 13a-14(a) / 15d -14 (a) Certification of Principal Financial
          Officer

32.1*     Section 1350 Certification of Principal Executive Officer

32.2*     Section 1350 Certification of Principal Financial Officer
</TABLE>

----------
* filed herewith.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

Audit Fees

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

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

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

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


                                       34




<PAGE>

                                   SIGNATURES

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

Dated: March 31, 2005                   Ortec International, Inc.


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

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

<TABLE>
<CAPTION>
Signature                                                             Title
---------                                                             -----
<S>                                 <C>

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


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


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


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


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


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


/s/ Gregory B. Brown                Director
---------------------------------
Gregory B. Brown
</TABLE>


                                       35




<PAGE>

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

<TABLE>
<CAPTION>
                                                                           Page
                                                                           -----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm - BDO Seidman,
   LLP                                                                       F-2

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

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

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

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

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

Notes to Consolidated Financial Statements                                  F-10
</TABLE>


                                       F1




<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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


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


                                       F2




<PAGE>

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

Directors and Stockholders
   Ortec International, Inc.

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

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

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

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

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


                                       F3




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                        2004
                                                                   -------------
<S>                                                                <C>
                                 ASSETS

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

               LIABILITIES AND SHAREHOLDERS' DEFICIT

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

COMMITMENTS AND CONTINGENCIES

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

     The accompanying notes are an integral part of these statements.


                                       F4




<PAGE>

                            ORTEC INTERNATIONAL, INC
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             Cumulative
                                                                                From
                                                                           March 12, 1991
                                                                           (inception) to
                                               Year ended December 31,      December 31,
                                             ---------------------------   --------------
                                                 2004           2003            2004
                                             ------------   ------------    -------------
<S>                                          <C>            <C>             <C>
Product Revenue                              $         --   $         --    $     265,665
                                             ------------   ------------    -------------

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

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

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

Weighted average shares outstanding
   Basic and diluted                            5,655,406      4,198,107
                                             ============   ============
</TABLE>

     The accompanying notes are an integral part of these statements.


                                       F5




<PAGE>

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

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




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




<CAPTION>
                                                                       Deficit
                                                                     accumulated
                                                        Additional    during the                   Total
                                                         paid-in     development   Treasury    shareholders'
                                                         capital        stage        stock    equity deficit)
                                                       -----------   -----------   --------   ---------------
<S>                                                    <C>           <C>           <C>         <C>
March 12, 1991 (inception) to December 31, 1991
Founders                                               $       715            --         --    $        870
First private placement ($3.00 per share)                   64,978            --         --          65,000
The Director ($11.50 and $53.00 per share)                 249,985            --         --         250,000
Second private placement ($94.25 per share)                499,995            --         --         500,000
Share issuance expense                                     (21,118)           --         --         (21,118)
Net loss                                                        --      (281,644)        --        (281,644)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1991                               794,555      (281,644)        --         513,108
Second private placement ($94.25 per share)                250,003            --         --         250,006
Second private placement ($94.25 per share)                215,465            --         --         215,467
Stock purchase agreement with the Director
   ($94.25 per share)                                      299,995            --         --         299,998
Share issuance expense                                     (35,477)           --         --         (35,477)
Net loss                                                        --      (785,941)        --        (785,941)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1992                             1,524,541    (1,067,585)        --         457,161
Third private placement ($100.00 per share)              1,096,489            --         --       1,096,500
Third private placement ($100.00 per share)                224,998            --         --         225,000
Stock purchase agreement with Home
   Insurance Company ($90.00 per share)                    999,988            --         --         999,999
Stock purchase agreement with the Director
   ($94.25 per share)                                      199,998            --         --         200,000
Shares issued in exchange for commission                     5,999            --         --           6,000
Share issuance expenses                                   (230,207)           --         --        (230,207)
Net loss                                                        --    (1,445,624)        --      (1,445,624)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1993                             3,821,806    (2,513,209)        --       1,308,829
Fourth private placement ($100.00 per share)               397,708            --         --         397,712
Stock purchase agreement with Home
   Insurance Company ($100.00 per share)                   499,995            --         --         500,000
Share issuance expense                                      (8,697)           --         --          (8,697)
Net loss                                                        --    (1,675,087)        --      (1,675,087)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1994                             4,710,812    (4,188,296)        --         522,757
Rent forgiveness                                            40,740            --         --          40,740
Net loss                                                        --    (1,022,723)        --      (1,022,723)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1995                             4,751,552    (5,211,019)        --        (459,226)
Initial public offering                                  5,999,880            --         --       6,000,000
Exercise of warrants                                        33,882            --         --          33,885
Fifth private placement ($64.90 per share)               6,220,701            --         --       6,220,797
Share issuance expenses                                 (1,580,690)           --         --      (1,580,690)
Stock options issued for services                          152,000            --         --         152,000
Net loss                                                        --    (2,649,768)        --      (2,649,768)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1996                            15,577,325    (7,860,787)        --       7,716,998




Exercise of warrants                                    10,822,675            --         --      10,822,791
Share issuance expenses                                   (657,508)           --         --        (657,508)
Stock options and warrants issued for services             660,000            --         --         660,000
Net loss                                                        --    (4,825,663)        --      (4,825,663)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1997                            26,402,492   (12,686,450)        --      13,716,618
Exercise of warrants                                     1,281,935            --         --       1,281,957
Stock options and warrants issued for services           1,920,111            --         --       1,920,111
Sixth private placement                                  1,788,678            --         --       1,788,698
Sixth private placement - warrants issued                  211,302            --         --         211,302
Share issuance expenses                                    (48,000)           --         --         (48,000)
Purchase of 660 shares of treasury stock (at cost)              --            --    (67,272)        (67,272)
Net loss                                                        --    (8,412,655)                (8,412,655)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1998                            31,556,518   (21,099,105)   (67,272)     10,390,759
Exercise of warrants                                        14,102            --         --          14,103
Stock options and warrants issued for services              64,715            --         --          64,715
Seventh private placement ($87.50 per share)             3,168,746            --         --       3,168,785
Seventh private placement - investor warrants              236,291            --         --         236,291
Seventh private placement - placement agent warrants       232,000            --         --         232,000
Eighth private placement ($55.00 per share)              8,999,838            --         --       9,000,002
Share issuance expenses                                   (619,908)           --         --        (619,908)
Purchase of 910 shares of treasury stock (at cost)              --            --    (75,518)        (75,518)
Net loss                                                        --   (10,040,509)        --     (10,040,509)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 1999                            43,652,302   (31,139,614)  (142,790)     12,370,720
Exercise of options and warrants                           327,265            --         --         327,282
Stock options and warrants issued for services              56,265            --         --          56,265
Ninth private placement ($150.00 per share)                999,998            --         --       1,000,005
Ninth private placement - placement agent warrants          23,000            --         --          23,000
Tenth private placement ($67.50 per share)               8,420,946            --         --       8,421,071
Share issuance expenses                                   (641,500)           --         --        (641,500)
Purchase of 430 shares of treasury stock (at cost)              --            --    (34,855)        (34,855)
Net loss                                                        --   (12,129,663)        --     (12,129,663)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 2000                            52,838,276   (43,269,277)  (177,645)      9,392,325
Stock options issued for services                          188,080            --         --         188,080
Net loss                                                        --   (15,885,377)        --     (15,885,377)
                                                       -----------   -----------   --------    ------------
Balance at December 31, 2001 (carried forward)          53,026,356   (59,154,654)  (177,645)     (6,304,972)
</TABLE>


                                       F6




<PAGE>

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

<TABLE>
<CAPTION>
                                                        Common Stock                 Preferred  Stock
                                                     ------------------   --------------------------------------
                                                       Shares    Amount     Series B      Series C     Series D
                                                     ---------   ------   -----------   -----------   ----------
<S>                                                  <C>         <C>      <C>           <C>           <C>
Balance at December 31, 2001 (brought forward)         971,167      971            --            --           --
Exercise of options and warrants                        35,720       36            --            --           --
Stock options and warrants issued for services              --       --            --            --           --
Warrants issued with convertible debentures                 --       --            --            --           --
Warrants issued with convertible redeemable
   preferred stock                                          --       --            --            --           --
Convertible debenture conversion benefit                    --       --            --            --           --
Redeemable convertible preferred stock
   conversion benefit                                       --       --            --            --           --
Issuance of series B preferred stock (938
   shares) ($10,000 per share)                              --       --     9,382,742            --           --
Warrants issued and exercised with preferred stock     938,275      938    (3,479,043)           --           --
Shares issuance costs - preferred stock                     --       --      (866,612)           --           --
Preferred stock dividends                              375,315      375            --            --
Net loss                                                    --       --            --            --           --
                                                     ---------   ------   -----------   -----------   ----------
Balance at December 31, 2002                         2,320,477    2,320     5,037,087            --           --
Exercise of options and warrants                       398,750      399            --            --           --
Issuance of preferred stock: series B (200
   shares), series C (948 shares)                           --       --     2,000,000     5,690,000           --
Warrants issued with preferred stock                        --       --      (490,567)   (1,225,632)          --
Warrants issued for services                                --       --            --                         --
Share issuance costs - preferred stock                      --       --      (393,488)     (797,327)          --
Conversion of series B preferred stock (605
   shares) into common stock                         2,421,556    2,422    (3,253,571)           --           --
Conversion of series B  preferred stock into
   series D preferred stock (483 shares)                    --       --    (2,628,602)           --    2,628,602
Preferred stock deemed dividends and discounts              --       --            --            --           --
Preferred stock dividends                               92,308       92            --            --           --
Common stock dividend to be distributed on
   series C preferred stock                                 --       --            --            --           --
Common stock to be issued in connection with
   promissory notes                                         --       --            --            --           --
Adjustment for one for ten reverse stock split              74       --            --            --           --
Net loss                                                    --       --            --            --           --
                                                     ---------   ------   -----------   -----------   ----------
Balance at December 31, 2003                         5,233,165    5,233       270,859     3,667,041    2,628,602




Common stock issued in connection with
   previously issued notes                             157,000      157            --            --           --
Common stock issued in
   connection with promissory notes                    331,831      332            --            --           --
Common stock (277,020) and 34.31 shares of
   series D preferred to be issued in connection
   with agreements which extended due date of
   promissory notes                                         --       --            --            --           --
Common stock issued in connection with exercise
   of warrants                                          32,460       32            --            --           --
Conversion of 35.62 shares of series C preferred
   stock into common stock                             106,872      107            --      (137,752)          --
Payment of dividends on 35.62 shares of series C
   preferred stock in common stock                      13,743       14            --            --           --
Common stock and series D preferred (233.83
   shares) issued in connection with special
   warrant offer                                       496,981      497            --            --      939,050
Common stock dividend to be distributed on
   series B and series C preferred stock                    --       --            --            --           --
Option issued to director for services                      --       --            --            --           --
Warrant issued for services                                 --       --            --            --           --
Warrant issued in connection with lease                     --       --            --            --           --
Share issuance expenses                                     --       --            --            --           --
Special warrant offer deemed dividends                      --       --            --            --           --
Net loss                                                    --       --            --            --           --
                                                     ---------   ------   -----------   -----------   ----------
Balance at December 31, 2004                         6,372,052   $6,372   $   270,859   $ 3,529,289   $3,567,652
                                                     =========   ======   ===========   ===========   ==========




<CAPTION>
                                                                      Deficit
                                                                    accumulated
                                                      Additional     during the                      Total
                                                       paid-in      development     Treasury     shareholders'
                                                       capital         stage         stock     equity (deficit)
                                                     -----------   -------------   ---------   ----------------
<S>                                                  <C>           <C>             <C>          <C>
Balance at December 31, 2001 (brought forward)        53,026,356     (59,154,654)   (177,645)     (6,304,972)
Exercise of options and warrants                             321              --          --             357
Stock options and warrants issued for services           113,060              --          --         113,060
Warrants issued with convertible debentures              440,523              --          --         440,523
Warrants issued with convertible redeemable
   preferred stock                                       559,289              --          --         559,289
Convertible debenture conversion benefit               1,042,663              --          --       1,042,663
Redeemable convertible preferred stock
   conversion benefit                                  1,097,886              --          --       1,097,886
Issuance of series B preferred stock (938
   shares) ($10,000 per share)                                --              --          --       9,382,742
Warrants issued and exercised with preferred stock     3,485,443              --          --           7,338
Shares issuance costs - preferred stock                  304,615              --          --        (561,997)
Preferred stock dividends                              1,125,559      (1,125,934)         --              --
Net loss                                                      --     (21,578,021)         --     (21,578,021)
                                                     -----------   -------------   ---------   ----------------
Balance at December 31, 2002                          61,195,715     (81,858,609)   (177,645)    (15,801,132)
Exercise of options and warrants                          12,567              --          --          12,966
Issuance of preferred stock: series B (200
   shares), series C (948 shares)                             --              --          --       7,690,000
Warrants issued with preferred stock                   1,716,199              --          --              --
Warrants issued for services                              87,000              --          --          87,000
Share issuance costs - preferred stock                   359,078              --          --        (831,737)
Conversion of series B preferred stock (605
   shares) into common stock                           3,251,149              --          --              --
Conversion of series B  preferred stock into
   series D preferred stock (483 shares)                      --              --          --              --
Preferred stock deemed dividends and discounts         4,269,000      (4,269,000)         --              --
Preferred stock dividends                                922,985        (923,077)         --              --
Common stock dividend to be distributed on
   series C preferred stock                              336,550        (336,550)         --              --
Common stock to be issued in connection with
   promissory notes                                      287,000              --          --         287,000
Adjustment for one for ten reverse stock split                --              --          --              --
Net loss                                                      --     (15,920,504)         --     (15,920,504)
                                                     -----------   -------------   ---------   ----------------
Balance at December 31, 2003                          72,437,243    (103,307,740)   (177,645)    (24,476,407)




Common stock issued in connection with
   previously issued notes                                  (157)             --          --              --
Common stock issued in
   connection with promissory notes                      745,870              --          --         746,202
Common stock (277,020) and 34.31 shares of
   series D preferred to be issued in connection
   with agreements which extended due date of
   promissory notes                                      828,540              --          --         828,540
Common stock issued in connection with exercise
   of warrants                                               293              --          --             325
Conversion of 35.62 shares of series C preferred
   stock into common stock                               137,645              --          --              --
Payment of dividends on 35.62 shares of series C
   preferred stock in common stock                        30,085         (30,099)         --              --
Common stock and series D preferred (233.83
   shares) issued in connection with special
   warrant offer                                         498,472              --          --       1,438,019
Common stock dividend to be distributed on
   series B and series C preferred stock                 613,805        (613,805)         --              --
Option issued to director for services                   398,574              --          --         398,574
Warrant issued for services                               94,393              --          --          94,393
Warrant issued in connection with lease                   18,500              --          --          18,500
Share issuance expenses                                  (26,600)             --          --         (26,600)
Special warrant offer deemed dividends                 1,123,000      (1,123,000)         --              --
Net loss                                                      --     (15,377,900)         --     (15,377,900)
                                                     -----------   -------------   ---------   ----------------
Balance at December 31, 2004                         $76,899,663   $(120,452,544)  $(177,645)   $(36,356,354)
                                                     ===========   =============   =========   ================
</TABLE>

The accompanying notes are an integral part of these statements.


                                       F7




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

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




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


                                       F8




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

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

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

The accompanying notes are an integral part of these statements.


                                       F9




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION

Formation of the Company

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

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

Basis of Presentation

We are a development stage enterprise which had no operating revenue prior to
December 2001. During 2001, we received Food and Drug Administration (FDA)
approval for the use of the fresh form of OrCel'r' (ORCEL) for the treatment of
patients with recessive dystrophic epidermolysis bullosa and for donor sites in
burn patients. We then began marketing and selling our product for use on
patients with these indications. Revenues were not significant. We terminated
our selling efforts and elected to focus our efforts on developing a
cryopreserved form of our product and on medical indications that had broader
marketability. After identifying an indication that had broad market appeal,
venous stasis ulcers, we completed a clinical trial during 2003 for the use of
cryopreserved form of ORCEL to treat venous stasis ulcers and filed an
application for pre-market approval (PMA) with the FDA in February 2004. We are
currently awaiting a determination from the FDA.

The accompanying financial statements have been prepared assuming that we will
continue as a going concern. We incurred a net loss applicable to common
shareholders of $17.1 million during the year ended December 31, 2004, and, as
of that date, our current liabilities exceeded our current assets by $14.6
million, our total liabilities exceeded our total assets by $36.4 million and we
have a deficit accumulated in the development stage of $120.5 million. These
factors, among others, raise substantial doubt about our ability to continue as
a going concern.

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

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

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


                                      F10




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to continue our operations for the next twelve months. Additionally, we are
continuing our equity financing efforts with an investment banking firm. There
can be no assurances that we can raise additional funds.

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

Principles of Consolidation

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

Common Stock Reserve Split

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

2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

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

Research and Development Costs

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

Depreciation and Amortization

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


                                      F11




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Intangible Assets

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

Impairment of Long-Lived Assets

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

Foreign Currency Translation

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

Use of Estimates

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

Income Taxes

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

Cash and Cash Equivalents

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


                                      F12




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Share

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

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

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

The amount of options and warrants excluded are as follows:

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

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

Employee Stock Option Plan

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

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

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

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


                                      F13




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                          Year ended December 31,
                          -----------------------
                               2004      2003
                             -------   -------
<S>                          <C>       <C>
Risk-free interest rate         3.1%      3.3%
Expected option life         5 years   5 years
Expected volatility            80.9%     84.9%
</TABLE>

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

Effect of New Accounting Standards

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

3 - CONCENTRATION OF CREDIT RISK

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

We have not experienced any losses in such accounts.

4 - PROPERTY AND EQUIPMENT

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

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

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


                                      F14




<PAGE>

                           ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5 - PATENTS

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

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

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

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

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

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

6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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


                                      F15




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 - LEASES

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

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

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

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

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

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

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


                                      F16




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8 - LOAN PAYABLE

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

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

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

9 - LICENSE AND OTHER ARRANGEMENTS

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

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

10 - PROMISSORY NOTES PAYABLE

Promissory notes at December 31, 2004 consists of:

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

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

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


                                      F17




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

11 - OBLIGATION UNDER REVENUE INTEREST ASSIGNMENTS

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

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


                                      F18




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

     o    any change of control of our company;

     o    a transfer of substantially all of our assets;

     o    a transfer of our interests in our products;

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

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

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

     o    our insolvency (as defined);

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

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

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




                                      F19




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

12 - EQUITY TRANSACTIONS

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

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

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



                                      F20




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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



                                      F21




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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



                                      F22




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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



                                      F23




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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


                                      F24




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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


                                      F25




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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


                                      F26




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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


                                      F27




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      F28




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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


                                      F29




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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


                                      F30




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

14 - STOCK OPTIONS

In April 1996, the Board of Directors and stockholders approved the adoption of
a stock option plan (the "Plan"). The Plan provides for the grant of options to
purchase up to 35,000 shares of our common stock. These options may be granted
to employees, our officers, our non-employee directors, consultants, and
advisors. The Plan provides for granting of options to purchase our common stock
at not less than the fair value of such shares on the date of the grant. Some of
the options generally vest ratably over a four-year period, while others vest
immediately. The options generally expire after seven years.

In August 1998, the stockholders and Board of Directors ratified and approved an
amended and restated 1996 Stock Option Plan increasing the maximum number of
shares of our common stock for which stock options may be granted from 35,000 to
155,000 shares. In August 2000, the stockholders and Board of Directors ratified
and approved the second amendment to our Amended and Restated 1996 Stock Option
Plan increasing the number of shares of our common stock for which options have
been or could be granted under the Plan from 155,000 to 300,000 shares.

In February 2003, the stockholders and Board of Directors ratified and approved
an amended and restated Stock Option Plan, increasing the maximum number of
shares of our common stock for which stock options may be granted from 300,000
to 450,000 shares. As of December 31, 2004, 21,676 options were available for
grant under the Plan.


                                      F31




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The following data has been provided for exercisable options:

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

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


                                      F32




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

15 - COMMITMENTS AND CONTINGENCIES

Cell Therapy Manufacturing Agreement

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

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


                                      F33




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Sales Agency Agreement

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

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


                                      F34




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Supply Agreement

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

Government Regulation

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

16 - LEGAL PROCEEDINGS

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

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

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


                                      F35




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17 - RELATED PARTY TRANSACTIONS

Due to Founder

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

Research Collaboration

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

Change of Control

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

18 - INCOME TAXES

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

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




                                      F36




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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


                                      F37




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Cash and Cash Equivalents

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

Loans Payable and Other Long-term Obligations

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

20 - RETIREMENT PLAN

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

21 - SUBSEQUENT EVENTS

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

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

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

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


                                      F38




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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


                                      F39




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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


                                      F40




<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Preferred stock

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


(1) Consists of the following:

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



                                       F41



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