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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
                                  -------------

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

[ ]  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 0-27368

                            ORTEC INTERNATIONAL, INC.
               (Exact name of issuer as specified in its charter)


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

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

Registrant's telephone number, including area code: (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 Securities 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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K 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-K or any
amendment to this Form 10-K. [ X ]

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

The number of shares outstanding of the Registrant's common stock is 9,691,608
(as of 4/11/02). The aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $35,878,542 as of April 11,
2002, based upon a closing price on such date of $4.27 as listed on the Nasdaq
SmallCap Market.

DOCUMENTS INCORPORATED BY REFERENCE - None

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                            ORTEC INTERNATIONAL, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                          YEAR ENDED DECEMBER 31, 2001

                               ITEMS IN FORM 10-K

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Facing Page                                                                                               Page
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<S>               <C>                                                                                     <C>
Part I
------
Item 1.           Business ...................................................................................1

Item 2.           Properties..................................................................................16

Item 3.           Legal Proceedings ..........................................................................17

Item 4.           Submission of Matters to a Vote of Security Holders.......................................None

Part II
-------
Item 5.           Market for the Registrant's Common Equity and Related Stockholder Matters ..................18

Item 6.           Selected Financial Data ....................................................................19

Item 7.           Management's Discussion and Analysis of Financial Condition and Results of Operations ......20

Item 7a.          Quantitative and Qualitative Disclosures About Market Risk ..............................None

Item 8.           Financial Statements and Supplementary Data.................................................27

Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....None

Part III
--------
Item 10.          Directors and Executive Officers of the Registrant .........................................28

Item 11.          Executive Compensation .....................................................................30

Item 12.          Security Ownership of Certain Beneficial Owners and Management .............................34

Item 13.          Certain Relationships and Related Transactions..............................................36

Part IV

Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................38

Signatures ...................................................................................................39

Financial Statements ........................................................................................F-1
</TABLE>






<PAGE>


                                     PART I

Item 1. BUSINESS

Overview

         We are a development stage tissue engineering company that has
developed a proprietary and patented technology that we call "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 for epidermal growth and
fibroblasts for dermal growth. This active dressing stimulates the repair,
replacement and regeneration of human skin. When OrCel is applied to the wound
site, it produces a mix of growth factors that stimulates wound closure.

         We have achieved a number of milestones toward our goal of the
commercial sale of OrCel including:

             o In August 2001 the FDA granted our application for commercial
               sale of OrCel for the treatment of donor site wounds. The results
               of the pivotal clinical trial for the use of OrCel to treat donor
               site wounds, which we submitted to the FDA, showed that there was
               a clinically and statistically shorter time to 100% wound closure
               when OrCel was used compared to the use of a current standard of
               care in that trial. The median differential in those healing
               times ranged from four to seven days

             o In December 2001 we commenced commercial sale of OrCel for the
               treatment of donor site wounds. These sales have been made to
               hospitals and other medical treatment facilities. For the 14-week
               period ended March 9, 2002, we generated gross sales of
               approximately $105,000. Such sales have been made before we have
               commenced any marketing efforts to sell OrCel.

             o In December 2001 our OrCel was approved by the Centers for
               Medicaid and Medicare Services for inclusion on the Outpatient
               Prospective Payment Systems Pass Through List. The inclusion on
               this list allows hospitals to recover their cost for OrCel from
               Medicare when utilizing OrCel for treatment of a Medicare patient
               as a hospital outpatient.

             o In December 2001 we entered into an agreement with PDI to market
               OrCel to hospitals and other medical treatment facilities. We
               have not yet started







<PAGE>



               utilizing PDI's marketing staff to generate sales. If on the
               basis of the results of our clinical trials for the use of OrCel
               for the treatment of venous and diabetic ulcers, the FDA
               authorizes us to make commercial sales of OrCel for the treatment
               of those medical conditions, we expect to enter into other
               marketing arrangements to market OrCel to the larger medical
               community for use of OrCel for those two larger patient markets.
               Such marketing programs might consist of joint ventures with
               pharmaceutical companies or pharmaceutical sales organizations.
               At this time we can give no assurance that we will enter into
               such other marketing arrangements.

             o We have received encouraging results from the pilot clinical
               trial of the non frozen version of OrCel for the treatment of
               venous ulcers. These results show that OrCel is significantly
               more effective in treating venous ulcer wounds than the standard
               of care used in the clinical trial. Two months after initiating
               treatments, the OrCel treated group achieved 100% healing in 47%
               of the patients treated vs. 26% of the patients in the standard
               of care group. Six months after treatment the OrCel treated group
               achieved 100% healing in 71% of the patients treated, compared to
               37% of the patients in the standard of care treated group. The
               results in that trial for the OrCel treated group compared
               favorably with the reported results of the clinical trials that
               were conducted by our competitors using their products for
               healing venous ulcers.

             o We have received encouraging results from the pilot clinical
               trial of the non frozen version of OrCel for the treatment of
               venous ulcers. These results show that OrCel is significantly
               more effective in treating venous ulcer wounds than the standard
               of care used in the clinical trial. Two months after initiating
               treatments, the OrCel treated group achieved 100% healing in 47%
               of the patients treated vs. 26% of the patients in the standard
               of care group. Six months after treatment the OrCel treated group
               achieved 100% healing in 71% of the patients treated, compared to
               37% of the patients in the standard of care treated group. The
               results in that trial for the OrCel treated group compared
               favorably with the reported results of the clinical trials that
               were conducted by our competitors using their products for
               healing venous ulcers.

             o In October 2001 a preliminary review of the first 13 patients
               completing treatment of venous ulcers using OrCel in its frozen
               (cryopreserved) state showed that 9 of the patients (69%)
               achieved 100% wound closure within three months and that the
               other 4 patients achieved 90% or higher wound closure in that
               same three month period.

             o We have also received encouraging results from the pilot clinical
               trial of OrCel for the treatment of diabetic foot ulcers. These
               results show that OrCel is significantly more effective in
               treating diabetic foot ulcer wounds than the standard of care
               used in that clinical trial. Twelve weeks after treatment of
               diabetic ulcers of 6 sq. cm. or less (the largest diabetic ulcers
               population group) the OrCel treated group achieved 100% healing
               in 47% (7 of 15 patients) of the patients treated, compared to
               23% (3 of 13 patients) of the patients in the standard of care
               treated group, for a greater than 100% improvement over standard
               of care. The daily rate of healing for the OrCel treated group
               was twice as fast as the rate for the standard of care treated
               group (2.2% /day vs. 1.1% /day). For the entire forty patient
               group, 35% (7 of 20 patients) of OrCel


                                     2




<PAGE>


               treated patients achieved 100% healing compared to 20% (4 of 20
               patients) in the standard of care treated group, for a 75%
               improvement over standard of care. This forty patient group
               included only difficult to heal ulcers in the study since the
               protocol required a pre-screening period in which all the
               patients whose ulcers responded readily to standard of care
               treatment were excluded from the trial. The results in that trial
               for the OrCel treated group compared favorably with the reported
               results of the clinical trials that were conducted by our
               competitors for use of their products for treatment of diabetic
               ulcers. Based on the results in the pilot trial, in February 2002
               the FDA authorized us to commence a pivotal trial for use of
               OrCel in the treatment of diabetic ulcers.

             o We have developed the technology for the cryopreservation of
               OrCel without diminishing its effectiveness. Cryopreservation is
               the freezing of our product which gives it a minimum shelf life
               of six months, as opposed to a few days when our product is not
               cryopreserved. We are using our product in its cryopreserved form
               in our pivotal clinical trials for the treatment of venous and
               diabetic ulcers.

             o On February 21, 2001, the FDA granted our application for
               commercial sale of OrCel for use on patients with recessive
               dystrophic epidermolysis bullosa undergoing hand reconstruction,
               as well as to treat donor site wounds created during that
               surgery. This is the most severe form of epidermolysis bullosa, a
               condition in which a newborn's skin constantly blisters and can
               peel off at the slightest touch and leave painful ulcerations and
               permanent scarring, resulting in deformity of the hands and feet.
               The epidermolysis bullosa patient population that OrCel will
               address is small.

             o Our manufacturing facilities, which are at the same location as
               our offices in New York City, have been approved by the FDA for
               the manufacture of OrCel for commercial sale. However, we will
               need larger facilities to manufacture sufficient units of OrCel
               for anticipated sales for treatment of donor site wounds, after
               our marketing efforts to secure such sales are under way, and for
               treatment of venous and diabetic ulcers, if and when FDA approval
               is secured for sales for treatment of those medical conditions.
               In December 2001 we entered into a ten-year lease with the New
               Jersey Economic Development Authority for lease of approximately
               58,000 square feet of manufacturing and office space located in
               North Brunswick, New Jersey. The leased premises (Tech Center)
               will be completed and will be available to us in two phases. The
               initial space, consisting of approximately 26,000 square feet, is
               in an existing





                                       3






<PAGE>




               building and will be renovated to our specifications ("Phase
               #1"). The additional space, consisting of 32,000 square feet,
               will be a newly constructed building to be built to our
               specifications ("Phase 2"). The new building will adjoin the
               existing building. The landlord will be responsible for the
               completion of the renovations and construction of the buildings
               and is contributing up to $1,300,000 for the renovations in the
               existing building and $3,200,000 for the construction of the new
               building. Any additional renovation or construction costs will be
               borne by us. We have not yet estimated the cost of such
               renovations and new construction.

         Our FDA trials have resulted in approval of commercial sales of OrCel
for treatment of donor site wounds and for patients with recessive epidermolysis
bullosa undergoing hand reconstruction. Two other FDA trials we are currently
conducting are for the use of OrCel in treating venous leg ulcers and diabetic
foot ulcers. The target population for these four conditions is approximately
one million people in aggregate, and a sales potential in excess of $1 billion.
Each market is described briefly below. See "Forward Looking Statements."

         Venous Leg Ulcers. Approximately 700,000 Americans are plagued with
         venous leg ulcers. This type of ulcer is generally found in the lower
         leg proximate to the ankle and can result from trauma, but is typically
         associated with chronic venous insufficiency. Chronic venous
         insufficiency occurs when the venous valves don't close completely and
         blood is allowed to flow back from the deep venous system through the
         perforator veins into the superficial venous system. The weight of the
         backlogged blood pushes on the surrounding tissues of the lower leg and
         produces swollen, hyperpigmented ankles. Over time the pressure will
         cause tissue breakdown and an ulcer will form. Roughly 50% of venous
         leg ulcers are successfully treated with traditional methods, which
         include compression therapy followed by suggested regular walking and
         resting with the legs elevated for two hours a day.

         Diabetic Foot Ulcers. Diabetic foot ulcers will affect about 2 million
         of the 14 million diabetics in the United States during their lifetime.
         We estimate that there are between 800,000 and 1,200,000 Americans
         infected with diabetic foot ulcers each year. The ulcers are open sores
         that remain after the destruction of surface tissue. There are
         approximately 67,000 amputations each year from the complications
         created by these ulcers. Current treatments, which include off-loading
         of pressure, debridement, maintenance of a moist wound environment,
         wound cleansing and nutritional support, will cure between 50% and 60%
         of



                                       4






<PAGE>



         most diabetic ulcers. Assuming that there are 800,000 persons infected
         with diabetic foot ulcers each year and that 50% are cured with
         traditional treatments, the remaining nearly 400,000 patients are
         candidates for use of OrCel to treat their ulcers.

         Donor Site Wounds. There are about 1.2 million people treated annually
         for burns at medical facilities across the United States. A vast
         majority of the burns, about 96%, cover a relatively small portion of
         the total body surface area and are treated on an outpatient basis in
         doctors' offices, hospitals and burn units. Roughly 4%, or 50,000, of
         the burn cases are severe and, we believe, require autograft
         transplants, thereby creating donor site wounds. A donor site wound is
         the result of an autograft, which involves removing a piece of healthy
         skin from an uninjured part of the body to cover an open wound at
         another location on the body. We estimate that the typical severe burn
         case in which autograft transplant procedures are required to be used
         creates four donor site wounds per patient, or a total of approximately
         200,000 donor site wounds created in the United States each year. Due
         to differing severity of burns, we estimate that OrCel can be used to
         treat the donor site wounds resulting from autograft transplants in
         about 43% of the 50,000 (or 21,500) severely burned patients.

         Epidermolysis Bullosa. Few babies born with severe epidermolysis
         bullosa survive the first year and those that do are bombarded with
         constant blistering, which causes scarring that constricts the skin so
         much that the hands can become disfigured and fingers and toes can fuse
         together requiring reconstructive surgery. In 1986 a national registry
         was established to track the number of people with epidermolysis
         bullosa. OrCel is for use by epidermolysis bullosa patients who have
         the dystrophic and junctional form of the disease, a population of
         about 900 according to the national registry's database. Advocacy
         groups for epidermolysis bullosa patients argue that the registry's
         estimate is significantly under reported. Although we have received FDA
         approval for the sale of OrCel for treatment of patients with recessive
         dystrophic epidermolysis bullosa undergoing hand reconstruction, as
         well as to treat donor site wounds created during that surgery, our
         sales efforts will be focused on a small number of regional hospitals
         with expertise in treating epidermolysis bullosa. Consequently, we do
         not expect to have significant revenues from the sale of OrCel for the
         treatment of epidermolysis bullosa.




                                       5






<PAGE>




         Our immediate focus is to use OrCel to treat these four medical
conditions. However, we believe OrCel can also be used to treat additional acute
and chronic indications such as pressure ulcers (decubitus), cosmetic surgery
and indeterminate burns. We also believe that there is an opportunity to apply
our core technologies to repair selected structural tissues such as tendon,
ligament, cartilage, bone and blood vessels.

         While we believe that our bi-layered product will be effective in
treating the medical conditions in our target markets, many companies and
academic institutions have developed, or are capable of developing, products or
other technologies that are or may be competitive with OrCel. We know of only
one other company, Organogenesis, Inc., that has developed a bi-layered product,
Apligraf, to treat the same wounds as OrCel. Organogenesis has licensed
Novartis, Inc. to market Apligraf and Apligraf, having received FDA approval, is
currently being sold for the treatment of venous and diabetic ulcers. We believe
that OrCel will have certain competitive advantages over other comparable
bio-engineered products in that OrCel (i) has demonstrated superior clinical
results in recently released clinical data, accelerating healing in comparison
to standard of care and other competitive products; (ii) has the capability to
be less expensive to produce and easier for the physician to handle and use; and
(iii) can be stored and delivered in a cryopreserved form, providing production
and distribution efficiencies.

         As a development stage company we have only recently begun selling
OrCel, realizing net revenues of $105,000 in the 14 week period ending March 9,
2002. Such modest sales were achieved without any marketing effort on our part.
Except for such limited sales our activities to date have been limited to human
clinical trials of OrCel and research and development. From the creation of our
company in March 1991 through December 31, 2001, we have spent approximately
$18.0 million for human clinical trials and research and development, not
including employee salaries. From inception in March 1991 through December 31,
2001, we have sustained a net loss of $59.2 million and expect to continue to
incur substantial operating losses until at least 2003.

         On August 29, 2001, we entered into a Revenue Interests Assignment
agreement with Paul Capital Royalty Acquisition Fund, L.P. Under such agreement
we received $6,000,000 during 2001 and received an additional $4,000,000 in
January 2002. Upon completion of additional milestones, we may be eligible to
receive another $5,000,000 from Paul Capital, if requested by us, and may
incrementally receive an additional $10,000,000, but only upon mutual agreement
by both Paul Capital and us.

         In consideration for the first $10,000,000 received by us, Paul Capital
will receive a minimum 3.33% of the end user sales of our products in the United
States, Canada, and Mexico. Such percentage may be further adjusted upward or
downward, based on the volume



                                       6






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of net receipts from end users of our products in those three countries. We
anticipate that the effective cost of the amounts we received from Paul Capital
will range from 20% to 35% per annum over the term of the agreement which
terminates in December 2011. Beginning on January 1, 2003, Paul Capital will be
entitled to receive each year the first proceeds we receive from end user sales
of our products in those three countries. Such annual amounts Paul Capital will
be able to draw in advance will range from $1.5 million in 2003 to $7.5 million
in 2005 and thereafter. The agreement provides for quarterly and annual
accountings between Paul Capital and us for those advance payments.

         In the event of a change in control of Ortec or upon the occurrence of
certain other events as defined in the agreement, Paul Capital has the option to
put its revenue interest back to us for an amount as provided in the agreement.
Ortec also has the option to repurchase Paul Capital's interest upon the
occurrence of a change in control of Ortec or a complete divestiture by us of
our products, for an amount provided in the agreement.

         We have granted Paul Capital a security interest in our United States
and Canadian patents and trademarks relating to our technology for our OrCel
product to secure payments we are required to make to Paul Capital.

         The agreement terminates on December 31, 2011, unless terminated
earlier by either party, as permitted by the terms of the agreement.

         We have also recently received a $1,300,000 line of credit for
equipment lease financing.

         At our current rate of spending, our cash and cash equivalents on hand
at December 31, 2001 (approximately $ .9 million) and the additional $4 million
which was due from Paul Capital at December 31, 2001, and was received in
January 2002, will enable us to continue our operations through April 30, 2002,
assuming that we will not incur unexpected costs. We will be required to raise
additional funds (through sale of our securities or debt financing) to complete
our clinical trials and to produce and market OrCel. Our failure to receive
additional financing will have a material adverse effect on our operations.
Also, in order to produce OrCel for treatment of medical conditions with large
patient populations, we will have to build larger production facilities, which
will require significant additional funding. If we secure the additional funding
we need, receive FDA approval for commercial sales of OrCel for treatment of
medical conditions with large patient populations and successfully market OrCel,
we believe that we will have the opportunity to reach cash break even in 2003.

         On March 27, 2002, we engaged H.C. Wainwright & Co., Inc., an
investment banking firm, to act as our financial advisor in connection with
raising capital for the Company through debt and/or equity financing. While we
can give no assurance that any equity financing will be secured, Wainwright is
assisting us in raising equity financing of $12,000,000, which we believe will
enable us to continue our operations for the next 12 months.

         If received, we will use the above proceeds primarily to complete our
clinical trials for use of OrCel in the treatment of venous stasis and diabetic
ulcers and to submit the results of those trials to the FDA for approval to
market OrCel for treatment of those medical conditions. We expect that the
anticipated financing will allow us to do this. Based upon our current schedule
for completion of the clinical trials and submission to the FDA, we believe that
we can obtain FDA approval for the use of our product in treating both venous
stasis and diabetic ulcers patients in 2003.




                                       7






<PAGE>


         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.

The Product

Background

         Human skin is composed of cells and matrix proteins that are tough yet
flexible and protect the body against abrasion, water loss, and infection. For
cells to function normally within tissues, the cells must interact with the
proteins that surround them. When certain tissues become damaged, normal healthy
cells attempt to repair the deficient site by moving into the damaged area,
dividing, and depositing new matrix proteins that very often result in scars.
Scars do not function like normal tissue since the area is surrounded by
excessive amounts of matrix proteins.

         In the case of burns, wounds and other skin diseases, where the human
body cannot repair the tissue by spontaneous healing, there are several medical
treatments that are available, but no treatment that provides completely
satisfactory results. For chronic wounds like epidermolysis bullosa and diabetic
ulcers, the conventional approach is cleaning, disinfecting the site, and then
treating with moist dressings; while for venous stasis ulcers the conventional
treatment after cleaning and disinfecting is compression therapy.

         Another approach is grafting the wound site with the patient's own
healthy tissue, which is called an autograft transplant. Physicians have for
years been using skin transplanted from one site of a patient's body onto a
wound site that no longer has the capacity to heal spontaneously. This approach
creates a second wound site where the healthy tissue is harvested and is of
limited use when patients are left with a minimal amount of healthy tissue for
grafting. Physicians have sought to replace autograft transplants with
substitute synthetic or natural materials which would eliminate the medically
undesirable problems that accompany autograft transplants, such as the creation
of additional wound sites, possible infection and scarring. Another approach
that has been developed in recent years is the replication of human skin in a
laboratory setting in order to create an artificial skin that can be
transplanted onto diseased or injured patients. Major problems encountered by
scientists include the rejection of the artificial skin by the patient's immune
system and significant contraction of the transplant after healing, causing
cosmetically undesirable scarring.




                                       8






<PAGE>


OrCel

         Our OrCel is a device consisting of two layers of immature
human-derived skin cells (dermal and epidermal) supported in a permeable
bi-layered collagen matrix. When applied to an area needing skin regeneration,
OrCel stimulates the body's healthy cells to rapidly regenerate and remodel the
human skin.

         OrCel is not a skin transplant or an artificial skin, but rather a
tissue engineered dressing which, we believe, provides an optimal environment
for the production and delivery of a multitude of growth factors which appear to
promote migration of the patient's own healthy cells into the wound site
resulting in accelerated skin regeneration and wound healing. Rejection of OrCel
is mitigated because in approximately two weeks the entire OrCel dressing is
absorbed by the body and the cells from our product are no longer present.

         We believe that OrCel's bi-layered structure and porous collagen matrix
are key differentiating product features which provide a superior structure for
cell migration and tissue regeneration. We believe that the immature cells in
OrCel produce an optimal mixture of growth factors that stimulate the patient's
own natural healing process. The open collagen structure also allows the
patients own dermal and epidermal cells to proliferate and migrate into the
wound site, as well as to allow the return of blood vessels to the wound site.
The OrCel dressing is absorbed by the body in approximately 7-14 days and is
replaced by the patient's own skin.

Benefits

         There are currently three primary and distinct approaches to the repair
and regeneration of skin: the acellular (no cell) approach, the cell-based
unilayered approach, and the cell based bi-layered approach. The acellular
approach uses a non-living material, particularly cadaver skin, collagen,
silicone, or an ointment to treat the wound. The cell-based approaches employ
living cells in order to closely replicate human skin cells and stimulate wound
repair and tissue regeneration. The unilayered approach, although a cell-based
approach, utilizes either living epidermal or dermal cells, but not both. The
approach we believe to be the most advanced is the bi-layered, dermal and
epidermal, approach. The only bi-layered product other than OrCel that is
available for sale is Apligraf, a product developed by Organogenesis, Inc.

         We believe OrCel induces faster wound healing and reduces pain and
complications generally associated with open wounds. We also believe that
autograft donor sites treated with OrCel tend to be ready for recropping earlier
than sites treated with the current standard of care.


                                       9






<PAGE>


         We believe that OrCel is easier to use than the existing available
bi-layered technology because the composition and packaging of our product
allows the surgeon or other physician to easily remove OrCel from its packaging
and simply drape it over the wound. Our product can generally be applied to a
wound in less than one minute.

         We further believe our product constitutes a cost effective alternative
to conventional standards of wound care. The conventional treatment for wounds
such as venous and diabetic ulcers, burns and autograft donor sites can be
expensive and require multiple doctor visits and potentially lengthy
hospitalization. Because of the more rapid healing process we expect from
treating these wounds with OrCel, the length of hospital stays and the number of
follow up visits to doctors may be reduced substantially. In addition, our
ability to cryopreserve our product allows for a longer shelf life for storage
of our product, which we believe will make it more appealing to the end user -
the physician or hospital. See " Forward Looking Statements."

Regulatory Process and Clinical Trials

         Regulatory Framework. 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 for commercial sale.

         The FDA regulates the manufacture, distribution and promotion of
medical devices in the United States, pursuant to the Federal Food, Drug and
Cosmetic Act and regulations promulgated thereunder. OrCel is subject to these
regulations and is currently classified as a medical device. We must obtain
pre-market approval by the FDA prior to commercial sale of OrCel. Pre-market
approval requires proof of safety and efficacy through human clinical trials.
Pre-market approval is a lengthy and expensive process. Although we have secured
pre market approval from the FDA for commercial sales of OrCel for the treatment
of donor site wounds and for use on patients with recessive dystrophic
epidermolysis bullosa undergoing reconstructive hand surgery and to treat donor
site wounds created during that surgery, we can give no assurance that we will
obtain pre-market approval for sale of OrCel for the treatment of medical
conditions with larger patient populations.

         To obtain pre-market approval, we must submit an application to the
FDA, supported by extensive data, including human clinical trial data, and
documentation to prove the safety and efficacy of the device. Applicable
regulations provide that the FDA has 180 days to review an application for
pre-market approval during which time an advisory committee usually evaluates
the application and makes recommendations to the FDA. While the FDA has




                                       10






<PAGE>



responded to applications for pre-market approval within that time period, as it
did in approving OrCel for treatment of donor site wounds, reviews usually occur
over a significantly protracted period of twelve to twenty-four months. Many
devices are never cleared for marketing.

         If human clinical trials of a proposed device are required and the
device presents a possible or unknown risk, the manufacturer or distributor of
the device has to file an application for an investigative device exemption with
the FDA prior to commencing such trials. The application for an investigative
device exemption must be supported by data, including the results of animal and
other testing. If the application for an investigative device exemption is
approved, human clinical trials may begin. The human clinical trials for medical
devices may consist of two stages: the first is a feasibility study/pilot trial,
in which a small group of patients is tested in order to collect preliminary
safety and effectiveness data; the second, a pivotal trial, requires testing of
a larger patient population to determine a fuller understanding of safety and to
confirm efficacy of the device for the targeted medical conditions.

         We have developed rigorous internal standards for testing and compiling
data necessary for FDA filings. We conducted feasibility studies for all the
medical conditions we propose to treat with OrCel prior to filing applications
with the FDA for pivotal trials. We assume that this process has allowed us to
submit more precise protocols to the FDA, clearly defining the clinical
objectives we wish to support in the pivotal trial phase. We engage in an
ongoing dialogue with the FDA in an effort to manage the approval process both
effectively and efficiently. At the present time we

               - have received FDA approvals for commercial sales of OrCel for
               treatment of donor site wounds and for use on patients with
               recessive dystrophic epidermolysis bullosa undergoing hand
               reconstructive surgery and to treat donor site wounds created
               during that surgery, and

               - are conducting two pivotal clinical trials for use of OrCel in
               its cryopreserved form for the treatment of venous ulcers and
               diabetic ulcers.

Description of the Production Process

         OrCel cells are derived from infant foreskins obtained during routine
circumcisions. The immature, neonatal cells are highly reproductive and provide
enhanced proliferation and




                                       11






<PAGE>


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 culture 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, which we can then deliver to customers in a
"fresh" or cryopreserved state.

Original Research

         Our technology was developed by Dr. Mark Eisenberg, a physician in
Sydney, Australia. Dr. Eisenberg is an officer and 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. The current research for
our proprietary technology is performed at our laboratory in New York City and
in our laboratory in Sydney, Australia.

Regulatory Strategies, Product Development and Sales

         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 approval 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 third party payors (insurance companies, Medicare,
Medicaid) for use of new medical products.



                                       12






<PAGE>


Production and Supply

         We believe that production capacity at our facility in the Audubon
Biomedical Science and Technology Park in New York City should be sufficient to
meet demands for OrCel for treatment of donor site wounds and in hand
reconstruction surgery for patients with recessive dystrophic epidermolysis
bullosa. We will need larger production facilities to achieve significant sales
of OrCel for treatment of larger patient populations, such as patients with
venous and diabetic ulcers.


         In December 2001 we entered into a ten-year lease with the New Jersey
Economic Development Agency to lease approximately 58,000 square feet of
manufacturing and office space, located in North Brunswick, New Jersey. The
terms of that lease transaction is described in Part I, Item 1 -
"Business-Overview" in this annual report and in Item 2 - "Properties."

         Such facilities will have to be FDA validated and approved. Any
manufacturing, whether by us or by a third party manufacturer, for any future
commercial scale production of OrCel will also have to be in compliance with the
good manufacturing processes and quality system regulations mandated by the FDA.
Our production facility in the Audubon Biomedical Science and Technology Park
was inspected and approved by the FDA in September 2000 for the manufacturing of
OrCel for commercial sale. We expect to move into our new facilities in North
Brunswick, New Jersey in 2003.

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. As
we noted previously, 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. The approach we believe to be the most advanced and
effective is the bi-layered approach.

         There is also a procedure which cultures the patient's own epidermal
cells to create an epidermis like layer. That procedure takes a number of weeks
to create that epidermal layer. Genzyme Biosurgery is currently selling such a
product for treatment of severely burned patients only, pursuant to an FDA
humanitarian device exemption.




                                       13






<PAGE>



         We consider our primary competitors to be Organogenesis, Inc. and
Advanced Tissue Sciences, Inc. The FDA approved Organogenesis' Apligraf, which
employs the bi-layered approach, for treatment of venous ulcers in May 1998 and
for the treatment of diabetic ulcers in June 2000, and Organogenesis is selling
Apligraf through a joint venture with Novartis Pharmaceuticals Corporation.
Advanced Tissue, through a joint venture agreement with Smith & Nephew PLC,
markets Transcyte, a unilayer, non-absorbable biosynthetic matrix, seeded with
dermal fibroblast cells, which acts as a temporary wound covering for severe
burns and as a covering for partial thickness burns. Advanced Tissue's
Dermagraft product for the treatment of diabetic foot ulcers was rejected by the
FDA in June 1998 and additional trials were mandated by the FDA to prove
efficacy. In August 2000 Advanced Tissue submitted the results of their
additional trials to the FDA and received approval for commercial sale of their
product in October 2001.

         We believe that the following are the greater benefits derived by users
of OrCel.

             o OrCel can be cryopreserved so that it can be stored by the
               hospital or clinic instead of awaiting shipment.

             o OrCel uses a porous collagen matrix and undifferentiated
               epidermal and dermal cells, resulting in a vigorous growth factor
               production which appears to enable a quicker healing process.

             o OrCel is "user friendly". The physician opens a cassette, peels
               off the protective mesh and immediately lays the Composite
               Cultured Skin on the wound. The process should take as little as
               one minute.

         We believe that many of our competitors may have greater financial and
other resources than we do and most of them have conducted and continue to
conduct human clinical trials, some of which are at more advanced stages than
our human clinical trials.

         Although we are not aware of any biologically active skin repair
product that has received pre-market approval from the FDA except as discussed
above, there may be other companies having greater financial resources than we
do who may develop other skin regeneration or wound healing technologies that
may be more effective than OrCel, or that may make OrCel obsolete.




                                       14






<PAGE>


Patents and Proprietary Rights

         We have two U.S. patents for the technology for OrCel, both of which
expire in 2011. We have also been granted corresponding patents in Europe (for
most of the countries in Europe) and in Australia and New Zealand, Ireland,
Israel, Japan, Thailand and South Africa. We are prosecuting patent claims in
Canada, The Russian Federation, Brazil and China.

         In December 2000 and January 2001, we filed four additional patent
applications with the United States Patent Office directed to further aspects of
our OrCel technology. The patent applications focus on our cryopreservation,
cell and manufacturing processes, and a cardiovascular application of our
technology.

         One of our competitors filed an opposition with the European Patent
Office challenging the validity of our European patent. The opposition in Europe
was rejected in February 2002 and our patent was held novel and inventive. The
expiration date of our European patent is March 24, 2011.

         Our patents might be successfully challenged in court proceedings,
invalidated or rendered unenforceable. Our success will depend, in part, on our
ability to maintain patent protection for our technology, both in the United
States and other countries. Our patents may be infringed, invalidated or
circumvented by others. Others may also develop technologies or processes that
are the same or substantially as effective as ours, thereby by-passing the
benefits of our patent protection. Therefore, our United States and foreign
patents may not provide us with any commercial benefits. Nor can we give any
assurance that our currently pending patent applications will be granted.

         Several of our competitors, including Organogenesis, Inc., Advanced
Tissue Sciences, Inc., Genzyme Biosurgery Repair Inc., Integra Life Sciences and
LifeCell Corporation, have been granted patents relating to their particular
artificial skin technologies. See "Competition".

Employees

         We presently employ 95 people on a full-time basis, including five
executive officers. Including our executive officers, we employ 92 persons in
New York City and 3 people at our laboratory in Sydney, Australia. We also have
part time employees, 4 in New York and 2, including Dr. Eisenberg, in Australia.
We anticipate hiring additional employees in the areas of quality assurance,
manufacturing, marketing and research and development as our needs arise.



                                       15






<PAGE>


Item 2. PROPERTIES

         We occupy an aggregate of 17,287 sq. ft. of space in Columbia
University's Audubon Biomedical Science and Technology Park in New York City,
pursuant to four separate lease agreements, 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. As of December 31, 2001 we were
paying an aggregate of $47,615 rent per month for use of all our space at the
Audubon facility.

         In December 2001 we entered into a ten-year lease with the New Jersey
Economic Development Agency to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. The
leased premises (Tech Center) will be completed and will be available to us in
two phases. The initial space, consisting of approximately 26,000 square feet,
is in an existing building, which will be renovated to our specifications
("Phase #1") and the additional space, consisting of 32,000 square feet, will be
a newly constructed building built to our specifications ("Phase #2"). The new
building ("Phase #2") will adjoin the existing building ("Phase #1"). The
landlord will be responsible for the completion of the renovations and
construction of the buildings and is contributing up to $1,300,000 for the
renovations in the existing building and $3,200,000 for the construction of the
new building. Any additional renovation or construction costs will be borne by
us. We have not estimated the cost of such renovations and new construction.

         We expect to move into these new facilities in 2003. The initial base
rent for Phase #1, starting 9 months after the lease Commencement Date, is
$14.00 per square foot for the next 15 months, increasing to $25.00 and $26.00
per square foot during the third and fourth years, respectively, and to a base
rent of $29.00 per square foot in the fifth year to the balance of the initial
term of the lease. The initial base rent for Phase #2, commencing upon
substantial completion of the construction of the building, is $23.00 per square
foot during the first year after completion, increasing annually at the rate of
$1.00 per square foot during the second and third years, to a base rent of
$26.00 per square foot in the fourth year to the balance of the initial term of
the lease. We will also be responsible for additional rent for operating
expenses.




                                       16






<PAGE>


         Due to timing of our anticipated move to the Tech Center premises in
North Brunswick, we also leased, as of March 1, 2002, from the same landlord,
approximately 3,200 square feet in an adjoining building, for a 16 month term,
at an initial base rent of $30.00 per square foot during the first year,
increasing to $31.50 per square foot during the last four months of the term.

         We also lease approximately 5,000 square feet of space at 147-155 Queen
Street, Beaconsfield, Sydney, Australia, on a month to month basis, where we
operate a research laboratory to conduct our research and development activities
in Australia. We pay rent in Australian dollars, which at the current rate of
exchange amounts to approximately US$24,900 per year. We rent this space from
Dr. Mark Eisenberg's father's estate on terms that we believe are not less
favorable to us than for rental of similar space in Sydney, Australia, from
non-related third parties.


ITEM 3. LEGAL PROCEEDINGS

         The summons and the complaint in the legal proceeding instituted by Dov
Shellef against us and six of our then directors and one of our executive
officers who was not a director, were served on us and those individual
defendants in December 2001. The complaint's allegations and the court in which
that legal proceeding was instituted, are described in our 10-Q report for the
quarter ended September 30, 2001.


                                       17






<PAGE>



                                     PART II


Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

         Our common stock is listed on the NASDAQ SmallCap Market under the
symbol "ORTC". The following table sets forth the high and low sales prices of
our common stock as reported by NASDAQ for each full quarterly period from
January 1, 2000 through December 31, 2001.

<TABLE>
<CAPTION>
2001                                      High             Low
----
          <S>                            <C>              <C>
          First Quarter                   8.75             5.81
          Second Quarter                  6.98             5.75
          Third Quarter                   7.75             6.00
          Fourth Quarter                  6.94             4.45
<CAPTION>
2000                                      High             Low
----
          <S>                            <C>              <C>
          First Quarter                   17.00            7.00
          Second Quarter                  11.13            6.00
          Third Quarter                   11.00            7.00
          Fourth Quarter                  11.15            5.50
</TABLE>

Security Holders

         To the best of our knowledge at March 11, 2002, there were 121 record
holders of our common stock. We believe that as of such date there were an
additional 1,889 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.



                                       18






<PAGE>


Recent Sales of Unregistered Securities

         During the fourth quarter of 2001 we granted to 17 employees, directors
and consultants options under our Employee Stock Option Plan to purchase an
aggregate of 426,000 shares of our common stock, at exercise prices ranging from
$4.70 to $6.10 per share. The grant of such options was exempt from the
registration requirements of the Act pursuant to the provisions of Section 4(2)
of the Act because such option grants did not involve any public offering and
because such option grants did not constitute sales of securities.


Item 6.  Selected Financial Data

The following selected financial data are derived from the Company's financial
statements and should be read in conjunction with, and are qualified in their
entirety by, the financial statements and related notes included in Item 7 and
Management's Discussion and Analysis included elsewhere in this Annual Report:

<TABLE>
<CAPTION>
                                                                                                                Cumulative
                                                                                                                    from
                                                                                                                  March 12,
                                                                                                                    1991
Statement of operations data                                                                                  (inception) to
----------------------------                                                                                   December 31,
  Years Ended December 31,            1997           1998            1999            2000            2001           2001
                                  ----------     ----------    ------------     -----------     -----------    ------------
<S>                              <C>            <C>            <C>             <C>             <C>             <C>
Product revenue                  $     -        $     -        $      -        $      -        $     21,890    $     21,890
                                  ----------     ----------    ------------     -----------     -----------    ------------
Expenses
   Research and development        1,178,836      1,933,877       3,106,908       4,191,317       4,283,038      18,048,392
   Rent                              166,498        252,397         473,010         535,443         589,238       2,179,535
   Consulting                        474,908        908,495         834,180         838,383       1,413,153       5,226,515
   Personnel                       1,901,409      4,060,629       3,742,632       4,763,662       6,605,630      22,949,360
   General and administrative      1,320,488      1,725,201       2,152,968       2,297,769       2,671,887      12,002,685
   Interest and other expense         75,126        104,605          99,522          89,712         536,070       1,019,506
   Interest income                  (291,602)      (572,549)       (368,711)       (586,623)       (191,749)     (2,249,449)
                                  ----------     ----------    ------------     -----------     -----------    ------------
                                   4,825,663      8,412,655      10,040,509      12,129,663      15,907,267      59,176,544
                                  ----------     ----------      ----------      ----------      ----------     -----------
Net loss                         $(4,825,663)   $(8,412,655)   $(10,040,509)   $(12,129,663)   $(15,885,377)   $(59,154,654)
                                  ==========     ==========     ===========     ===========     ===========     ===========
Net loss per share of common
 stock
   Basic and diluted                  $(1.01)        $(1.43)         $(1.51)         $(1.37)         $(1.64)        $(12.67)
Weighted average common stock
 outstanding
   Basic and diluted               4,782,239      5,878,971       6,634,874       8,847,295       9,691,608       4,668,594
                                   =========      =========       =========       =========       =========       =========
Balance sheet data
------------------
Working capital (deficiency)     $12,982,711    $ 9,368,901    $ 11,009,660    $  7,966,410    $ (2,529,159)
Total assets                      14,998,414     12,391,039      15,011,645      11,719,760       4,038,601
Long-term debt, excluding
 current maturities                  722,704      1,152,180       1,044,857         912,489       6,768,983
Shareholders' equity/(deficit)    13,716,618     10,390,759      12,370,720       9,392,325      (6,304,972)
</TABLE>


                                        19




<Page>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

Forward Looking Information

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

         The following discussion should be read in conjunction with our
financial statements and notes thereto.

General

         Since Ortec's inception we have been principally engaged in the
research and development of our tissue engineered skin regeneration product, for
use in the treatment of chronic and acute wounds, such as venous and diabetic
skin ulcers, and autograft donor site wounds for



                                       20






<PAGE>


burn victims. We call our product OrCel'TM' and in June 2001 we filed a
trademark application for such name with the United States Patent and Trademark
Office.

         In February 2001 Ortec received FDA approval to make commercial sales
of OrCel for use on patients with recessive dystrophic epidermolysis bullosa,
followed by FDA approval in September 2001 for use of the product in the
treatment of donor site wounds in burn patients. With these approvals, though
Ortec is still a development stage enterprise, in December 2001 we began our
first commercial shipment of product, realizing sales revenues of approximately
$22,000.

         From inception to date, we have incurred cumulative net losses of
approximately $59.2 million. We expect to continue to incur substantial losses
until at least 2003, due to continued spending on research and development
programs, the funding of clinical trials and regulatory activities and the
increased personnel costs of manufacturing, marketing and sales, distribution
and administrative activities.

         We are currently conducting pivotal clinical trials of OrCel in the
treatment of venous stasis and diabetic foot ulcers. Venous stasis ulcers are
open lesions on the legs, which result from the poor circulation of blood
returning from the legs to the heart. Diabetic ulcers are open sores that remain
after the destruction of surface tissue. Ortec expects to complete the venous
stasis clinical trials by the end of 2002, with submission of the FDA filing by
the first quarter of 2003. We expect to complete the diabetic ulcers pivotal
clinical trials early in 2003, with submission to the FDA anticipated by the end
of the second quarter 2003. We anticipate obtaining FDA approval in 2003 for the
use of our OrCel product in the treatment of both these medical conditions.

         We anticipate that future revenues and results of operations may
continue to fluctuate significantly depending on, among other factors, the
timing and outcome of applications for additional regulatory approvals, our
ability to successfully manufacture, market and distribute OrCel and/or the
establishment of collaborative arrangements for the manufacturing, marketing and
distribution of our product. We anticipate that our operating activities will
result in substantial net losses until at least 2003.

Critical Accounting Policies

Revenue Recognition. Revenues from sales are recognized upon shipment of product
to customers. In December 2001 Ortec made its first commercial sales of product
to customers.



                                       21






<PAGE>


         We account for our Revenue Interest Assignment Agreement in a manner
similar to that of debt and provide for interest to reflect the estimated cost
of the funds received. Interest is imputed at 30% per annum, which is the
minimum return under the agreement. Interest may range from 20% to 35% per annum
depending on our sales and the ultimate term of the Agreement.


Results of Operations

Year Ended December 31, 2001, and December 31, 2000.

Revenues
         Ortec made its first commercial shipments of OrCel to customers in
December 2001, earning revenues from operations of approximately $22,000.

Expenses
         Expenses increased by approximately $3.4 million in 2001 from
approximately $12.7 million in 2000 to approximately $16.1 million in 2001.

Personnel. Personnel costs increased by approximately $1.8 million to $6.6
million in 2001, compared with $4.8 million in 2000. This increased expense
resulted from the additional personnel required to conduct and manage the
clinical trial programs, to manufacture the product required by our clinical
trial programs and other research and development activities, to prepare for
manufacturing scale-up and marketing and an increase in corporate and
administrative expenses. During 2001, we conducted two pilot clinical trials,
concluded a pivotal clinical trial and the relevant FDA submissions. Based on
these trials and submissions, Ortec was granted two FDA approvals in 2001.

Consulting. These fees increased by $.6 million from $.8 million in 2000 to $1.4
million in 2001, primarily due to costs incurred in conducting the clinical
trials and FDA submissions, noted above, the development of a new cryopreserved
product and in hiring a marketing consultant.

Research and Development. These expenses increased by approximately $.1 million
to $4.3 million in 2001, compared with $4.2 million in 2000. The increase in
research and development expenses was primarily due to the costs of conducting
the venous and diabetic ulcers clinical trials, as well as research work
performed in the areas of cryopreservation and production cost reduction.




                                       22






<PAGE>


General and Administrative. These expenses increased by $.4 million from $2.3
million in 2000 to $2.7 million in 2001, due to increased marketing and legal
expenses incurred, as Ortec prepares for commercial sales of its product and
continues its financing activities. During 2001, the Company worked on and
entered into several significant agreements, including the Paul Capital Revenue
Interest Assignment agreement, the GE Capital Asset Financing agreement and the
Technology Center of New Jersey Lease agreement. We also investigated and
evaluated several potential corporate investment partners.

Interest Expense. Ortec incurred increased interest expense of $.4 million in
2001, compared with the expense incurred in 2000. On August 29, 2001, Ortec
entered into a Royalty Revenue Interest Assignment agreement with Paul Capital
and as part of this agreement, was entitled to receive $10.0 million in 2001.
$6.0 million of this amount was received in 2001 and the remaining $4.0 million
was received in January 2002. Upon the achievement of certain milestones, Ortec
may be entitled to receive another $5.0 million and may incrementally receive an
additional $10.0 million, but only upon the mutual agreement of both the Company
and Paul Capital. Management anticipates that the effective cost of these funds
based on the anticipated revenue stream, over the term of this agreement, which
terminates in December 2011, will range between 20% to 35% per annum and as
such, approximately $455,000 in interest expense has been accrued in 2001. We
have provided for interest at 30% per annum which represents the minimum return
to Paul Capital assuming that we do not early terminate the agreement.

Interest Income. Interest income declined by approximately $395,000 from
$587,000 in 2000 to approximately $192,000 in 2001, primarily due to the smaller
average cash balances outstanding during 2001 compared with 2000.

Year Ended December 31, 2000, and December 31, 1999.

Revenues
There were no revenues from commercial sales in 2000 and 1999.

Expenses
Research and Development. Expenses for the year ended December 31, 2000
increased to $4.2 million from $3.1 million for the year ended December 31,
1999, which amounts do not include consulting expenses, a significant portion of
which was paid for research and development projects. Such consulting expenses
for research and development amounted to approximately $838,000 in 2000 and
$834,000 in 1999. The increase in research and development expenses relate
primarily to the costs associated with the increased clinical trial activity,
cryopreservation research and for enhancement and other applications of Orcel.




                                       23






<PAGE>


General and Administrative. This expense amounted to $2.3 million for the year
ended December 31, 2000 and $2.2 million for 1999.

Personnel. Personnel expenses for the year ended December 31, 2000 increased to
$4.8 million from $3.7 million for the year ended December 31, 1999. This
increase resulted from the larger number of persons employed because of
increased research and product development, to conduct our clinical trials, to
prepare for manufacturing scale-up in anticipation of marketing our product, and
for additional administrative personnel required as a result of such increased
staffing levels.

Rent. This expense increased to $535,000 in 2000 from $473,000 for the year
ended December 31, 1999. This resulted from the increased space occupied at
Columbia University's Audubon Biomedical Science and Technology Park in New York
City for additional research and development laboratories and to accommodate the
increased staffing in 2000.

Interest Income. Interest income increased by approximately $218,000 from
approximately $369,000 in 1999 to approximately $587,000 in 2000, because of
larger cash and cash equivalent balances in 2000 that resulted from sales of
common stock.

Liquidity and Capital Resources

         Since inception (March 12, 1991) through December 31, 2001, Ortec has
accumulated a deficit of approximately $59.2 million and we expect to continue
to incur substantial operating losses until at least 2003. We have financed our
operations primarily through private placements of our common stock, our initial
public offering and the exercise of our publicly traded Class A warrants at the
end of 1997. From inception to December 31, 2001, we received cash proceeds from
the sale of equity securities, net of share issuance expenses, of approximately
$49.9 million, and in 2001, we received $6 million from the sale of a percentage
interest in our future revenues from the sale of our product in North America.

         For the year ended December 31, 2001, we used net cash for operating
activities of approximately $13.0 million. Cash used in operating activities
resulted primarily from our net loss of $15.9 million, offset by non cash
depreciation and amortization of approximately $737,000, approximately $188,000
of non cash stock compensation and an increase in accounts payable and accrued
expenses of approximately $2.1 million.



                                       24






<PAGE>


         In 2001 we invested approximately $620,000 in property, plant,
equipment and patent application costs and made deposits and advances of
$105,000 toward certain agreements. Additionally, we paid down $132,000 on our
loans payable during 2001. We did not receive any cash from the sale of our
common stock, but we did receive $6.0 million under our agreement with Paul
Capital Royalty Acquisition Fund, L.P.

         In December 2001 we entered into a ten-year lease with New Jersey
Economic Development Authority to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. The
leased premises will be completed and will be available to us in two phases. The
initial space, consisting of approximately 26,000 square feet, is in an existing
building, which will be renovated to our specifications. The additional space,
adjoining the existing building and consisting of 32,000 square feet, will be
constructed to our specifications. The landlord is responsible for the
completion of the renovations and construction of the building and is
contributing up to $1,300,000 for the renovations and $3,200,000 for the
construction of the new building. Any additional renovation or construction
costs will be borne by us.

         We expect to move to the new facility and to be fully operational at
that site in 2003. We believe that the move into the existing building will
provide us with the anticipated manufacturing capacity required through 2004,
sufficient to generate sales revenues in excess of $50.0 million. Accordingly,
we believe that initially no additional manufacturing build-out costs will be
necessary in the building to be constructed. That second move into the newly
constructed building will allow us to consolidate our manufacturing, marketing
and sales, research and administrative operations in one location, facilitate
future growth and afford us the ability to increase our manufacturing capacity
at such time as the manufacturing capacity in the existing building is fully
utilized.

         On August 29, 2001, we entered into a Revenue Interests Assignment
Agreement with Paul Capital. During 2001, Ortec was eligible to receive $10.0
million under this agreement. We received $6.0 million in 2001 and the remaining
$4.0 million balance in January 2002. Upon completion of additional milestones,
we may be eligible to receive another $5.0 million. In addition, we may
incrementally receive another $10.0 million, but only upon mutual agreement by
both Ortec and Paul Capital.

         In consideration for the first $10.0 million received by us, Paul
Capital will receive a minimum of 3 1/3% of end user revenues from the sale of
our products in the United States, Canada and Mexico, which percentage will be
proportionately increased by the additional amounts paid by Paul Capital to us
under the August 29, 2001 agreement. These percentage payments may be further
adjusted upward or downward, based on the volume of net sales to



                                       25






<PAGE>



end users of our products in those three countries. We anticipate that our
effective cost for the amounts we receive from Paul Capital will range between
20% to 35% per annum. Beginning on January 1, 2003, Paul Capital will be
entitled to receive each year the first proceeds to us from end user sales of
our products in those three countries. Such annual amounts Paul Capital will be
able to draw in advance will range from $1.5 million in 2003 to $7.5 million in
2005 and thereafter. The agreement provides for quarterly and annual accountings
between Paul Capital and us for those advance payments.

         In the event of a change in control of Ortec or upon the occurrence of
certain other events as defined in the agreement, Paul Capital has the option to
put its revenue interest back to us for an amount as provided in the agreement.
Ortec also has the option to repurchase Paul Capital's interest upon the
occurrence of a change in control of Ortec or a complete divestiture by us of
our products, for an amount provided in the agreement.

         We have granted Paul Capital a security interest in our United States
and Canadian patents and trademarks relating to our technology for our product,
to secure payments we are required to make to Paul Capital.

         The agreement terminates on December 31, 2011, unless terminated
earlier by either party, as permitted by the terms of the agreement.

         In January 2002 we received a $1,300,000 line of credit from GE Capital
for equipment lease financing. These proceeds will be utilized in financing
manufacturing equipment purchases in 2002.

         Our capital funding requirements will depend on numerous factors,
including the progress and magnitude of our research and development programs,
preclinical testing and clinical trials, the time involved in obtaining
regulatory approvals for commercial sale of our product to treat venous stasis
and diabetic foot ulcers, the cost involved in filing and maintaining patent
claims, technological advances, competitive and market conditions, our ability
to establish and maintain collaborative arrangements, our cost of manufacturing
scale up and the cost and effectiveness of commercialization activities and
arrangements.

         We require substantial funding to continue our research and development
activities, clinical trials, manufacturing scale up, marketing, sales,
distribution, and administrative activities. Our cash and cash equivalents on
hand at December 31, 2001, (approximately $.9 million), and the additional $4.0
million which was due from Paul Capital and was received in January 2002, will
enable us to continue our operations until April 30, 2002.



                                       26






<PAGE>


         We have raised funds in the past through the public or private sale of
securities and through the agreement with Paul Capital. Even after the remaining
$4.0 million received from Paul Capital in January 2002, we will need to raise
additional funds in the future through public or private financings,
collaborative arrangements or from other sources. The success of such efforts
will depend in large part upon continuing developments in our clinical trials
and upon market conditions.

         On March 27, 2002, we engaged H.C. Wainwright & Co., Inc., an
investment banking firm, to act as our financial advisor in connection with
raising capital for the Company through debt and/or equity financing. While we
can give no assurance that any equity financing will be secured, Wainwright is
assisting us in raising equity financing of $12,000,000, which we believe will
enable us to continue our operations for the next 12 months.

         If received, we will use the above proceeds primarily to complete our
clinical trials for use of OrCel in the treatment of venous stasis and diabetic
ulcers and to submit the results of those trials to the FDA for approval to
market OrCel for treatment of those medical conditions. We expect that the
anticipated financing will allow us to do this. Based upon our current schedule
for completion of the clinical trials and submission to the FDA, we believe that
we can obtain FDA approval for the use of our product in treating both venous
stasis and diabetic ulcers patients in 2003.

         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 manufacturing, marketing, distribution or other rights to our product.
However, we can give no assurance 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
financing will be available to us on acceptable terms, if at all. Further, we
can give no assurance that any arrangements resulting from these discussions
will successfully reduce our funding requirements. If additional funding is not
available to us when needed, we may not be able to continue operations.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the financial statements of the Company,
together with the report of Grant Thornton LLP, dated February 22, 2002, except
for Note A as to which the date is April 15, 2002.




                                       27






<PAGE>


                                    PART III

Item 10. DIRECTORS AND  EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors and Executive Officers

Our directors and executive officers are as follows:


<TABLE>
<CAPTION>
Name                                       Age       Position
----                                       ---       --------
<S>                                        <C>       <C>
Steven Katz, Ph.D.                         57        Chairman of the Board of Directors and Chief
                                                     Executive Officer

Dr. Mark Eisenberg                         64        Senior Vice President, Research and Development,
                                                     and Director

Ron Lipstein                               46        Vice Chairman of the Board of Directors,
                                                     Secretary, Treasurer and Chief Financial Officer

Alain M. Klapholz                          45        Vice President, Operations, and Director

Costa Papastephanou, Ph.D.                 56        President

William Schaeffer                          54        Chief Operating Officer

Steven Lilien, Ph.D.                       54        Director

Allen I. Schiff, Ph.D.                     56        Director
</TABLE>


         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. He has been employed by us 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.



                                       28






<PAGE>



         Dr. Mark Eisenberg, one of our founders, has been a director and Senior
Vice President since 1991. Dr. Eisenberg has also been a consultant to us since
1991. See "Eisenberg Consulting Agreement". 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.

         Ron Lipstein, one of our founders, has been our Secretary, Treasurer,
Chief Financial Officer and a director since 1991. In January 2001 Mr. Lipstein
was elected Vice Chairman of our Board of Directors. He has been employed by us
since 1991. Mr. Lipstein is a certified public accountant.

         Alain M. Klapholz, one of our founders, has been our Vice President and
a director since 1991. He has been employed by us since 1991. He has an MBA from
New York University.

         Costa Papastephanou was employed by us in February 2001 as our
president. 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 University of Miami as well as a Master of Science in
Microbial Biochemistry from University of London.

         William Schaeffer, has been our Chief Operating Officer since May 1998.
Prior to joining us, Mr. Schaeffer was employed by Johnson & Johnson for more
than 25 years. His last position was Vice President, Quality Assurance Worldwide
for Johnson & Johnson's Cordis, Inc., where he was also a member of its
Management Board. Mr. Schaeffer has also held senior management positions at
Johnson & Johnson's Ethicon, Inc., Johnson & Johnson Cardiovascular and Ortho
Diagnostics, Inc. His responsibilities have included process development,
manufacturing and quality assurance for a broad range of medical devices
developed, produced and distributed by Johnson & Johnson.

         Steven Lilien has been a director of Ortec since February 1998. He has
been chairman of the accounting department of Bernard M. Baruch College in New
York City for the past fourteen 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.



                                       29






<PAGE>


         Allen I. Schiff was elected a director of Ortec on June 11, 2001. He
has been Director of the Field Study Program at Fordham University Graduate
School of Business since 1992. That program performs consulting projects for
businesses and charitable institutions including a number of major well known
business and charitable entities. From 1985 through 1989 he was chairman of both
the undergraduate and the graduate accounting departments at Fordham University.
He has a Ph.D. in business administration and an MS in accounting, both from New
York University. He is a director and chairman of the audit committee of Data
Software and Systems, Inc., a publicly held company whose shares are listed on
NASDAQ and whose principal business is the development of compatible software
for use by utilities.

         All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Our non-employee
directors were compensated for their services and attendance at meetings in 2001
through the grant of options pursuant to our Employee Stock Option Plan and
payment of $5,000 to Dr. Steven Lilien for his services as chairman of our audit
committee and $2,500 to Dr. Allen Schiff for his services in the last three
months of 2001 as a director and a member of our audit committee. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.

Eisenberg Consulting Agreement

         Pursuant to a consulting agreement dated June 7, 1991, as amended on
September 1, 1992, with Dr. Eisenberg, we have retained the services of Dr.
Eisenberg as a consultant until June 6, 2005. Under such consulting agreement,
Dr. Eisenberg is required to devote 20 hours per week to Ortec. We pay Dr.
Eisenberg an annual fee at the rate of $73,000. Dr. Eisenberg's fee is subject
to annual increases based on certain formulas. Dr. Eisenberg has agreed not to
compete with us until one year after termination of his consulting agreement.

Item 11. EXECUTIVE COMPENSATION

Compensation of Executive Officers

         The following table sets forth the compensation paid by us for our
fiscal years ended December 31, 2001, 2000 and 1999 to our Chief Executive
Officer and to each of our other executive officers (collectively, the "Named
Officers").




                                       30






<PAGE>


                                            SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                                                          Long Term
                                                        Annual Compensation                              Compensation
                                                        -------------------                              ------------
                                                                                                           Securities
               Name and                                                               Other Annual         Underlying
          Principal Position               Year        Salary($)       Bonus($)      Compensation($)      Options/SARs
          ------------------               ----        ---------       --------      ---------------      ------------
<S>                                        <C>          <C>             <C>             <C>                <C>
Steven Katz ...........................    2001         236,392         92,000                              200,000
Chief Executive                            2000         209,807         94,605           9,000*             129,278
 Officer and Chairman                      1999         200,000         35,000           9,000*              50,000

Ron Lipstein .........................     2001         214,447         86,000                              185,000
Vice Chairman, Secretary,                  2000         179,712         78,105           9,000*             118,128
Treasurer and CFO                          1999         165,000         50,000           9,000*              35,000

Costa Papastephanou................        2001         181,625                                              60,000
President

Alain Klapholz .......................     2001         170,604         20,000                               60,000
Vice President                             2000         159,808         30,000                               23,300
and Director                               1999         150,000         15,000                               10,000

William Schaeffer ...................      2001         188,688                                              10,000
Chief Operating Officer                    2000         167,308                                              17,000
                                           1999         157,871         30,000                               20,000
</TABLE>

----------------------
* In lieu of health insurance.


Board Compensation

         Drs. Steven Lilien and Allen I. Schiff are our only non-employee
directors. For Dr. Steven Lilien's services in 2001 as a director and as
chairman of our audit committee, in November 2001 we granted Dr. Lilien 7 year
options to purchase 15,000 shares of our common stock. For his services in 2001
as a director and as a member of our audit committee, in June and November 2001
we paid Dr. Schiff an aggregate of $2,500 and we granted Dr. Schiff 7 year
options to purchase an aggregate of 15,000 shares of our Common Stock. Such
options were granted under our Employee Stock Option Plan and different options
are exercisable at $4.75, $6.30 and $8.75 per share each.



                                       31






<PAGE>


Option Grants in Last Fiscal Year

         The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2001 by us to the Named
Officers:


<TABLE>
<CAPTION>
                                                                                        Potential Realizable
                                                                                              Value at
                                                                                           Assumed Annual
                                                                                        Rates of Stock Price
                                                                                          Appreciation for
                                Individual Grants                                            Option Term
                                -----------------                                            -----------
             (a)              (b)                 (c)              (d)           (e)            (f)       (g)
                           Number of           % of Total
                          Securities          Options/SARs
                          Underlying           Granted to      Exercise or
                         Options/SARs         Employees in     Base Price     Expiration
            Name            Granted         Fiscal Year (1)     ($/Share)        Date         5% ($)    10% ($)
            ----            -------         ---------------     ---------        ----         ------    -------
<S>                          <C>                   <C>            <C>          <C>           <C>       <C>
Steven Katz                  50,000                7.9            8.75         2/12/08        178,106   415,064
                            150,000               23.8            4.75         11/1/08        290,059   675,961

Ron Lipstein                 45,000                7.1            8.75         2/12/08        160,296   373,557
                            140,000               22.2            4.75         11/1/08        270,722   630,877

Costa Papastephanou(2)       10,000                1.6            7.063         2/5/08        28,753     67,008
                             30,000                4.8            6.30         6/12/08        76,942    179,308
                             20,000                3.2            4.75         11/1/08        38,675     90,128

Alain Klapholz               10,000                1.6            8.75         2/12/08        35,621     83,013
                             50,000                7.9            4.75         11/1/08        96,686    225,320

William D. Schaeffer (2)     10,000                1.6            4.75         11/1/08        19,337     45,064
</TABLE>


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

 (1) Options to purchase a total of 630,500 shares of common stock were
     granted to our employees, including the Named Officers, during the fiscal
     year ended December 31, 2001.

 (2) The options granted to Messrs. Papastephanou and Mr. Schaeffer vest as
     follows: 25% one year after the date of grant, an additional 25% two years
     after, an additional 25% three years after and the remaining 25% four years
     after the date of grant.



                                       32






<PAGE>



Aggregated Options Exercised in Last Fiscal Year and Fiscal Year End Option
Value

         The following table sets forth certain information regarding options
(which include warrants) exercisable during 2001 and the value of the options
held as of December 31, 2001 by the Named Officers. None of the Named Officers
exercised any options in 2001 nor did Messrs. Katz, Lipstein or Klapholz hold
any options which were not exercisable at December 31, 2001. At December 31,
2001, Mr. Papastephanou and Mr. Schaeffer respectively held 60,000 and 35,874
options which were not yet exercisable.


<TABLE>
<CAPTION>
                                                                              Value of Unexercised
                             Number of Unexercised Options at                 In-the-Money Options
Name                                 Fiscal Year End                         at Fiscal Year End (1)
---------                            ---------------                         ----------------------
<S>                                      <C>                                        <C>
Steven Katz                              625,028                                    $158,820

Ron Lipstein                             633,128*                                    148,100

Costa Papastephanou                       60,000 (not exercisable)                    21,000

Alain Klapholz                           202,300                                      52,940

William D. Schaeffer                      34,876                                       2,625

William D. Schaeffer                      35,874 (not exercisable)                     7,875
</TABLE>

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

 *   Includes warrants to purchase 15,000 shares held by Mr. Lipstein's minor
     children.

 (1) The closing price of our common stock on December 31, 2001, as listed
     on the Nasdaq SmallCap Market, was less than the exercise price of options
     held by these five Named Officers to purchase an aggregate of 1,164,006
     shares.

Compensation Committee Interlock and Insider Participation

         None of Ortec's executive officers serves as a member of the
compensation committee or on the board of directors of another entity, one of
whose executive officers serves on Ortec's Board of Directors.

         The Compensation Committee of our Board of Directors determines
compensation policies applicable to our five executive officers. Messrs. Steven
Katz, Mark Eisenberg and Steven Lilien are the members of the Compensation
Committee. Mr. Katz is an executive officer of Ortec. Although Dr. Mark
Eisenberg is not an executive officer of Ortec, he is employed by Ortec on a
part time basis devoting his time to research in our facility in Australia. The
compensation paid to Dr. Eisenberg is determined by an agreement between Dr.
Eisenberg and Ortec entered into on June 7, 1991 and amended on September 1,
1992.



                                       33






<PAGE>


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of our common stock as of February 28, 2002 by (i) each person (or
group of affiliated persons) who we know owns beneficially more than 5% of the
outstanding shares of our common stock, (ii) each of our executive officers and
directors, and (iii) all of our executive officers and directors as a group.
Except as indicated in the footnotes to this table, the persons named in this
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.


<TABLE>
<CAPTION>
                                                     Amount and                  Percentage of
Name and Address                                      Nature of                   Outstanding
of Beneficial Owner                             Beneficial Ownership             Shares Owned**
-------------------                             --------------------             --------------
<S>                                                   <C>                             <C>
Steven Katz*                                          747,915(1)                      7.2

Mark Eisenberg*                                       596,000                         6.1

Ron Lipstein*                                         876,024(2)                      8.5

Alain Klapholz*                                       491,806(3)                      5.0

Costa Papastephanou*                                    4,250(4)                      ***

William D. Schaeffer*                                  40,114(5)                      ***

Steven Lilien                                          35,900(6)                      ***
   19 Larchmont Street
   Ardsley, NY 10502

Allen I. Schiff                                        15,000(7)                      ***
   Fordham University
   Graduate School of Business
   113 West 60th Street
   New York, NY 10023

George Soros                                        1,153,906(8)                     11.9%
   888 Seventh Avenue, 33rd Floor
   New York, NY 10106

Franklin Resources, Inc.                              688,866(9)(10)                  7.1%
   One Franklin Parkway
   San Mateo, CA 94403-1906

Pequot Capital Management, Inc.                     2,069,064(9)(10)                 21.3%
   5000 Nyala Farm Road
   Westport, CT 06880

All officers and directors as a group               2,807,009(1-7)                   25.0%
(eight persons)
</TABLE>



                                       34




<PAGE>



*     The address of these persons is at the Company's offices 3960 Broadway,
      New York, NY 10032.

**    The number of shares of common stock beneficially owned by each person
      or entity is determined under rules promulgated by the Securities and
      Exchange Commission. Under such rules, beneficial ownership includes any
      shares as to which the person or entity has sole or shared voting power
      or investment power. Included among the shares owned by such person are
      any shares which such person or entity has the right to acquire within
      60 days after February 28, 2002. Unless otherwise indicated, each person
      or entity referred to above has sole voting and investment power with
      respect to the shares listed. The inclusion herein of any shares deemed
      beneficially owned does not constitute an admission of beneficial
      ownership of such shares.

***   Less than 1%, based upon information available to us.

(1)   Does not include shares owned by Dr. Katz's children, their spouses and
      his grandchildren. Dr. Katz disclaims any beneficial interest in such
      shares. Includes 625,853 shares issuable to Dr. Katz upon his exercise of
      outstanding options and warrants.

(2)   Includes 33,600 shares owned by Mr. Lipstein's minor children. Mr.
      Lipstein disclaims any beneficial interest in such 33,600 shares. Also
      includes 618,953 shares issuable to Mr. Lipstein and 15,000 to his minor
      children upon his and their exercise of outstanding options and warrants.

(3)   Includes 26,900 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
      disclaims any beneficial interest in such 26,900 shares. Also includes
      202,300 shares issuable to Mr. Klapholz upon his exercise of outstanding
      options.

(4)   Includes 2,500 shares issuable to Mr. Papastephanou upon his exercise of
      outstanding options.

(5)   Includes 37,514 shares issuable to Mr. Schaeffer on his exercise of
      outstanding options.

(6)   Includes 35,500 shares issuable to Dr. Lilien on his exercise of
      outstanding options.

(7)   All 15,000 shares are issuable to Dr. Schiff on his exercise of
      outstanding options.

(8)   As reported by Mr. Soros on a Form 13GA filed by him with the Securities
      and Exchange Commission which recites that this number includes 722,238
      shares held for the account of Quasar International Partners C.V.
      ("Quasar") and 431,572 shares held for the account of Lupa Family Partners
      ("Lupa"). Soros Fund Management LLC serves as principal investment manager
      of Quasar (a Netherlands Antilles limited partnership) and, as such, and
      Mr. George Soros as Chairman of Soros Fund




                                       35






<PAGE>



      Management LLC, may be deemed to have investment discretion over and the
      power to direct the voting and disposition of the shares held for the
      account of Quasar. Lupa is a New York limited partnership. In his capacity
      as a general partner of Lupa, Mr. Soros may be deemed to have voting and
      dispositive power with respect to shares held for the account of Lupa.

(9)   As reported on Forms 13G filed by such persons with the Securities and
      Exchange Commission.

(10)  Shares held by investment funds. These have sole or shared investment
      and/or voting power for these shares.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Consulting Agreement

         See "Eisenberg Consulting Agreement" for a description of our
consulting agreement with Dr. Mark Eisenberg.

Change of Control Agreements

         Our Board of Directors has authorized agreements with four of our
executive officers in the event of a "change of control" of Ortec. In the
agreements with Messrs. Katz, Lipstein and Klapholz "change of control" of Ortec
will be defined as a change in the ownership or effective control of Ortec or in
the ownership of a substantial portion of Ortec's assets, but in any event if
Messrs. Katz, Lipstein and Klapholz and Dr. Mark Eisenberg no longer constitute
a majority of our Board of Directors. The payments to be made to such three
executive officers in the event of a change of control range from 2 to 2.99
times the compensation paid by us to such executive in the twelve-month period
prior to the change of control. The change of control agreements with Messrs.
Katz, Lipstein and Klapholz will provide that in the event that such change of
control occurs, the expiration dates of all options and warrants which have been
granted to such executive officers and which expire less than three years after
such change of control, will be extended so that such options and warrants
expire three years after such change of control, and that at Messrs. Katz,
Lipstein or Klapholz' election, we will lend such executive officer upon his
exercise of any of his warrants or options, interest free and repayable after
three years, the funds needed by such executive officer to pay the exercise
price.

         We believe that such payments to most, if not all, of these three
executive officers will, if they are made, constitute "golden parachute"
payments under the Internal Revenue Code and to the extent the change of control
payments made to an individual executive officer exceeds the average annual
compensation paid by us to such executive officer in the five year period



                                       36






<PAGE>



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. The change of control agreements will provide
that we will pay such excise tax payable by such executive officer.

         The change of control agreement with Mr. Schaeffer will provide that
all his options will vest immediately upon a change of control of Ortec. The
agreement with Mr. Schaeffer will define "change of control" as a merger or
consolidation of Ortec with another company or the sale by us of all or
substantially all of our assets.


                           FORWARD LOOKING STATEMENTS

         This Annual Report includes statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, hopes, beliefs, intentions or
strategies regarding the future, that are based on the beliefs of our
management, as well as assumptions made by and information currently available
to us. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to us are
intended to identify such forward-looking statements. Such statements reflect
the current views of our management with respect to future events and are
subject to certain risks, uncertainties and assumptions, including those
described in this annual report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. We do not intend to update these
forward-looking statements.


                           AVAILABILITY OF FORM 10-K

         We will provide a copy of our annual report on Form 10-K for the year
ended December 31, 2001, filed with the Securities and Exchange Commission,
including our financial statements and the financial statement schedules, to any
of our stockholders and to any person holding our warrants or options to
purchase shares of our common stock, upon written request and without charge.
Such written request should be directed to Mr. Ron Lipstein, Secretary, at Ortec
International, Inc., 3960 Broadway, New York, NY 10032.




                                       37






<PAGE>


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) Financial Statements and Financial Statement Schedules.

         (i) Financial Statements:

         See Index to Financial Statements.

         (ii) Financial Statement Schedules

         All financial statement schedules have been omitted since either (i)
the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Financial Statements
and Notes thereto or in Management's Discussion and Analysis of Financial
Condition and Results of Operation.

     (b) Reports on Form 8-K.

         We did not file any report on Form 8-K in the fourth quarter of 2001.

     (c) Exhibits.


<TABLE>
<CAPTION>
Exhibit No.         Description
----------          -----------
<S>                 <C>
 3.1                Agreement of Merger of the Skin Group, Ltd. and the Company dated July
                    9, 1992 (1)

 3.2                Original Certificate of Incorporation (1)

 3.3                By-Laws (1)

 4.1                Form of Certificate evidencing shares of Common Stock (1)

10.1                Agreement for Consulting Services dated as of June 7, 1991 by and between
                    the Company and Dr. Mark Eisenberg (1)

 23                 Consent of Grant Thornton LLP (2)
</TABLE>

-----------

 (1) Filed as an Exhibit to the Company's Registration Statement on Form
     SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated herein
     by reference.

 (2) Filed herewith



                                       38






<PAGE>

                                   SIGNATURES

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


                                          Registrant:

                                          ORTEC INTERNATIONAL, INC.


                                          By: /s/ Steven Katz
                                              ---------------
                                              Steven Katz, Ph.D.
                                              Chairman and Chief
                                              Executive Officer

Dated:  April 12, 2002

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


<TABLE>
<CAPTION>
Signature                                                   Title                          Date
---------                                                   -----                          ----
<S>                                     <C>                                            <C>
/s/ Steven Katz                         Chairman, Chief Executive                      April 12, 2002
-------------------------               Officer and Director (Principal
Steven Katz, Ph.D.                      Executive Officer)

-------------------------------         Senior Vice President, Research
Dr. Mark Eisenberg                      and Development and Director

/s/ Ron Lipstein                        Vice Chairman, Chief Financial                 April 12, 2002
-------------------------               Officer, Secretary,
Ron Lipstein                            Treasurer and Director (Principal
                                        Financial and Accounting Officer)

/s/ Alain M. Klapholz                   Vice President, Operations                     April 12, 2002
----------------------                  and Director
Alain M. Klapholz
</TABLE>




                                       39






<PAGE>


<TABLE>
<CAPTION>
Signature                                                   Title                          Date
---------                                                   -----                          ----
<S>                                     <C>                                            <C>
/s/ Steven Lilien                       Director                                       April 12, 2002
------------------------
Steven Lilien
/s/ Allen I. Schiff                     Director                                       April 12, 2002
------------------------
Allen I. Schiff
</TABLE>



                                 Exhibit Index.


<TABLE>
<CAPTION>
Exhibit No.         Description
----------          -----------
<S>                  <C>
 3.1                Agreement of Merger of the Skin Group, Ltd. and the Company dated July
                    9, 1992 (1)

 3.2                Original Certificate of Incorporation (1)

 3.3                By-Laws (1)

 4.1                Form of Certificate evidencing shares of Common Stock (1)

10.1                Agreement for Consulting Services dated as of June 7, 1991 by and between
                    the Company and Dr. Mark Eisenberg (1)

 23                 Consent of Grant Thornton LLP (2)
</TABLE>

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

 (1) Filed as an Exhibit to the Company's Registration Statement on Form
     SB-2 (File No. 33-96090), or Amendment 1 thereto, and incorporated herein
     by reference.

 (2) Filed herewith.




                                       40




<PAGE>





                            Ortec International, Inc.
                        (a development stage enterprise)

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                                                                                                         <C>
Report of Independent Certified Public Accountants                                                          F-2

Financial Statements

       Balance Sheets as of December 31, 2001 and 2000                                                      F-3

       Statements of Operations for the years ended December 31, 2001, 2000 and
          1999, and for the cumulative period from March 12, 1991 (inception) to
          December 31, 2001                                                                                 F-5

       Statement of Shareholders' Equity/(Deficit) for the cumulative
          period from March 12, 1991 (inception) to December 31, 2001                                       F-6

       Statements of Cash Flows for the years ended December 31, 2001, 2000 and
          1999, and for the cumulative period from March 12, 1991 (inception) to
          December 31, 2001                                                                                 F-10

       Notes to Financial Statements                                                                        F-12 - F-40
</TABLE>

                                      F-1








<PAGE>





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
    Ortec International, Inc.


We have audited the accompanying balance sheets of Ortec International, Inc. (a
development stage enterprise) (the "Company") as of December 31, 2001 and 2000,
and the related statements of operations, shareholders' equity/(deficit) and
cash flows for each of the three years in the period ended December 31, 2001,
and for the period from March 12, 1991 (inception) to December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ortec International, Inc. at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, and for the
period from March 12, 1991 (inception) to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
incurred a net loss of $15,885,337 during the year ended December 31, 2001, and,
as of that date, the Company's current liabilities exceeded its current assets
by $2,529,159 and its total liabilities exceeded its total assets by $6,304,972.
These factors, among others, as discussed in Note A to the 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 A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



GRANT THORNTON LLP

New York, New York
February 22, 2002, except for Note A as to which the date is April 15, 2002

                                      F-2








<PAGE>




                            Ortec International, Inc.
                        (a development stage enterprise)

                                 BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                                    ASSETS                                                2001                   2000
                                                                                       ------------           ------------
<S>                                                                                    <C>                     <C>
CURRENT ASSETS
    Cash and cash equivalents                                                          $    854,025            $ 9,292,478
    Accounts receivable                                                                      21,890
    Due from New Jersey Economic Development Authority                                       82,433
    Other current assets                                                                     87,083                 88,878
                                                                                         ----------            -----------
           Total current assets                                                           1,045,431              9,381,356

PROPERTY AND EQUIPMENT, AT COST
    Laboratory equipment                                                                  2,126,771              1,768,872
    Office furniture and equipment                                                          982,948                857,031
    Leasehold improvements                                                                1,367,784              1,333,144
                                                                                         ----------             ----------
                                                                                          4,477,503              3,959,047
    Less accumulated depreciation and amortization                                       (2,894,782)            (2,223,064)
                                                                                         -----------            ----------
                                                                                          1,582,721              1,735,983

OTHER ASSETS
    Patent application costs, net of accumulated
       amortization of $213,105 in 2001 and
       $159,460 in 2000                                                                     619,676                572,089
    Deferred financing costs, net of accumulated
       amortization of $1,983 in 2001                                                        57,517
    Security deposit - New Jersey location                                                  598,000
    Other deposits and other assets                                                         135,256                 30,332
                                                                                        -----------            -----------
                                                                                        $ 4,038,601            $11,719,760
                                                                                        ===========            ===========
</TABLE>

                                      F-3








<PAGE>




                            Ortec International, Inc.
                        (a development stage enterprise)

                           BALANCE SHEETS (continued)

                                  December 31,

<TABLE>
<CAPTION>
                               LIABILITIES AND
                        SHAREHOLDERS' EQUITY/(DEFICIT)                                     2001                    2000
                                                                                       -----------            ------------
<S>                                                                                    <C>                    <C>
CURRENT LIABILITIES
    Accounts payable and accrued expenses                                             $  2,444,945            $    872,760
    Accrued compensation                                                                   223,393                 226,208
    Accrued professional fees                                                              301,783                 176,528
    Accrued interest                                                                       460,964                   7,081
    Loan payable - current                                                                 143,505                 132,369
                                                                                      ------------            ------------
           Total current liabilities                                                     3,574,590               1,414,946

LONG-TERM LIABILITIES
    Loan payable - noncurrent                                                              768,983                 912,489
    Other long-term obligations                                                          6,000,000

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY/(DEFICIT)
    Common stock, $.001 par value; authorized,
       35,000,000 shares; 9,711,608 shares issued,
       9,691,608 shares outstanding, at
       December 31, 2001 and 2000                                                            9,712                   9,712
    Additional paid-in capital                                                          53,017,615              52,829,535
    Deficit accumulated during the development
       Stage                                                                           (59,154,654)            (43,269,277)
    Treasury stock, at cost (20,000 shares at
       December 31, 2001 and 2000)                                                        (177,645)               (177,645)
                                                                                      ------------            ------------
                                                                                        (6,304,972)              9,392,325
                                                                                      ------------            ------------
                                                                                      $  4,038,601            $ 11,719,760
                                                                                      ============            ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4








<PAGE>




                            Ortec International, Inc.
                        (a development stage enterprise)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                                  Cumulative
                                                                                                                     from
                                                                                                                   March 12,
                                                                                                                     1991
                                                                    Year ended December 31,                     (inception) to
                                                     -------------------------------------------------------     December 31,
                                                         2001                2000               1999                 2001
                                                     ------------        ------------       ------------         ------------
<S>                                                  <C>                 <C>                <C>                  <C>
Product revenue                                      $     21,890        $      -           $       -            $     21,890
                                                     ------------        ------------       ------------         ------------
Expenses
    Research and development                            4,283,038           4,191,317          3,106,908           18,048,392
    Rent                                                  589,238             535,443            473,010            2,179,535
    Consulting                                          1,413,153             838,383            834,180            5,226,515
    Personnel                                           6,605,630           4,763,662          3,742,632           22,949,360
    General and administrative                          2,671,887           2,297,769          2,152,968           12,002,685
    Interest and other expense                            536,070              89,712             99,522            1,019,506
    Interest income                                      (191,749)           (586,623)          (368,711)          (2,249,449)
                                                     ------------        ------------       ------------         ------------
                                                       15,907,267          12,129,663         10,040,509           59,176,544
                                                       ----------        ------------       ------------         ------------
       Net loss                                      $(15,885,377)       $(12,129,663)      $(10,040,509)        $(59,154,654)
                                                     ============        ============       ============         ============
Net loss per share
    Basic and diluted                                     $(1.64)             $(1.37)            $(1.51)            $(12.67)
                                                           =====               =====              =====              ======
Weighted average shares outstanding
    Basic and diluted                                   9,691,608           8,847,295          6,634,874            4,668,594
                                                        =========           =========          =========            =========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5



<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                   STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)


<TABLE>
<CAPTION>
                                                                                        Deficit
                                                                                       accumulated
                                                          Common stock    Additional   during the                  Total
                                                       -----------------   paid-in     development  Treasury   shareholders'
                                                        Shares    Amount   capital        stage       stock   equity/(deficit)
                                                        ------    ------  -----------  -----------  --------  ----------------
<S>                                                  <C>        <C>      <C>         <C>          <C>       <C>
March 12, 1991 (inception) to December 31, 1991

Issuance of stock
    Founders                                           1,553,820  $1,554  $      (684)                            $        870
    First private placement ($.30 cash per share)        217,440     217       64,783                                   65,000
    The Director ($1.15 and $5.30 cash per share)        149,020     149      249,851                                  250,000
    Second private placement ($9.425 cash per share)      53,020      53      499,947                                  500,000
Share issuance expenses                                                       (21,118)                                 (21,118)
Net loss                                                                               $  (281,644)                   (281,644)
                                                       ---------  ------  -----------  -----------                ------------

Balance at December 31, 1991                           1,973,300   1,973      792,779     (281,644)                    513,108

Issuance of stock
   Second private placement ($9.425 cash per share)       49,320      49      465,424                                  465,473
   Stock purchase agreement with the Director ($9.425
     cash per share)                                      31,820      32      299,966                                  299,998
Share issuance expenses                                                       (35,477)                                 (35,477)
Net loss                                                                                  (785,941)                   (785,941)
                                                       ---------  ------  -----------  -----------                ------------

Balance at December 31, 1992                           2,054,440   2,054    1,522,692   (1,067,585)                    457,161

Issuance of stock
   Third private placement ($10.00 cash per share)       132,150     132    1,321,368                                1,321,500
   Stock purchase agreement with Home
     Insurance Company ($9.00 cash per share)            111,111     111      999,888                                  999,999
   Stock purchase agreement with the Director
     ($9.425 cash per share)                              21,220      21      199,979                                  200,000
   Shares issued in exchange for commission
     ($10.00 value per share)                                600       1        5,999                                    6,000
Share issuance expenses                                                      (230,207)                                (230,207)
Net loss                                                                                (1,445,624)                 (1,445,624)
                                                       ---------  ------  -----------  -----------                ------------

Balance at December 31, 1993 (carried forward)         2,319,521   2,319    3,819,719   (2,513,209)                  1,308,829
</TABLE>


                                      F-6





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

             STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)


<TABLE>
<CAPTION>
                                                                                        Deficit
                                                                                       accumulated
                                                          Common stock    Additional   during the                  Total
                                                       -----------------   paid-in     development  Treasury   shareholders'
                                                        Shares    Amount   capital        stage       stock   equity/(deficit)
                                                        ------    ------  -----------  -----------  --------  ----------------
<S>                                                  <C>        <C>      <C>         <C>          <C>       <C>
         (brought forward)                             2,319,521  $2,319  $ 3,819,719  $(2,513,209)               $  1,308,829
Issuance of stock
   Fourth private placement ($10.00 cash per share)       39,451      40      397,672                                  397,712
   Stock purchase agreement with Home
     Insurance Company ($10.00 cash per share)            50,000      50      499,950                                  500,000
Share issuance expenses                                                        (8,697)                                  (8,697)
Net loss                                                                                (1,675,087)                 (1,675,087)
                                                       ---------  ------  -----------  -----------                ------------
Balance at December 31, 1994                           2,408,972   2,409    4,708,644   (4,188,296)                    522,757
Rent forgiveness                                                               40,740                                   40,740
Net loss                                                                                (1,022,723)                 (1,022,723)
                                                       ---------  ------  -----------  -----------                ------------
Balance at December 31, 1995                           2,408,972   2,409    4,749,384   (5,211,019)                   (459,226)

Initial public offering                                1,200,000   1,200    5,998,800                                6,000,000
Exercise of warrants                                      33,885      34       33,851                                   33,885
Fifth private placement ($6.49 cash per share)           959,106     959    6,219,838                                6,220,797
Share issuance costs                                                       (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 (carried forward)         4,601,963   4,602   15,573,183   (7,860,787)                  7,716,998
</TABLE>


                                      F-7





<PAGE>





                            Ortec International, Inc.
                        (a development stage enterprise)

             STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)


<TABLE>
<CAPTION>
                                                                                        Deficit
                                                                                       accumulated
                                                          Common stock    Additional   during the                  Total
                                                       -----------------   paid-in     development  Treasury   shareholders'
                                                        Shares    Amount   capital        stage       stock   equity/(deficit)
                                                        ------    ------  ----------- ------------  --------  ----------------
<S>                                                  <C>        <C>      <C>         <C>          <C>       <C>
         (brought forward)                             4,601,963  $4,602  $15,573,183 $ (7,860,787)               $  7,716,998

Exercise of warrants                                   1,158,771   1,159   10,821,632                               10,822,791
Share issuance costs                                                         (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                           5,760,734   5,761   26,397,307  (12,686,450)                 13,716,618

Exercise of warrants                                     221,486     221    1,281,736                                1,281,957
Stock options and warrants issued for services                              1,920,111                                1,920,111
Sixth private placement                                  200,000     200    1,788,498                                1,788,698
Warrants issued in Sixth private placement                                    211,302                                  211,302
Share issuance costs                                                          (48,000)                                 (48,000)
Purchase of 6,600 shares of treasury stock (at cost)                                                $(67,272)          (67,272)
Net loss                                                                                (8,412,655)                 (8,412,655)
                                                       ---------  ------  ----------- ------------  --------      ------------

Balance at December 31, 1998                           6,182,220   6,182   31,550,954  (21,099,105)  (67,272)       10,390,759
Exercise of warrants                                      14,103      14       14,089                                   14,103
Stock options and warrants issued for services                                 64,715                                   64,715
Seventh private placement ($8.75 cash per share)         389,156     389    3,168,396                                3,168,785
Warrants issued in Seventh private placement                                  468,291                                  468,291
Eighth private placement ($5.50 cash per share)        1,636,364   1,637    8,998,365                                9,000,002
Share issuance costs                                                         (619,908)                                (619,908)
Purchase of 9,100 shares of treasury stock (at cost)                                                 (75,518)          (75,518)
Net loss                                                                               (10,040,509)                (10,040,509)
                                                       ---------  ------  ----------- ------------  --------      ------------

Balance at December 31, 1999 (carried forward)         8,221,843   8,222   43,644,902  (31,139,614) (142,790)       12,370,720
</TABLE>


                                      F-8





<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

             STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT) (continued)


<TABLE>
<CAPTION>
                                                                                        Deficit
                                                                                       accumulated
                                                          Common stock    Additional   during the                  Total
                                                       -----------------   paid-in     development  Treasury   shareholders'
                                                        Shares    Amount   capital        stage       stock   equity/(deficit)
                                                        ------    ------  -----------  -----------  --------  ----------------
<S>                                                  <C>        <C>      <C>         <C>          <C>       <C>
         (brought forward)                             8,221,843  $8,222  $43,644,902 $(31,139,614)$(142,790)     $ 12,370,720

Exercise of options and warrants                         175,532     175      327,107                                  327,282
Stock options and warrants issued for services                                 56,265                                   56,265
Ninth private placement ($15.00 cash per share)           66,667      67      999,938                                1,000,005
Warrants issued in Ninth private placement                                     23,000                                   23,000
Tenth private placement ($6.75 cash per share)         1,247,566   1,248    8,419,823                                8,421,071
Share issuance costs                                                         (641,500)                                (641,500)
Purchase of 4,300 shares of treasury stock (at cost)                                                 (34,855)          (34,855)
Net loss                                                                               (12,129,663)                (12,129,663)
                                                       ---------  ------  ----------- ------------ ---------      ------------

Balance at December 31, 2000                           9,711,608   9,712   52,829,535  (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                           9,711,608  $9,712  $53,017,615 $(59,154,654)$(177,645)     $ (6,304,972)
                                                       =========  ======  =========== ============ =========      ============
</TABLE>



The accompanying notes are an integral part of this statement.



                                      F-9



<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                               Cumulative
                                                                                                                   from
                                                                                                                 March 12,
                                                                                                                   1991
                                                                    Year ended December 31,                   (inception) to
                                                     ----------------------------------------------------       December 31,
                                                         2001                2000               1999               2001
                                                      -----------         -----------        ------------       ---------
<S>                                                  <C>                 <C>                <C>               <C>
Cash flows from operating activities
   Net loss                                          $(15,885,377)       $(12,129,663)      $(10,040,509)     $(59,154,654)
   Adjustments to reconcile net loss to net cash
     used in operating activities
       Depreciation and amortization                      725,567             708,928            597,528         3,118,328
       Unrealized loss on marketable securities                                                                     11,404
       Realized loss on marketable securities                                                                        5,250
       Non-cash stock compensation and imputed interest   642,855              56,265             64,715         3,495,946
       Purchases of marketable securities                                                         (6,298)      (19,075,122)
       Sales of marketable securities                                                            771,956        19,130,920
       (Increase) decrease in assets
         Accounts receivable                              (21,890)                                                 (21,890)
         Other current assets                             (80,638)            (87,177)               (37)         (169,514)
       Increase (decrease) in liabilities
         Accounts payable and accrued liabilities       1,634,233            (186,243)           762,650         3,004,637
                                                     ------------        ------------       ------------      ------------

       Net cash used in operating activities          (12,985,250)        (11,637,890)        (7,849,995)      (49,654,695)
                                                     ------------        ------------       ------------      ------------

Cash flows from investing activities
   Purchases of property and equipment, excluding
       capital leases                                    (518,456)           (551,630)          (705,277)       (4,390,437)
   Payments for patent applications                       (99,453)            (90,363)          (124,917)         (831,002)
   Organization costs                                                                                              (10,238)
   Deposits                                              (702,924)                578                787          (731,273)
   Purchases of marketable securities                                                                             (594,986)
   Sale of marketable securities                                                                                   522,532
                                                     ------------        ------------       ------------      ------------

       Net cash used in investing activities           (1,320,833)           (641,415)          (829,407)       (6,035,404)
                                                     ------------        ------------       ------------      ------------
</TABLE>

                                      F-10





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                      STATEMENTS OF CASH FLOWS (continued)

<TABLE>
<CAPTION>
                                                                                                               Cumulative
                                                                                                                  from
                                                                                                                 March 12,
                                                                                                                   1991
                                                                    Year ended December 31,                   (inception) to
                                                     ----------------------------------------------------      December 31,
                                                         2001                2000               1999               2001
                                                      -----------         -----------        -----------       ------------
<S>                                                     <C>                 <C>               <C>                <C>

Cash flows from financing activities
    Proceeds from issuance of notes payable                                                                   $     515,500
    Proceeds from issuance of common stock                                $ 9,748,358        $12,419,181         53,550,522
    Share issuance expenses                                                  (618,500)          (387,908)        (3,605,105)
    Purchase of treasury stock                                                (34,855)           (75,518)          (177,645)
    Proceeds from issuance of loans payable                                                       20,379          1,446,229
    Proceeds from other long-term obligations          $6,000,000                                                 6,000,000
    Repayment of capital lease obligations                                     (5,151)           (30,706)          (107,204)
    Repayment of loan payable                            (132,370)           (122,096)          (111,678)          (562,673)
    Repayment of notes payable                                                                                     (515,500)
                                                      -----------         -----------        -----------       ------------

       Net cash provided by financing activities        5,867,630           8,967,756         11,833,750         56,544,124
                                                      -----------         -----------        -----------       ------------

       NET INCREASE (DECREASE) IN
          CASH AND CASH EQUIVALENTS                    (8,438,453)         (3,311,549)         3,154,348            854,025

Cash and cash equivalents at beginning of period        9,292,478          12,604,027          9,449,679               -
                                                      -----------         -----------        -----------       ------------

Cash and cash equivalents at end of period            $   854,025         $ 9,292,478        $12,604,027       $    854,025
                                                      ===========         ===========        ===========       ============


Supplemental disclosures of cash flow information:
   Noncash financing activities
     Capital lease obligations                        $      -            $     -            $      -          $    118,903
     Deferred offering costs included in
       accrued professional fees                             -                                      -               314,697
     Financing costs - other long-term obligations
       included in accrued expenses                        59,500               -                   -                59,500
     Forgiveness of rent payable                             -                  -                   -                40,740
     Share issuance expenses - warrants                      -                 23,000            232,000            255,000

   Cash paid for interest                                  80,205              90,565            100,418            487,541
   Cash paid for income taxes                              44,528              41,286             53,671            199,576
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-11



<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000



NOTE A - 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, composite cultured skin
     ("OrCel"), for use in skin transplant procedures (the "Technology").
     Pursuant to a license agreement dated June 7, 1991, Dr. Eisenberg had
     granted Ortec a license for a term of ten years, with automatic renewals by
     Ortec for two additional ten-year periods, to commercially use and exploit
     the Technology for the development of products. In April 1998, Dr.
     Eisenberg assigned his patent for the Technology to Ortec for no
     consideration.

     The Skin Group, Ltd. (the "Skin Group") also was formed as a Delaware
     corporation, in March 1991, to raise funds for 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

     The Company is a development stage enterprise which prior to 2001 had no
     operating revenue. In February and September 2001, respectively, the
     Company received Food and Drug Administration ("FDA") approvals for the use
     of OrCel for treatment of Epidermolysis Bullosa and donor sites in burn
     patients. Following these approvals, in December 2001 the Company shipped
     its first product and realized approximately $22,000 in revenues. The
     Company is also pursuing FDA approvals for venous and diabetic skin ulcers.
     Successful future operations depend upon gaining FDA approvals for these
     indications, as well as the successful development and marketing of OrCel.

     The accompanying financial statements have been prepared assuming that the
     Company will continue as a going concern. The Company incurred a net loss
     of $15,885,337 during the year ended December 31, 2001, and, as of that
     date, the Company's current liabilities exceeded its current assets by
     $2,529,159 and its total liabilities exceeded its total assets by
     $6,304,972. These factors, among others, raise substantial doubt about the
     Company's ability to continue as a going concern.

     On March 27, 2002, the Company engaged H.C. Wainwright & Co., Inc.
     ("Wainwright"), an investment banking firm, to act as its financial advisor
     and assist it in obtaining financing.



                                      F-12






<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE A (continued)

     While the Company can give no assurance that any equity financing will be
     secured, Wainwright and the Company are proceeding to try to secure
     $12,000,000 in equity financing. If the Company receives the $12,000,000 it
     believes that it will be able to continue its operations for the next
     twelve months.

     The Company's primary focus, and the anticipated use of the above proceeds,
     is completion of the venous stasis and diabetic skin ulcers clinical
     trials, with submission of the relevant Pre-Market Approval ("PMA") filings
     to the FDA. The Company expects that the anticipated financing will allow
     it to do this. Based upon the Company's current schedule for completion of
     the clinical trials and PMA submission to the FDA, the Company believes
     that it can obtain FDA approval for the use of its product in treating both
     venous stasis and diabetic skin ulcer patients in 2003.

     The Company's continuation as a going concern is dependent upon its ability
     to obtain the additional financing. No assurance can be given that the
     Company will be successful in these efforts. The financial statements do
     not include any adjustments that might result from the outcome of this
     uncertainty.

     Initial Public Offering

     On January 19, 1996, the Company completed an initial public offering
     ("IPO") of 1,200,000 units. Each unit consisted of one share of the
     Company's common stock, one Class A warrant to purchase one share of common
     stock at $10, of which 1,083,780 were exercised and the balance was not
     exercised and has expired as of December 31, 1998, and one Class B warrant
     to purchase one share of common stock at $15, of which 11,400 were
     exercised and the balance was not exercised and has expired as of December
     31, 2000.




                                      F-13






<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE A (continued)

     The IPO raised gross proceeds of approximately $6,000,000, of which
     $800,000, $537,500 and approximately $315,000 were used to pay underwriting
     commissions, notes payable and deferred offering costs, respectively,
     thereby providing the Company with net proceeds of approximately
     $4,347,500.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     1.  Revenue Recognition

         Product revenue is recognized upon delivery of OrCel to our customers.

     2.  Research and Development Costs

         The Company is in the business of research and development and
         therefore, all research and development costs, including payments
         related to products under development and research consulting
         agreements and personnel costs, are expensed when incurred and for 2001
         include costs of production related to sales as such costs are not
         readily separable.

     3.  Depreciation and Amortization

         Property and equipment are carried at cost, less any grants received
         for construction. In 1996, the Company received a $400,000 grant toward
         the construction of its new laboratory and office facilities and it
         received an additional grant of $130,000 in 1998. (see Note J).

         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 life of the asset. Depreciation and
         amortization expense for the years ended December 31, 2001, 2000 and
         1999, was approximately $672,000, $657,000 and $554,000, respectively.

     4.  Patent Application Costs

         Patent application costs relate to the Company's U.S. patent
         application and application fees in foreign jurisdictions and consist
         of legal fees and other direct fees. The recoverability of the patent
         application costs is dependent upon, among other matters, obtaining
         further FDA approvals for use on the underlying technology.





                                      F-14







<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE B (continued)

     5.  Foreign Currency Translation

         The Company conducts some of its research and development at its
         laboratory in Sydney, Australia. However, because all Australian
         expenditures are funded from the United States, the Company has
         determined that the functional currency of its Australian office is 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 remeasured 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.

     6.  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.

     7.  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.

     8.  Cash and Cash Equivalents

         For purposes of the statement of cash flows, the Company considers 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. Cash and cash equivalents includes
         approximately $2,000 and $25,000, at December 31, 2001 and 2000,
         respectively of bank balances denominated in Australian dollars.



                                      F-15







<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE B (continued)

     9.  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. (See Notes H and I.)

         The amount of options and warrants excluded are as follows:

<TABLE>
<CAPTION>

                                                Years ended December 31,
                                        2001             2000              1999
                                        ----             ----              ----
                  <S>                  <C>              <C>               <C>
                  Warrants             395,412          609,773           764,091
                                       =======          =======           =======

                  Stock options      2,033,306        1,524,106         1,122,500
                                     =========        =========         =========
</TABLE>

     10. Impairment of Long-Lived Assets

         The Company reviews 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. The Company has determined that no
         provision is necessary for the impairment of long-lived assets at
         December 31, 2001.



                                      F-16






<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE C - CONCENTRATION OF CREDIT RISK

     The Company maintains cash and money market accounts at four financial
     institutions located in New York City. Cash accounts are insured by the
     FDIC up to $100,000. Uninsured balances aggregate to approximately $723,000
     and $8,681,000 at December 31, 2001 and 2000, respectively. The Company has
     not experienced any losses in such accounts and believes it is not exposed
     to any significant credit risk.


NOTE D - PATENTS

     Patent application costs are stated at cost less amortization computed by
     the straight-line method principally over 14 years. The Company's U.S.
     patent was issued in 1994 and expires in 2011.

     There can be no assurance that any patent will provide commercial benefits
     to the Company.

     The Company has granted a security interest in its United States and
     Canadian patents and trademarks relating to OrCel to collateralize payments
     it will be required to make to satisfy its other long-term obligation. (see
     Note G).


NOTE E - CAPITAL LEASE OBLIGATION

     The Company had entered into several capital lease agreements with terms of
     two to three years at effective interest rates ranging from 12.22% to
     15.48%. The agreements ended during the year ended December 31, 2000.

     As of December 31, 2001 and 2000, the Company has recorded $118,903 in
     equipment purchased under capital leases and $118,903 in accumulated
     amortization, respectively.

     In January 2002, the Company secured a $1,300,000 lease line of credit to
     be used for the acquisition of additional manufacturing, laboratory and
     other equipment required to expand its manufacturing capacity.





                                      F-17






<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE F - LOAN PAYABLE

     During 1996, the Company obtained a loan from the landlord of its
     laboratory for the construction of, and equipment for, the leased facility.
     During 1997, the Company modified the terms of the loan as a result of
     increased build-out costs incurred in the construction of the facility. An
     adjustment has been made in 1997 to record additional interest and
     principal. The adjusted loan payments are due in monthly installments of
     $10,103, including interest at an effective rate of 7.98%, through July
     2006.

     During 1998, the Company obtained an additional loan from the landlord for
     improvements to the leased facility. During 1999, the Company modified the
     terms of the additional loan as a result of increased build-out costs
     incurred. The adjusted loan payments are due in monthly installments of
     $7,605, including interest at an effective rate of 8.6%, through March
     2008.

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

<TABLE>
<CAPTION>
      Year ending December 31,
      <S>                                                            <C>
          2002                                                       $  212,503
          2003                                                          212,503
          2004                                                          212,503
          2005                                                          212,503
          2006                                                          161,988
          2007 and thereafter                                           121,688
                                                                      ---------

                                                                      1,133,688
      Less amount representing interest                                 221,200
                                                                      ---------

      Net present value of future loan payments                      $  912,488
                                                                      =========

      Current portion                                                $  143,505
      Noncurrent portion                                                768,983
                                                                     ----------

                                                                     $  912,488
                                                                      =========

</TABLE>



                                      F-18



<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE G - OTHER LONG-TERM OBLIGATIONS

     On August 29, 2001, the Company entered into a Revenue Interests Assignment
     agreement with Paul Capital Royalty Acquisition Fund L.P. ("Paul Capital").
     Under such agreement the Company was eligible to receive $10,000,000 during
     2001. The Company received $6,000,000 during 2001 and the remaining
     $4,000,000 in January 2002. Upon completion of additional milestones, the
     Company may be eligible to receive another $5,000,000. In addition, the
     Company may incrementally receive another $10,000,000, but only upon mutual
     agreement by both the Company and Paul Capital.

     In consideration for the first $10,000,000, Paul Capital will receive a
     minimum of 3.33% of end user sales of the Company's products in the United
     States, Canada and Mexico, which percentage will be proportionately
     increased by any additional amounts paid to the Company by Paul Capital.
     Such percentage may be further adjusted upward or downward, based on the
     volume of net sales to end users of the Company's products in those three
     countries. The Company anticipates that its effective cost of the amounts
     it receives from Paul Capital will range from 20% to 35% per annum over the
     term of the agreement which terminates in December 2011. Beginning on
     January 1, 2003, Paul Capital will be entitled to receive each year the
     first proceeds to the Company from end user sales of its products in those
     three countries. Such annual amounts that Paul Capital will be able to draw
     in advance will range from $1,500,000 in 2003 to $7,500,000 in 2005 and
     thereafter. The agreement provides for quarterly and annual accountings
     between Paul Capital and the Company for those advance payments. The
     amounts received from Paul Capital have been classified as a long-term
     liability similar to debt, and interest has been imputed at a rate of 30%
     per annum to reflect the estimated cost of such funds.

     In the event of a change in control of the Company or upon the occurrence
     of certain other events as defined in the agreement, Paul Capital has the
     option to put its revenue interest back to the Company for an amount as
     provided in the agreement. The Company also has the option to repurchase
     Paul Capital's interest upon the occurrence of a change in control of the
     Company or a complete divestiture by the Company of its interests in its
     products, for an amount provided in the agreement.

     The Company granted Paul Capital a security interest in its United States
     and Canadian patents and trademarks relating to its technology for its
     OrCel product, to secure payments required to be made by the Company to
     Paul Capital under this agreement.

                                      F-19







<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H - EQUITY TRANSACTIONS

     Each share of the Company's common stock is entitled to one vote.

     In January 1993, Ortec effected a stock split and granted twenty new shares
     of common stock of $.001 par value for each outstanding share of common
     stock. This stock split is retroactively reflected in the accompanying
     financial statements and all references to shares are to the new shares
     with per share amounts appropriately adjusted.

     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 (600,000
     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
     (953,820 shares). In March 1991, the Skin Group issued, in a private
     placement, 217,440 shares for $65,000. In June and October 1991, the Skin
     Group issued 130,160 and 18,860 shares, to a then director of the Company
     (the "Director") for $150,000 and $100,000, respectively. Commencing in
     November 1991, the Skin Group issued 79,480 shares under a second private
     placement for $750,006 (including 26,460 shares during the year ended
     December 31, 1992). On July 27, 1992, the Skin Group was merged with and
     into Ortec.

     Also under the second private placement 22,860 shares of Ortec were issued
     for $215,467. In addition, the Director was granted warrants to purchase
     7,360 shares of Ortec at $9.425 per share.

     Pursuant to a stock purchase agreement entered into with the Director in
     June 1992, 53,040 shares of Ortec were sold to the Director for a total
     purchase price of $499,998. In addition, the Director was granted warrants
     to purchase 79,570 shares at an exercise price of $9.425 per share, such
     warrants were exercised on December 29, 1998. 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, 1993 and 1992, the Director paid $200,000 and $299,998,
     respectively, and was issued 21,220 and 31,820 shares, respectively.

                                      F-20






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     Further, in connection with the Director's purchase of the 53,040 shares,
     in 1993, the Other Founders granted to the Director options to purchase
     from them an aggregate of 74,000 Ortec shares, at a price of $5 per share.
     In 1993, the Director exercised such option in part, and purchased 49,000
     shares from the Other Founders at the option price of $5 per share. The
     remaining balance of such options expired April 15, 1994.

     Pursuant to a third private placement that commenced in January 13, 1993,
     and concluded on March 31, 1993, Ortec sold an aggregate of 109,650 shares
     at $10 per share ($1,096,500). Subsequent to such offering, in 1993, the
     Company sold an additional 22,500 shares at $10 per share ($225,000). In
     connection with such purchases, all purchasers received certain
     registration rights.

     Pursuant to a Stock Purchase Agreement dated July 19, 1993, by and between
     Ortec and the Home Insurance Company ("Home Insurance"), the Company sold
     to Home Insurance 111,111 shares of common stock for an aggregate purchase
     price of $999,999, or $9 per share. In connection with such purchase, Home
     Insurance received certain registration rights.

     In addition, in 1993, the Company issued 600 shares to an individual as
     compensation for commissions in connection with the sale of the Company's
     shares. Such commissions are included in share issuance expenses. The stock
     issued was valued at $10 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 100,000 shares owned by such persons in various
     amounts and at various times, at a purchase price of $10 per share. As of
     December 31, 1993, the Director had exercised options and purchased 5,000
     shares under such agreement at $10 per share. The remaining balance of such
     options has expired.

     Pursuant to a fourth private placement consummated in July 1994, Ortec sold
     an aggregate of 39,451 shares at between $10 and $10.25 per share for
     aggregate proceeds of $397,712.

     Pursuant to a Stock Purchase Agreement dated July 22, 1994, between Ortec
     and Home Insurance, the Company sold to Home Insurance 50,000 shares of
     common stock for an aggregate purchase price of $500,000, or $10 per share.
     In connection with such purchase, Home Insurance received certain
     registration rights and warrants to purchase 10,000 shares of common stock
     at $12 per share, which expired on July 21, 1997.

                                      F-21






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     On January 19, 1996, the Company completed an initial public offering
     ("IPO") of 1,200,000 units for aggregate proceeds of $6,000,000. Each unit
     consisted of one share of the Company's common stock, one Class A warrant
     to purchase one share of common stock at $10 and one Class B warrant to
     purchase one share of common stock at $15. As of December 31, 1998,
     1,083,780 Class A warrants were exercised and the balance expired
     unexercised. The Class B warrants were originally set to expire in January
     1999. The Company extended the expiration date to March 31, 2000. The Class
     B warrants are subject to redemption by the Company at $.01 per warrant.
     The Company 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.

     In November 1996, the Company completed a private placement of its
     securities from which it 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).
     The Company sold 959,106 shares of common stock in such private placement
     at average prices of $6.49 per share. In addition, the Company 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, the Company registered all
     959,106 shares.

     During 1992 and 1993, the Company issued warrants to purchase 6,660 shares
     at $9.425 per share, and during 1995 the Company issued warrants to
     purchase 2,000 shares at $10 per share to members of the Scientific
     Advisory Board of the Company. During 1996 and 1997, the Company issued
     warrants to purchase 242,101 shares at $6 to $12 per share to the Director
     and certain others. These warrants expired at various dates through
     November 2001.

     On January 20, 1996, the Company granted "lock-up warrants" entitling
     shareholders to purchase an aggregate of 389,045 shares of the Company's
     common stock at a price of $1.00 per share. All unexercised warrants
     expired on January 18, 2000. At different times during 1996, seven persons
     exercised such warrants and purchased 33,885 shares of common stock at the
     $1.00 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 the Company's common stock purchased at
     prices of $9.00 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 21,210 shares of common stock at the

                                      F-22







<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     $1.00 per share exercise price. During 1998, nine persons exercised such
     warrants and purchased an aggregate of 96,077 shares of common stock at the
     $1.00 per share exercise price. During 1999, five persons exercised such
     warrants and purchased an aggregate of 14,103 shares of common stock at the
     $1.00 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, the Company granted to one person and its
     seven designees four-year warrants to purchase an aggregate of 37,500
     shares of common stock, at an exercise price of $12.00 per share. Such
     warrants are not exercisable until July 18, 1998 and were granted in
     consideration for consulting services rendered to the Company.

     During the fourth quarter of 1997, the Company granted to one person and
     its six designees four-year warrants to purchase an aggregate of 37,500
     shares of common stock, at an exercise price of $12.00 per share. Such
     warrants are not exercisable until July 18, 1998 and were granted in
     consideration for consulting services rendered to the Company.

     During 1998, warrants for 18,700 shares, mentioned in the two previous
     paragraphs, were exercised utilizing the cashless exercise option of the
     warrant agreement. The Company issued 6,204 shares under this exercise.

     During the third quarter of 1997, the Company granted to one person a
     one-year warrant to purchase an aggregate of 625 shares of common stock, at
     an exercise price of $12.00 per share. Such warrants were granted in
     consideration for consulting services rendered to the Company. The warrant
     was exercised during 1998.

     The Company recorded consulting expense of approximately $64,000 as a
     result of these grants during the year ended December 31, 1998.

     During the fourth quarter of 1997, the Company granted five-year warrants
     to its three executive officers to purchase an aggregate of 240,000 shares
     of common stock, at an exercise price of $12.00 per share. Such warrants
     were granted in consideration for services rendered to the Company. The
     exercise of such warrants is 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 have occurred so that 185,000 of

                                      F-23






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     those warrants are now vested. As a result, the Company 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 the Company's Board of Directors.

     In consideration for services rendered by him as a director of the Company
     in the five-year period from 1992 to 1996 for which he never received
     compensation, the Company extended by one year to December 31, 1998 the
     expiration date of warrants owned by a director to purchase an aggregate of
     86,930 shares, exercisable at $9.425 per share. As a result, the Company
     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, the Company granted five-year options to
     its three executive officers to purchase an aggregate of 520,750 shares of
     common stock, at exercise prices ranging from $12.13 to $12.44 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 the Company's Board of
     Directors. As a result, the Company recorded compensation expense of
     approximately $495,000 in December 1998.

     In December 1998, the Company completed a private placement of its
     securities from which it received proceeds of $2,000,000. In addition, the
     Company granted three-year warrants to the Purchaser to purchase 50,000
     shares at $12 per share. The Company sold 200,000 shares of common stock in
     such private placement. The Company assigned value to the common stock and
     warrants issued of $1,788,698 and $211,302 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.

     In March 1999, the Company completed a private placement of 389,156 shares
     of its common stock to twenty investors from which it received proceeds of
     approximately $3,405,000. In addition, each investor also received a
     three-year warrant to purchase 20% of the number of shares of the Company's
     common stock such investor purchased in such private placement. The prices
     at which such warrants are

                                      F-24






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     exerciseable are $12.50 per share for one half, and $14.50 per share for
     the other half, of the number of shares issuable upon exercise of such
     warrants. The Company assigned value to the common stock and warrants
     issued to the investors of $3,168,785 and $236,291 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. Oscar Gruss & Son, Incorporated ("Gruss") acted as placement agent
     in such private placement. For its services as placement agent, the Company
     paid Gruss $272,406 and granted Gruss a five-year warrant to purchase an
     aggregate of 38,915 shares of the Company's common stock at an exercise
     price of $10.50 per share. The value assigned to the Gruss warrants was
     $232,000. Other share issuance costs amounted to $106,002.

     In December 1999, the Company completed a private placement of 1,636,364
     shares of its common stock to two institutional funds from which it
     received proceeds of approximately $9,000,000. Share issuance costs
     amounted to approximately $9,500.

     In March 2000, the Company completed a private placement of 66,667 shares
     of its common stock to one fund from which it received proceeds of
     approximately $1,000,000. In addition, the Company paid a placement agent
     who introduced the Company to the fund a fee of approximately $43,400 and
     granted such placement agent a five year warrant to purchase 2,667 shares
     of the Company's common stock at an exercise price of $15.00 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.

     In September 2000, the Company completed a private placement of 1,247,566
     shares of its common stock to ten investors from which it received
     approximately $8,421,000. In addition, the Company paid the placement agent
     who introduced the Company to the investors a fee of approximately
     $525,400. Other share issuance costs amounted to approximately $46,500.

     In April 2001, the Company issued options to purchase 60,000 shares of the
     Company's common stock, at $6.95 per share, to certain professionals. The
     estimated fair value of $188,080 of such options has been recorded as an
     expense in the accompanying financial statements.

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



                                      F-25






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

     The following table summarizes warrant activity during the period from
     March 12, 1991 (inception) through December 31, 2001 (excluding the Class A
     and B warrants which were issued during the IPO):

<TABLE>
<CAPTION>
                                                                                         Price range               Shares
                                                                                         -----------               ------
<S>                                                                                         <C>                       <C>
       March 12, 1991 (inception) to December 31, 1991
           Granted                                                                          $ 9.425                   7,360
                                                                                                                  ---------
       Balance, December 31, 1991                                                             9.425                   7,360
           Granted                                                                            9.425                  55,080
                                                                                                                   --------
       Balance, December 31, 1992                                                             9.425                  62,440
           Granted                                                                      9.425 - 12.00                48,230
                                                                                                                   --------
       Balance, December 31, 1993                                                       9.425 - 12.00               110,670
           Granted                                                                           12.00                   10,000
                                                                                                                   --------
       Balance, December 31, 1994                                                       9.425 - 12.00               120,670
           Granted                                                                           10.00                    4,000
           Expired                                                                            9.425                  (2,680)
                                                                                                                  ---------
       Balance, December 31, 1995                                                       9.425 - 12.00               121,990
           Granted                                                                       1.00 - 10.00               511,606
           Exercised                                                                          1.00                  (33,885)
           Expired                                                                           12.00                   (2,450)
                                                                                                                  ---------
       Balance, December 31, 1996                                                        1.00 - 12.00               597,261
           Granted                                                                      12.00 - 14.25               330,625
           Expired                                                                           12.00                  (10,000)
                                                                                                                   --------
       Balance, December 31, 1997                                                        1.00 - 14.25               917,886
           Granted                                                                      12.00 - 14.00                75,000
           Exercised                                                                     1.00 - 12.00              (205,852)
           Expired                                                                          12.00                  (108,425)
                                                                                                                   --------
       Balance, December 31, 1998 (carried forward)                                      1.00 - 14.25               678,609
</TABLE>

                                      F-26






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE H (continued)

<TABLE>
<CAPTION>
                                                                                         Price range                Shares
                                                                                         -----------                ------
<S>                                                                                     <C>                         <C>
       Balance, December 31, 1998 (brought forward)                                     $ 1.00 - 14.25              678,609
            Granted                                                                      12.50 - 14.50              116,745
            Exercised                                                                        1.00                   (14,103)
            Expired                                                                       6.00 - 9.425              (17,160)
                                                                                                                   --------
       Balance, December 31, 1999                                                         1.00 - 14.25              764,091
            Granted                                                                         15.00                     2,667
            Exercised                                                                       12.00                    (2,000)
            Expired                                                                       1.00 - 10.00             (154,985)
                                                                                                                   --------
       Balance, December 31, 2000                                                         7.70 - 15.00              609,773
            Expired                                                                       7.70 - 12.00             (214,361)
                                                                                                                   --------
       Balance, December 31, 2001                                                       $ 7.70 - 15.00              395,412
                                                                                                                   ========
</TABLE>


        The following table summarizes warrant data as of December 31, 2001:

<TABLE>
<CAPTION>
                                                             Weighted
                                                              average          Weighted                          Weighted
                                                             remaining          Average                           average
         Range of                            Number         contractual        Exercise          Number          exercise
      exercise prices                      outstanding         life              price         exercisable         price
      ---------------                     ------------     -----------         ---------      ------------       -------
<S>                                         <C>                <C>             <C>               <C>              <C>
      $7.70 to $10.50                        38,915         2.24 years          $10.50            38,915          $10.50
      $12.00 to $12.50                      278,918         0.67 years          $12.07           278,918          $12.07
      $14.00 to $15.00                       77,579         0.96 years          $14.32            77,579          $14.32
</TABLE>

                                      F-27



<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE I - STOCK OPTIONS AND WARRANTS

     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 350,000 shares of the Company's common
     stock. These options may be granted to employees, officers of the Company,
     nonemployee directors of the Company and consultants to the Company. The
     Plan provides for granting of options to purchase the Company's common
     stock at not less than the fair value of such shares on the date of the
     grant. The options generally vest ratably over a four year period and
     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 the Company's common stock for which stock
     options may be granted from 350,000 to 1,550,000 shares. In August 2000,
     the stockholders and Board of Directors ratified and approved the second
     amendment to the Company's Amended and Restated 1996 Stock Option Plan
     increasing the number of shares of the Company's common stock for which
     options have been or could be granted under the Plan from 1,550,000 to
     3,000,000 shares. The following table summarizes the stock option activity
     through December 31, 2001:

<TABLE>
<CAPTION>
                                                                                             Weighted average
                                                                           Number             exercise price
                                                                           ------             --------------
       <S>                                                                 <C>                   <C>
       Granted - adoption of stock option plan                             156,000               $ 7.08
                                                                         ---------

       Balance, December 31, 1996                                          156,000                 7.08

       Granted                                                             123,000                11.94
       Forfeited, expired                                                   (3,000)                6.63
                                                                         ---------

       Balance, December 31, 1997                                          276,000                 9.25

       Granted                                                             689,750                12.10
       Exercised                                                            (6,750)                7.42
       Forfeited, expired                                                  (14,500)               11.19
                                                                         ---------

       Balance, December 31, 1998                                          944,500                11.17

       Granted                                                             399,000                10.87
       Forfeited, expired                                                 (221,000)               14.93
                                                                         ---------

       Balance, December 31, 1999 (carried forward)                      1,122,500                10.33
</TABLE>

                                      F-28





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE I (continued)

<TABLE>

       <S>                                                                  <C>                   <C>
       Balance, December 31, 1999 (brought forward)                         1,122,500               $10.33

       Granted                                                                449,956                 7.96
       Exercised                                                               (3,500)                7.00
       Forfeited, expired                                                     (44,850)                8.27
                                                                            ---------

       Balance, December 31, 2000                                           1,524,106               $12.30

       Granted                                                                756,500                 5.93
       Forfeited, expired                                                    (247,300)                7.41
                                                                            ---------

       Balance, December 31, 2001                                           2,033,306               $ 8.54
                                                                            =========
</TABLE>


     The following data has been provided for exercisable options:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   ------------
                                                      2001              2000             1999
                                                      ----              ----             ----
         <S>                                      <C>               <C>             <C>
         Number of options                         1,686,707         1,237,706          974,950
         Weighted average exercise price               $8.93            $12.02           $10.74
         Weighted remaining contractual
           life                                   4.71 years        3.95 years       4.18 years
</TABLE>


     The exercise price for all stock options awarded has been determined by the
     Board of Directors of the Company.

     The weighted average fair value at the date of grant for options granted
     during the year ended December 31, 2001 and 2000 was $3.83 and $4.37,
     respectively.

                                      F-29







<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE I (continued)

     The following table summarizes option data as of December 31, 2001:

<TABLE>
<CAPTION>
                                                              Weighted
                                                               Average          Weighted                          Weighted
                                                              Remaining          average                           average
           Range of                          Number          Contractual        exercise          Number          exercise
      exercise prices                      outstanding          life              Price         exercisable         price
      ---------------                     ------------      -----------         ---------      ------------       -------
      <S>                                  <C>               <C>                <C>             <C>               <C>
      $4.50 to $7.50                        1,025,400        5.62 years          $ 5.79            723,263         $ 5.61
      $8.00 to $10.44                         408,906        4.95 years            9.47            366,444           9.44
      $10.50 to $14.25                        584,000        2.61 years           12.43            582,500          12.43
      $14.25 to $21.38                         15,000        1.40 years           20.73             14,500          21.45
                                            ---------                                            ---------

                                            2,033,306                            $ 8.54          1,686,707         $ 8.93
                                            =========                            ======          =========         ======
</TABLE>

     In October 1995, the Financial Accounting Standards No. 123 ("SFAS No.
     123"), "Accounting for Stock-Based Compensation," established financial
     accounting and reporting standards for stock-based employee compensation
     plans. The financial accounting standards of SFAS No. 123 permit companies
     to either continue accounting for stock-based compensation under existing
     rules or adopt SFAS No. 123 and reflect the fair value of stock options and
     other forms of stock-based compensation in the results of operations as
     additional expense. The disclosure requirements of SFAS No. 123 require
     companies which elect not to record the fair value in the statement of
     operations to provide pro forma disclosures of net income and earnings per
     share in the notes to the financial statements as if the fair value of
     stock-based compensation had been recorded.

     The Company follows Accounting Principles Board Opinion No. 25 and its
     related interpretations in accounting for its stock-based compensation
     plans.

     The Company recognized approximately $1,696,000 of compensation expense for
     options and warrants issued to officers and directors of the Company 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 a director of the Company, in
     accordance with the terms of certain compensation provisions provided for
     and approved by the Company's Board of Directors.

     The Company utilized the Black-Scholes option-pricing model to quantify the
     expense of options and warrants granted to nonemployees and the pro forma
     effects on net loss and net loss per share of the fair value of the options
     and warrants granted to employees during the years ended December 31, 2001,
     2000 and 1999. The following assumptions were made in estimating fair
     value.

                                      F-30





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE I (continued)

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                             -----------------------
                                                                2001                  2000                  1999
                                                                ----                  ----                  ----
       <S>                                                     <C>                   <C>                   <C>
       Risk-free interest rate                                    4.6%                  4.5%                    5%
       Expected option life                                    7 years               7 years               3 years
       Expected volatility                                       65.8%                   65%                   65%
</TABLE>

     Had compensation cost been determined under SFAS No. 123 for the years
     ended December 31, 2001, 2000 and 1999, net loss and loss per share would
     have been increased as follows:

<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                              -----------------------
                                                                   2001                  2000                 1999
                                                                   ----                  ----                 ----
       <S>                                                    <C>                   <C>                   <C>
       Net loss
           As reported                                        $(15,885,377)         $(12,129,663)         $(10,040,509)
           Pro forma                                          $(18,779,097)         $(13,948,132)         $(11,149,970)

       Net loss per share (basic and diluted)
           As reported                                              $(1.64)               $(1.37)               $(1.51)
           Pro forma                                                $(1.94)               $(1.58)               $(1.68)
</TABLE>

     In addition, the Company recognized approximately $188,000, $56,000 and
     $65,000 in consulting expenses in 2001, 2000 and 1999, respectively, for
     options and warrants granted to independent consultants and investment
     bankers for services rendered to the Company.


NOTE J - COMMITMENTS AND CONTINGENCIES

     Agreement With Dr. Eisenberg

     Pursuant to an amended agreement, the Company has engaged the services of
     Dr. Eisenberg as a consultant through August 31, 2005. The consulting
     agreement may be renewed for an additional two years unless terminated by
     either party prior to such renewal period. Under the agreement, Dr.
     Eisenberg is obligated to devote twenty hours per week to Company business
     and is entitled to an annual compensation for such services with annual
     increases, as defined. In addition, Dr. Eisenberg is paid $58 per hour for
     services in excess of twenty hours per week. The agreement also provides
     for a bonus in the event the Company files for the registration of any
     patent. The bonus, which shall be determined by the

                                      F-31





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE J (continued)

     Board of Directors of the Company, shall not be less than $30,000 per
     patent registration, but may not aggregate more than $60,000 during any
     twelve-month period. As of December 31, 1999 and for the cumulative period
     since inception, no bonuses have been earned by Dr. Eisenberg. For each of
     the years ended December 31, 2001, 2000 and 1999, Dr. Eisenberg earned
     approximately $73,000 for consulting services and approximately $761,000
     for the period from inception to December31, 2001, which is included in
     research and development expense. Included in accrued compensation at
     December 31, 2001 and 2000 are $36,826 and $21,411, respectively,
     representing unpaid consulting fees to Dr. Eisenberg.

     Sales Force

     In December 2001, the Company entered into an agreement with PDI, Inc.
     ("PDI"), a pharmaceutical and medical device and diagnostics sales and
     marketing company to provide a dedicated sales force to the Company to
     target the donor site burn market. The agreement provides for a monthly fee
     based on the number of sales representatives engaged plus commissions based
     upon sales of OrCel. In the event that the agreement is terminated by the
     Company before February 2003, an early termination charge of up to $150,000
     will be payable to PDI.

     Supply Agreements

     In October 1991, the Company entered into an agreement with Cornell
     University Medical College ("Cornell"), a medical institution in New York
     City, for Cornell to produce and supply the Company, on an exclusive basis
     and using Dr. Eisenberg's technology, all of the cultured skin equivalent
     necessary for the Company's use in human clinical tests in the United
     States. Fees earned by Cornell amounted to approximately $1,145,000 for the
     period from inception to December 31, 1996. The Cornell arrangement was
     terminated as of December 31, 1996.

     Research Agreement

     In January 1997, the Company entered into an agreement with the New Jersey
     Center for Biomaterials and Medical Devices (the "New Jersey Center"),
     whereby the Company and the New Jersey Center will collaborate on research
     focusing on the development of collagen-based biomaterials for soft tissue
     repair, specifically targeting the development of a second generation
     collagen matrix to be used for the production of OrCel. The New Jersey
     Center is a cooperative research initiative sponsored by the University of
     Medicine and Dentistry of New Jersey, Rutgers University and the New Jersey
     Institute of Technology, and receives financial support from the New Jersey
     Commission of Science and Technology. The Company contributed $40,000 of
     the $100,000 cost of such research in 1998, $45,000 in 1999 and the final
     $15,000 in 2000.

                                      F-32





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE J (continued)

     Occupancy Arrangements

     The Company leases approximately 5,000 square feet of space in Sydney,
     Australia, on a month-to-month basis, in which the Company operates a
     research laboratory to conduct its research and development activities in
     Australia and to produce OrCel used in the operations conducted in
     Australia. The Company pays rent in Australian dollars, which at the
     current rate of exchange, amounts to approximately US $25,000 per year.
     This space is rented from Dr. Mark Eisenberg's father on terms that the
     Company believes are not less favorable to it than for rental of similar
     space in Sydney, Australia, from nonrelated third parties.

     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.

     In March 1996, the Company entered into a five-year lease with Columbia
     University for the Company's 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. In 1996, the
     Company also granted Columbia a warrant which expired in March 2001 to
     purchase 5,000 shares of common stock at an exercise price of $10 per
     share. In addition, Columbia had agreed to provide the Company with a grant
     of $400,000 and a ten-year self-amortizing loan with interest at the rate
     charged by Columbia's bank for up to an additional $600,000, to build and
     equip the Company's laboratory. During 1998, the Company received the
     $600,000 loan and an additional grant of $130,000 and entered into two
     leases with Columbia for additional space in the building. During 2000, the
     Company extended the two leases for another year and entered into a new
     lease for additional space in the building. During 2001, the Company
     extended two of its leases, one for an additional two years and the other
     for one year and entered into a new lease for additional space in the
     building. The Company utilizes its laboratory facilities to produce OrCel.

     Total rent expense for the years ended December 31, 2001, 2000 and 1999 was
     approximately $589,000, $535,000 and $473,000, respectively.

                                      F-33





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE J (continued)

     In December 2001, the Company entered into a ten year lease with the New
     Jersey Economic Development Authority ("NJEDA") to lease approximately
     58,000 square feet of manufacturing and office space, located in North
     Brunswick, New Jersey. The leased premises will be completed and will be
     available to the Company in two phases. The initial space, consisting of
     approximately 26,000 square feet, is an existing building, which will be
     renovated to the Company's specifications. The additional space, adjoining
     the existing building and consisting of approximately 32,000 square feet,
     will be constructed to the Company's specifications. The landlord is
     responsible for the completion of the renovations and construction of the
     building and is contributing up to $1,300,000 for the renovations to the
     existing building and $3,200,000 for the construction of the new building.
     Any additional renovation or construction costs will be borne by the
     Company. The Company expects to initiate transition to the new facility
     during 2002 and to be fully operational at that site during 2003.

     The Company has also been approved for Business Employment Incentive Grants
     by the NJEDA, with an anticipated potential value of approximately
     $1,500,000 over the ten year grant period.

     The minimum rental payments on noncancelable operating leases with terms
     exceeding one year at December 31, 2001 are as follows:

<TABLE>
                    <S>                                          <C>
                    Year ending December 31,
                        2002                                     $  424,000
                        2003                                        611,000
                        2004                                      1,110,000
                        2005                                      1,476,000
                        2006                                      1,586,000
                        Thereafter                                8,410,000
</TABLE>

     Government Regulation

     The Company is subject to extensive government regulation. Products for
     human treatment are subject to rigorous preclinical and clinical testing
     procedures as a condition for approval by the FDA and by similar
     authorities in foreign countries prior to commercial sale. Presently, the
     Company is continuing to submit the results of its human clinical trials to
     the FDA; however, it is not possible for the Company to determine whether
     the results achieved from the human clinical trials will be sufficient to
     obtain FDA approval.

                                      F-34





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE J (continued)

     Legal Proceedings

     On August 15, 2001, a complaint was filed against the Company and its
     directors in the United States District Court for the Southern District of
     New York. The complaint claims that the plaintiff purchased the Company's
     class B warrants, which expired on December 31, 2000 claiming that he
     received assurances from the Company's chief executive officer that the
     board would reduce the strike price of such warrants and/or extend the due
     date of such warrants and that the plaintiff relied on actions taken in the
     past by the Company to extend these warrants. The Company's chief executive
     officer denies giving such assurances. The Company denies that the
     plaintiff could rely upon actions taken in the past as representation that
     future actions would be taken.

NOTE K - RELATED PARTY TRANSACTIONS

     Prior to December 31, 1998, the "Other Founders" were paid fees for
     services rendered of approximately $980,000 in the aggregate, for the
     period from inception to December 31, 1998. In addition, in 1996, $140,000
     was paid to a director as cash compensation for services as placement agent
     in connection with the November 1996 private placement. Also, the director
     received 30,500 warrants (see Note G).

     In December 1997, the Company extended the expiration date on warrants to
     the director to purchase 86,930 shares, exercisable at $9.425 per share,
     resulting in compensation expense of approximately $420,000 (see Note G).

     The Company paid approximately $35,000 and $25,000 for the years ended
     December 31, 1997 and 1996, respectively, as fees for accounting services,
     to a stockholder (approximately $100,000 for the period from inception to
     December 31, 1997). Also during the year ended December 31, 1996, the
     Company repaid loans of approximately $247,000 from the net proceeds of the
     "IPO" to officers.

     Prior to June 1996, the Company's executive offices were located in office
     space leased by a company owned by an officer, founder and director of the
     Company on a rent-free basis.

     Change of Control

     In December 1998, the Company's Board of Directors authorized agreements
     between the Company and its four executive officers 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 the Company or in the ownership of a substantial
     portion of the assets of the

                                      F-35





<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000

NOTE K (continued)

     Company, but in any event if certain members of the Company's Board of
     Directors no longer constitute a majority of the Board of Directors. In the
     event that such change of control occurs, the agreements will provide three
     of its officers 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. In addition, for all
     four of the officers, in the event of a change of control, all unvested
     options and warrants will vest immediately upon such change of control.

NOTE L - INCOME TAXES

     The Company has deferred start-up costs for income tax purposes and intends
     to elect to amortize such costs over a period of 60 months, under Section
     195(b) of the Internal Revenue Code, when the Company commences operations.

     At December 31, 2001, the Company had net operating loss carryforwards of
     approximately $14,713,000 for Federal and New York State income tax
     purposes expiring through 2021. 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. The Company's 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 the
     Company's common stock or other changes in control, as defined in the
     Internal Revenue Code and related regulations.

     For financial statement purposes, a valuation allowance of approximately
     $23,294,000 and $16,623,000 at December 31, 2001 and 2000, respectively,
     has been recognized to offset entirely the deferred tax assets related to
     the Company's operating loss carryforwards and other temporary differences
     related to the deferral of start-up expenses for tax purposes, as the
     realization of such deferred tax assets is uncertain.

                                      F-36



<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE L (continued)

     Components of the Company's deferred tax asset are as follows:

<TABLE>
<CAPTION>

                                                                                               December 31,
                                                                                     -----------------------------------
                                                                                        2001                    2000
                                                                                     -----------             -----------
<S>                                                                                 <C>                     <C>
       Net operating loss carryforwards                                             $  6,179,000            $  4,494,000
       Deferral of start-up costs                                                     16,757,000              12,129,000
       Other                                                                             358,000
                                                                                     -----------             -----------

                                                                                      23,294,000              16,623,000

       Valuation allowance                                                           (23,294,000)            (16,623,000)
                                                                                     -----------             -----------

       Net deferred tax asset                                                       $     -                 $       -
                                                                                     ===========             ===========

</TABLE>

     The following reconciles the income taxes computed at the Federal Statutory
rate to the amounts recorded in the Company's statement of operations:

<TABLE>
<CAPTION>

                                                                                             Cumulative from
                                                                                        March 12, 1991 (inception)
                                                  Year ended December 31,                  to December 31, 2001
                                                  -----------------------               -----------------------

                                             2001         2000             1999
                                             ----         ----             ----
<S>                                   <C>            <C>               <C>                      <C>
     Income tax benefit at the
      Statutory rate                   $(5,401,000)    $(4,124,000)     $(3,414,000)          $(20,113,000)
     State and local income
      taxes, net of Federal
      benefit                           (1,270,000)       (961,000)        (795,000)            (3,181,000)
     Effect of valuation
      allowance                          6,671,000       5,085,000        4,209,000             23,294,000
                                       -----------     -----------      -----------           ------------

         Total                         $     -         $     -          $     -               $      -
                                       ===========     ===========      ===========           ============

</TABLE>




                                      F-37






<PAGE>



                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE L (continued)

     The Company's net operating loss tax carryforwards expire as follows:

<TABLE>
         <S>                  <C>
         December 31, 2006    $    76,000
         December 31, 2007        233,000
         December 31, 2008        511,000
         December 31, 2009        597,000
         December 31, 2010        440,000
         December 31, 2011        677,000
         December 31, 2012        839,000
         December 31, 2018      1,189,000
         December 31, 2019      2,602,000
         December 31, 2020      3,535,000
         December 31, 2021      4,014,000
                               ----------

                              $14,713,000
                              ===========

</TABLE>


NOTE M - OPERATIONS IN OTHER GEOGRAPHIC AREAS

     Long-lived assets which consists of fixed assets and patents are as follows
     as of December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                               2001                       2000
                                               ----                       ----

<S>                                         <C>                        <C>
       United States                        $2,139,341                 $2,246,423

       Australia                                63,056                     61,649
                                             ---------                  ---------

                                            $2,202,397                 $2,308,072
                                             =========                  =========

</TABLE>





                                      F-38






<PAGE>


                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair
     Value of Financial Instruments," requires disclosure of the estimated fair
     value of an entity's financial instrument assets and liabilities. For the
     Company, financial instruments consist principally of cash and cash
     equivalents, loan 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
     maturity of those instruments.

     Loan Payable and Other Long-term Obligations

     Based on borrowing rates currently available to the Company for bank loans
     and other financings with similar terms and maturities, the carrying value
     of the Company's loan payable and other long-term obligations approximates
     the fair value.




                                      F-39






<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2001 and 2000



NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial for the years ended December 31, 2001 and
     2000, is as follows:

<TABLE>
<CAPTION>

                                                          Quarter Ended

                         March 31,                         June 30,                            September 30,
                         ---------                         --------                            -------------

                      2001           2000               2001            2000               2001            2000
                      ----           ----               ----            ----               ----            ----
<S>               <C>              <C>               <C>               <C>              <C>               <C>
Revenues          $     -          $     -           $     -           $     -          $     -           $     -

Net loss          $(3,494,473)     $(2,650,531)      $(3,753,130)      $(2,811,949)     $(4,173,593)      $(3,408,097)

Net loss per share
  Basic and diluted   $(.36)           $(.32)            $(.39)           $(.33)            $(.43)           $(.38)


<CAPTION>

                                Quarter Ended

                                 December 31,
                                 ------------

                            2001             2000
                            ----             ----
<S>                      <C>            <C>
Revenues                 $    21,890     $     -

Net loss                 $(4,464,181)    $(3,259,086)

Net loss per share
  Basic and diluted          $(.46)          $(.34)

</TABLE>


                                      F-40





                          STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as..................................'TM'