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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 SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

|_|   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
            (Address of principal                     10032
              executive offices)                   (Zip Code)

       Registrant's telephone number, (212) including area code: 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. |_|

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

The number of shares outstanding of the Registrant's common stock is 9,691,608
(as of 3/26/01). The aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $52,433,556 as of March 26,
2001, based upon a closing price on such date of $6.25, 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, 2000

                               ITEMS IN FORM 10-K
                                                                            Page
                                                                            ----
Facing page

Part I
------

Item 1.     Business ....................................................     1

Item 2.     Properties ..................................................    13

Item 3.     Legal Proceedings ...........................................    14

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 .............................    14

Item 6.     Selected Financial Data .....................................    16

Item 7.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations ...............    17

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

Item 8.     Financial Statements and Supplementary Data .................    21

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 ..........    21

Item 11.    Executive Compensation ......................................    23

Item 12.    Security Ownership of Certain Beneficial
            Owners and Management .......................................    27

Item 13.    Certain Relationships and Related Transactions ..............    29

Part IV
-------

Item 14.    Exhibits, Financial Statement Schedules
            and Reports on Form 8-K......................................    31

Signatures...............................................................    32

Financial Statements.....................................................   F-1






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                                     PART I

Item 1. BUSINESS

Overview

      We are a development stage tissue engineering company that has developed a
proprietary and patented technology which we call Composite Cultured Skin, which
is used to stimulate the repair and regeneration of human skin. We often refer
to our Composite Cultured Skin by its initials, CCS. Our Composite Cultured Skin
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 our CCS is applied to the wound
site, it produces a mix of growth factors that stimulates wound closure.

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

      o On February 21, 2001, the FDA granted our application for commercial
      sale of our product 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. While the epidermolysis bullosa patient population that
      our CCS will address is small, the FDA's approval gives us our first
      opportunity for the commercial sale of CCS. We plan to launch a focused
      marketing program for sale of our CCS for the treatment of these
      epidermolysis bullosa wounds. Our marketing program will be directed to a
      small number of regional hospitals with expertise in treating
      epidermolysis bullosa.

      o We have completed the pivotal clinical trial for the use of our CCS for
      the treatment of donor site wounds and we have filed our application with
      the FDA to permit us to make commercial sales of our CCS for the treatment
      of donor site wounds. The results of that trial which we submitted to the
      FDA show that there was a clinically and statistically shorter time to
      100% wound closure when our CCS 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 We have received encouraging results, to date, from the pivotal clinical
      trial of our CCS for the treatment of venous ulcers. These results show
      our CCS significantly


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      more effective in treating venous ulcer wounds than a standard of care now
      used. Eight weeks after treatment the CCS treated group achieved 100%
      healing in 47% of the patients treated, compared to 26% of the patients in
      the standard of care treated group. The results in that trial for the CCS
      treated group compared favorably with the reported results of the clinical
      trials that were conducted by Organogenesis for its Apligraf product. In
      the clinical trial for use of Apligraf for the treatment of venous ulcers,
      six months after treatment (as compared to eight weeks after treatment in
      the clinical trial of our CCS) 47% of the patients treated achieved 100%
      healing, compared to 19% of the patients in the standard of care treated
      group in the Apligraf trial.

      o In September 2000, our manufacturing facilities were inspected and
      approved by the FDA for the manufacture and commercial sale of our CCS.

      o We have released a preliminary analysis of our pilot trial using our CCS
      for the treatment of diabetic ulcers. That analysis shows that at 12 weeks
      56% of the patients treated with our CCS achieved 100% wound closure
      compared to 29% of the patients in the group treated with the current
      standard of care used in that trial. We expect to receive 12 week data for
      all the diabetic ulcers patients treated in that pilot trial in the second
      quarter of 2001.

      Our CCS addresses large markets. We intend to utilize our CCS for the
treatment of numerous skin wounds, such as venous stasis ulcers, autograft donor
site wounds, diabetic foot ulcers, indeterminate depth burns and epidermolysis
bullosa. We believe that our CCS could be used for up to 1 million patients,
representing a potential market of approximately $3.5 billion. Each market is
explained briefly below. See "Forward Looking Statements."

      Venous Stasis Ulcers. Approximately 700,000 Americans are plagued with
      venous stasis 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. The remaining 50% of venous ulcers patients, totaling
      about 350,000, are candidates for our CCS. We believe that the average
      selling price for our CCS will be $975 per unit for all the medical
      conditions described above. Our belief is based on the known selling price
      of our primary competitor's product. If each patient suffering with venous
      ulcers has only one ulcer and each ulcer has to be treated with four units


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      of our CCS (in our venous ulcers clinical trial we have so far used up to
      four units per ulcer), the potential market revenue for venous ulcers is
      approximately $1.4 billion.

      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 our
      CCS 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. At an average of eight of our CCS units per patient, (2 units of
      our CCS per donor site wound and 4 donor sites wounds per patient), we
      estimate potential market revenues of approximately $167 million per year
      from the use of our CCS for the treatment of donor site wounds.

      Indeterminate Depth Burns. While we are pursuing approval from the FDA to
      market our CCS for treatment of donor site wounds in burn patients, we
      believe there is also the opportunity to use our CCS for the treatment of
      certain indeterminate depth wounds directly without involvement of
      autograft transplants. In order to do so we will have to design and
      conduct a clinical trial for the use of our CCS for the treatment of
      indeterminate depth burns. To date, we have not allocated resources for a
      clinical trial for indeterminate depth burns because we have committed our
      resources to concentrate on the venous and diabetic ulcers markets.
      However, the market for treatment of indeterminate depth burns with our
      CCS is one that we could pursue in the future. As we noted above, there
      are approximately 50,000 severely burned patients each year in the United
      States and we believe that 43% of those patients require autograft
      transplants. The other 57% of these 50,000 patients with severe burns,
      about 28,500 patients, do not require autograft transplants. It is this
      group whose burns we believe can be treated directly with our CCS. In such
      treatment we assume that we will need six CCS units to treat each patient,
      creating a potential market revenue of approximately $167 million.

      Of the other 1.15 million people who are treated for lesser burns, we
      believe that about 15%, or 170,000 patients, can be treated with our CCS.
      We assume


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      that if one unit of our CCS is used for the treatment of each of those
      170,000 patients, there is a potential market revenue of approximately
      $166 million. All together, the potential market revenue for the treatment
      of indeterminate depth burns with our CCS is approximately $336 million
      annually. However, as we have noted above, we cannot use our CCS to treat
      burns until we conclude an FDA approved clinical trial to prove the safety
      and the efficacy of our CCS in the treatment of indeterminate depth burns.
      We are not conducting that clinical trial now.

      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 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 our CCS to treat their
      ulcers. In our pilot clinical trial for the use of our CCS to treat
      diabetic foot ulcers, we have up to now used up to six units of our CCS to
      treat each ulcer. If we assume the use of four units of our CCS to treat
      each diabetic foot ulcer, there is a potential annual market of $1.5
      billion from the sale of our CCS to treat diabetic foot ulcers.

      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. Our
      CCS 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 our CCS
      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 our CCS for the treatment of epidermolysis bullosa.


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      We have developed the technology for the cryopreservation of our product
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 trial for the treatment of venous
ulcers and we intend to use it in our pivotal trial for the treatment of
diabetic ulcers.

      Our immediate focus is to use our CCS to treat acute and chronic skin
wounds. However, we 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 our CCS. We know of only one
other company, Organogenesis, Inc., that has developed a bi-layered product,
Apligraf, to treat the same wounds as our CCS. 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 our CCS will have certain competitive advantages over other comparable
bio-engineered products in that our CCS: (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 not yet sold any products. Our
activities have been limited to human clinical trials of our CCS and research
and development. From the creation of our company in March 1991 through December
31, 2000, we have spent approximately $13.8 million for human clinical trials
and research and development, not including employee salaries. From inception in
March 1991 through December 31, 2000, we have sustained a net loss of $43.3
million and expect to continue to incur substantial operating losses until at
least 2003.

      At our current rate of spending, our cash and cash equivalents on hand at
December 31, 2000 (approximately $9.3 million) will enable us to continue our
operations through the end of 2001, assuming that we will not incur unexpected
costs. Before the end of 2001 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 our CCS. Our failure to receive additional
financing will have a material adverse effect on us and our operations. Also, in
order to produce our CCS for treatment of medical conditions with large patient
populations we may 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 our CCS for treatment of medical
conditions with large patient populations and successfully market


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our CCS, we believe that we will have the opportunity to reach cash break even
in 2003. Revenues from sales of our CCS to treat epidermolysis bullosa patients
could begin as early as the second half of this year.

      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.


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Our Composite Cultured Skin

      Our Composite Cultured Skin 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, our Composite Cultured Skin stimulates the body's healthy cells to
rapidly regenerate and remodel the human skin.

      Our Composite Cultured Skin 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 our Composite Cultured Skin is mitigated because in
approximately two weeks the entire Composite Cultured Skin dressing is absorbed
by the body and the cells from our product are no longer present.

      We believe that our Composite Cultured Skin'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 our Composite Cultured Skin 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 Composite Cultured Skin 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 our Composite
Cultured Skin that is available for sale is Apligraf, a product developed by
Organogenesis, Inc.

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


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      We believe that our Composite Cultured Skin 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 our
Composite Cultured Skin 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 acute
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 our Composite Cultured Skin, 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 "Disclosure Regarding
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. Our Composite Cultured Skin 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 our
Composite Cultured Skin. 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 our product 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 our Composite Cultured Skin for the treatment of
medical conditions with large 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
responded to applications for pre-market approval within that time period,
reviews usually


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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 conduct feasibility studies for all the
medical conditions we propose to treat with our Composite Cultured Skin 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 approval for commercial sales of our product for
            use on patients with recessive dystrophic epidermolysis bullosa
            undergoing hand reconstructive surgery and to treat donor site
            wounds created during that surgery.

            - have completed the pivotal trial for use of our product in
            treating all donor site wounds and have filed an application with
            the FDA for pre-market approval for commercial sale of our product
            for treatment of all donor site wounds.

            - are conducting a pivotal clinical trial for use of our product in
            its cryopreserved form for the treatment of venous ulcers.

            - are conducting a pilot clinical trial for the use of our product
            for the treatment of diabetic ulcers.

Description of the Production Process

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


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proliferation and rapid remodeling of the human skin. We separate the epidermis
from the dermis and treat each of these layers to release individual
keratinocyte (epidermal) and fibroblast (dermal) cells, which are the primary
cellular components of human skin. We grow the fibroblast and keratinocyte cells
in 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 Composite Cultured Skin, 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 our Composite Cultured Skin - 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.

European Market

      In June 1999 we entered into an agreement with Grupo Ferrer International,
SA. of Barcelona, Spain, giving Grupo Ferrer the exclusive right for a period of
ten years to market our Composite Cultured Skin in Spain. The agreement requires
Grupo Ferrer to pay for all clinical, regulatory and marketing expenses
necessary to gain regulatory approval for the commercial sale of our Composite
Cultured Skin in Spain. Grupo Ferrer is one of the largest pharmaceutical
companies in Spain. We believe that regulatory approval for the sale of our
Composite Cultured Skin for the treatment of venous and diabetic ulcers may be
secured more quickly in Spain than in the United States, even though Grupo
Ferrer will use the results of our clinical trials in the United States as the
basis for seeking regulatory approval in Spain. Of the different medical
conditions creating skin wounds which we believe our Composite Cultured Skin can
treat, venous and diabetic ulcers have the largest patient populations. We also
believe


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that securing regulatory approval in Spain may facilitate our ability to
register and ultimately sell our Composite Cultured Skin in the large markets of
other European Common Market countries.

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.

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 our Composite Cultured Skin for the initial volume required by
the FDA's approval for its use in epidermolysis bullosa surgery and, if approved
by the FDA, for donor site wounds. For sale of our Composite Cultured Skin for
other medical conditions, based on our sales projections, we will need larger
production facilities. 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 our Composite Cultured Skin will 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 our Composite Cultured Skin for
commercial sale.

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.


                                       11





<PAGE>

      The Company considers its 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

      We believe that the following are the greater benefits derived by patients
when they use our Composite Cultured Skin.

            o     Our Composite Cultured Skin can be cryopreserved so that it
                  can be stored by the hospital or clinic instead of awaiting
                  shipment.

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

            o     Our Composite Cultured Skin 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 our Composite Cultured Skin, or that may make our Composite
Cultured Skin obsolete.

Patents and Proprietary Rights

      We have two U.S. patents for the technology for our Composite Cultured
Skin, 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,


                                       12





<PAGE>

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 Composite Cultured Skin 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 may
not be resolved for more than a year. The expiration date of our European patent
is dependent upon the resolution of such opposition. The result in Europe will
not affect the validity of our patent in the United States. However, 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 71 people on a full-time basis, including five
executive officers. Including our executive officers, we employ 69 persons in
New York City and 2 people at our laboratory in Sydney, Australia. We also have
part time employees, 3 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 and
based on our finances.

Item 2. PROPERTIES

      We occupy an aggregate of 17,000 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 our product. As of December


                                       13





<PAGE>

31, 2000 we were paying an aggregate of $43,829 rent per month for use of all
our space at the Audubon facility.

      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$25,402 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

      We are disputing a claim of approximately $250,000 made against us by a
consulting firm we had retained to assist us in gathering and analyzing the data
from our pivotal clinical trial for the use of our Composite Cultured Skin for
the treatment of donor site wounds and in preparing our submission of such data
to the FDA for pre-market approval for the commercial sale of our CCS for
treatment of donor site wounds. We believe that such consulting firm did not
render such service competently and we had to retain and pay a different firm to
perform such services and assist us in that recent submission to the FDA.

                                    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, 1999 through December 31, 2000.


                                       14





<PAGE>

<TABLE>
<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

<CAPTION>
    1999                                        High      Low
<S>                                             <C>       <C>

             First Quarter                      14.00     8.13

             Second Quarter                     10.25     7.00

             Third Quarter                      12.75     7.13

             Fourth Quarter                     10.00     5.13
</TABLE>

Security Holders

      To the best of our knowledge at March 1, 2001, there were 131 record
holders of our common stock. We believe that as of such date there were an
additional 1,646 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.

Recent Sales of Unregistered Securities

      During the fourth quarter of 2000 we granted to 53 employees and 3
consultants options under our Employee Stock Option Plan to purchase an
aggregate of 315,306 shares of our common stock, at exercise prices ranging from
$5.75 to $10.00 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.



                                       15





<PAGE>

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 and the Management's
Discussion and Analysis included elsewhere in this Annual Report:

<TABLE>
<CAPTION>
Statement of operations data

Years Ended December 31,
                                                   1996            1997            1998            1999            2000
                                               ------------    ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>             <C>
Revenues - interest income                     $    171,057    $    291,602    $    572,549    $    368,711    $    586,623
                                               ------------    ------------    ------------    ------------    ------------

Expenses
   Research and development                         964,864       1,178,836       1,933,877       3,106,908       4,191,317
   Rent                                              85,076         166,498         252,397         473,010         535,443
   Consulting                                       261,633         474,908         908,495         834,180         838,383
   Personnel                                        730,357       1,901,409       4,060,629       3,742,632       4,763,662
   General and administrative                       727,192       1,320,488       1,725,201       2,152,968       2,297,769
   Interest and other expense                        51,703          75,126        104,,605          99,522          89,712
                                               ------------    ------------    ------------    ------------    ------------

                                                  2,820,825       5,117,265       8,985,204      10,409,220      12,716.286
                                               ------------    ------------    ------------    ------------    ------------

Net loss                                       $ (2,649,768)   $ (4,825,663)   $ (8,412,655)   $(10,040,509)   $(12,129,663)
                                               ============    ============    ============    ============    ============

Net loss per share of common stock
   Basic and diluted                           $       (.64)   $      (1.01)   $      (1.43)   $      (1.51)   $      (1.37)
                                               ============    ============    ============    ============    ============

Weighted average common stock outstanding
   Basic and diluted                              4,110,507       4,782,239       5,878,971       6,634,874       8,847,295
                                               ============    ============    ============    ============    ============

Balance sheet data
As of December 31,

Working capital                                $ (6,848,650)   $ 12,982,711    $  9,368,901    $ 11,009,660    $  7,966,410
Total assets                                      8,791,925      14,998,414      12,391,039      15,011,645      11,719,760
Long-term debt, excluding current maturities        460,774         722,704       1,152,180       1,044,857         912,489
Stockholders' equity                              7,716,998      13,716,618      10,390,759      12,370,720       9,392,325

<CAPTION>
                                                  Cumulative
                                                     From
                                                   March 12,
Statement of operations data                         1991
                                                (inception) to
Years Ended December 31,                         December 31,
                                                    2000
                                                ------------
<S>                                             <C>
Revenues - interest income                      $  2,057,700
                                                ------------

Expenses
   Research and development                       13,765,354
   Rent                                            1,590,297
   Consulting                                      3,813,362
   Personnel                                      16,343,730
   General and administrative                      9,330,798
   Interest and other expense                        483,436
                                                ------------

                                                  45,326,977
                                                ------------

Net loss                                        $(43,269,277)
                                                ============

Net loss per share of common stock
   Basic and diluted                            $     (10.41)
                                                ============

Weighted average common stock outstanding
   Basic and diluted                               4,157,780
                                                ============
</TABLE>


                                       16





<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.

General

      Since Ortec's inception we have been principally engaged in the research
and development of our skin regeneration product for use in the treatment of
chronic and acute wounds, such as venous and diabetic skin ulcers, indeterminate
depth burns and autograft donor site wounds. We have not had any revenues from
operations since Ortec's inception in 1991 because we cannot make any sales of
our product until we receive approval from the FDA to do so. We have incurred a
cumulative net loss of approximately $43.3 million as of December 31, 2000. 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 costs of manufacturing, marketing,
sales, distribution and administrative activities.

      Our revenues consist only of interest income. To date, we have received no
revenue from the sale of our Composite Cultured Skin. While we may make
commercial sales of our product for use in surgeries on patients with recessive
dystrophic epidermolysis bullosa, which has a small patient population, we are
not permitted to engage in commercial sales of our product for treatment of skin
wounds with larger patient populations, until such time, if ever, as we receive
requisite FDA and/or other foreign regulatory approvals for such sales. As a
result, we do not expect to record significant product sales until such
approvals are received.

      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 regulatory approvals, our ability to successfully
manufacture, market and distribute our product 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.

      We are currently conducting or have completed clinical trials of our
Composite Cultured Skin in the treatment of autograft donor site wounds, venous
and diabetic ulcers and chronic ulcers resulting from epidermolysis bullosa.


                                       17





<PAGE>

Results of Operations

Year Ended December 31, 2000 to Year Ended December 31, 1999

      Revenues. 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 sale of
common stock.

      Research and Development. Our 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 we paid for research and development. Such
consulting expenses for research and development amounted to approximately
$838,000 in 2000 and approximately $834,000 in 1999. The increase in research
and development expenses relates primarily to the costs associated with the
increase in clinical trial activity, cryopreservation research and for
enhancement and other applications of our Composite Culture Skin.

      General and Administrative. Our general and administrative expenses for
the year ended December 31, 2000 amounted to $2.3 million and $2.2 million for
the year ended December 31, 1999.

      Personnel. Our 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 we employed
because of our increased research for product development, to conduct our
clinical trials, to prepare for manufacturing scale up and for marketing of our
CCS, and for additional personnel required in administrative positions because
of such increased staff.

      Rent. Our expenses for rent for the year ended December 31, 2000 increased
to $535,000 from $473,000 for the year ended December 31, 1999. The increase in
rent expense in 2000 as compared to 1999 is the result of the increase in the
amount of space we occupied at Columbia University's Audubon Biomedical Science
and Technology Park in New York City for additional laboratories we built for
research and development, and to accommodate the additional personnel we
employed in 2000.

Year Ended December 31, 1999 to Year Ended December 31, 1998

      Revenues. Interest income decreased approximately $204,000 from
approximately $573,000 in 1998 to approximately $369,000 in 1999 because of
lower average cash and marketable securities balances in 1999 that resulted from
the sale of common stock.

      Research and Development. Our research and development expenses for the
year ended December 31, 1999 increased to approximately $3.1 million from
approximately $1.9 million


                                       18





<PAGE>

for the year ended December 31, 1998, which amounts do not include consulting
expenses, a significant portion of which we paid for research and development.
Such consulting expenses for research and development amounted to approximately
$834,000 in 1999 as compared to approximately $908,000 in 1998. The increase in
research and development expenses related primarily to the costs associated with
the increase in clinical trial activity, cryopreservation research and for
enhancement and other applications of our Composite Cultured Skin.

      General and Administrative. Our general and administrative expenses for
the year ended December 31, 1999 increased to approximately $2.2 million from
approximately $1.7 million for the year ended December 31, 1998. The increase in
general and administrative expenses for the year ended December 31, 1999 as
compared to the same period in 1998 was the result of (i) the increase in costs
associated with professional services received from financial consultants,
attorneys and accountants and (ii) the increased overhead costs resulting from
the increase in personnel.

      Personnel. Our personnel expenses for the year ended December 31, 1999
decreased to approximately $3.7 million from approximately $4.1 million for the
year ended December 31, 1998. Cash compensation paid by us to our personnel
actually increased $1.6 million from $2.1 million in 1998 to $3.7 million in
1999, but non-cash compensation in the form of stock options decreased from $1.9
million in 1998 to $64,715 in 1999. The increased cash compensation in 1999
compared to 1998 resulted from the larger number of persons we employed because
of our increased research and development, including the conducting and
preparation for clinical trials, and for which additional personnel were
required in administrative positions.

      Rent. Our expenses for rent for the year ended December 31, 1999 increased
to $473,000 from $252,000 for the year ended December 31, 1998. The increase in
rent expense in 1999 as compared to 1998 was the result of new office and
laboratory space we rented at Columbia University's Audubon Biomedical Science
and Technology Park in New York City for a full year in 1999 and for only part
of the year in 1998.

Liquidity and Capital Resources

      Since inception (March 12, 1991) through December 31, 2000, we have
accumulated a deficit of approximately $43.3 million and we expect to continue
to incur substantial operating losses for the next two years. 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, 2000 we have received
proceeds from the sale of equity securities, net of share issuance expenses, of
approximately $49.9 million.


                                       19





<PAGE>

      In 2000 we used net cash for operating activities of approximately $11.6
million. Cash used in operating activities resulted primarily from our net loss
of $12.1 million offset by non-cash depreciation and amortization.

      In 2000 we realized cash provided by our financing activities of
approximately $9.0 million. We received approximately $9.1 million in 2000 from
sale of our common stock net of share issuance costs which was offset by
payments of $127,000 on capital leases and $35,000 for purchases of treasury
stock

      We invested a total of approximately $641,000 consisting of $552,000 for
property, plant and equipment and $90,000 for patents. Since inception, we have
spent approximately $3.9 million for property, plant and equipment, excluding
capital lease agreements, and approximately $732,000 for patents. The capital
lease agreements consist primarily of laboratory equipment.

      Our capital funding requirements will depend on numerous factors,
including the progress and magnitude of our research and development programs
and our clinical trials, the time involved in obtaining regulatory approvals for
the use of our Composite Cultured Skin for the treatment of skin wounds with
large patient populations, the cost involved in filing and maintaining patent
claims, technological advances, competitor and market conditions, our ability to
establish and maintain collaborative arrangements, the cost of manufacturing
scale-up and the cost and effectiveness of commercialization activities and
arrangements.

      We have raised funds in the past through the public and private sale of
securities, and may raise 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. We continue to explore and, as appropriate, enter into
discussions with other companies regarding the potential for equity investment,
collaborative arrangements, license agreements or development or other funding
programs in exchange for marketing, distribution or other rights to our
Composite Cultured Skin. However, such discussions with other companies may not
result in any investments, collaborative arrangements, agreements or funding,
and the necessary additional financing through debt or equity financing may not
be available to us on acceptable terms, if at all. Furthermore, any arrangements
resulting from these discussions may not reduce our funding requirements. If we
cannot secure additional funding when needed, we will be required to scale back
our research and development programs, clinical trials and administrative
activities and our business and financial results and condition would be
materially adversely affected. At our current rate of spending, our cash and
cash equivalents on hand at December 31, 2000 (approximately $9.3 million) will
enable us to continue our operations through the end of 2001.


                                       20





<PAGE>

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 21, 2001.

                                    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.           56    Chairman of the Board of Directors and
                                   Chief Executive Officer

Dr. Mark Eisenberg           63    Senior Vice President, Research and
                                   Development, and Director

Ron Lipstein                 45    Vice Chairman of the Board of Directors,
                                   Secretary, Treasurer and Chief Financial
                                   Officer

Alain M. Klapholz            44    Vice President, Operations, and Director

Costa Papastephanou          55    President

William Schaeffer            53    Chief Operating Officer

Joseph Stechler              49    Director

Steven Lilien, Ph.D.         53    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.

      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


                                       21





<PAGE>

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. Mr. Klapholz 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.

      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.

      Joseph Stechler has been a director since 1992. He has been President and
CEO of Stechler & Company, an investment management firm, since 1986, and from
1990 to January 1997, he was the general partner of Old Ironsides Capital, L.P.,
an investment fund. Prior to 1986, he was a securities analyst with several
investment firms. Mr. Stechler has a JD degree from Columbia University and an
LLM degree in corporate law from New York University.

      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.

      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 2000
through the grant of options pursuant to our


                                       22





<PAGE>

Employee Stock Option Plan and payment of $5,000 to Dr. Steven Lilien for his
services as chairman of our audit committee. Officers are elected annually by
the Board of Directors and serve at the discretion of the Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

      In 2000 Messrs. Steven Katz, Ron Lipstein, Alain Klapholz and William D.
Schaeffer failed to file on a timely basis Form 4 as required by Section 16(a)
of the Securities and Exchange Act reporting stock options granted to each of
them on October 3, 2000, under the Company's Employee Stock Option Plan. Such
reports were filed by them in December 2000 instead of November 2000. Messrs.
Katz, Lipstein and Klapholz are all directors and executive officers, and Mr.
Schaeffer is an executive officer, of the Company.

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, 2000, 1999 and 1998 to our Chief Executive Officer and
to each of our executive officers whose compensation exceeded $100,000 on an
annual basis (collectively, the "Named Officers").


                                       23





<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 .................. 2000     209,807        94,605         9,000*            129,278
Chief Executive                1999     200,000        35,000         9,000*             50,000
 Officer and Chairman          1998     200,000                       9,000*            230,750

Ron Lipstein ................  2000     179,712        78,105         9,000*            118,128
Vice Chairman,                 1999     165,000        50,000         9,000*             35,000
Secretary,                     1998     165,000                       9,000*            220,000
Treasurer and CFO

Alain Klapholz ..............  2000     159,808        30,000                            23,300
Vice President                 1999     150,000        15,000                            10,000
and Director                   1998     150,000                                          70,000

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

----------

*     In lieu of health insurance.

Board Compensation

      Mr. Joseph Stechler and Dr. Steven Lilien are our only non employee
directors. For his services in 2000 as a director and as chairman of our audit
committee, in February 2001 we paid Dr. Lilien $5,000 and granted him 7 year
options to purchase 7,500 shares of our common stock. For his services in 2000
as a director and as a member of our audit committee, in February 2001 we
granted Mr. Stechler 7 year options to purchase 7,500 shares of our Common
Stock. Such options were granted under our Employee Stock Option Plan and are
exercisable at $8.75 per share each.


                                       24





<PAGE>

Option Grants in Last Fiscal Year

      The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2000 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                        3,900              0.89             6.75          4/16/07        10,717         24,975
                                  18,300              4.20             6.50          5/29/07        48,425        112,850
                                   2,100              0.48             7.00           8/2/07         5,984         13,946
                                  16,200              3.71             9.94          10/3/07        65,538        152,732
                                  62,378             14.30            10.00         10/30/07       253,941        591,791
                                  26,400              6.05             5.75         12/20/07        61,798        144,015

Ron Lipstein                       3,250              0.75             6.75          4/16/07         8,931         20,812
                                  15,250              3.50             6.50         05/29/07        40,354         94,042
                                   1,750              0.40             7.00           8/2/07         4,987         11,622
                                  13,500              3.09             9.94          10/3/07        54,615        127,276
                                  62,378             14.30            10.00         10/30/07       253,941        591,791
                                  22,000              5.04             5.75         12/20/07        51,498        120,013

Alain Klapholz                     1,300              0.30             6.75          4/16/07         3,572          8,325
                                   6,100              1.40             6.50          5/29/07        16,142         37,617
                                     700              0.16             7.00           8/2/07         1,995          4,649
                                   5,400              1.24             9.94          10/3/07        21,853         50,923
                                   8,800              2.02             5.75         10/30/07        20,599         48,005

William D. Schaeffer (2)           1,800              0.41             6.75          4/16/07         4,946         11,527
                                   9,150              2.10             6.50          5/29/07        24,212         56,425
                                   1,050              0.24             7.00           8/2/07         2,992          6,973
                                   5,000              1.15             9.94          10/3/07        20,228         47,139
</TABLE>
----------------------

(1)   Options to purchase a total of 436,206 shares of common stock were granted
      to our employees, including the Named Officers, during the fiscal year
      ended December 31, 2000.

(2)   The options granted to 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.


                                       25





<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 2000 and the value of the options
held as of December 31, 2000 by the Named Officers. None of the Named Officers
exercised any options in 2000 nor did Messrs. Katz, Lipstein or Klapholz hold
any options which were not exercisable at December 31, 2000. At December 31,
2000, Mr. Schaeffer held 41,062 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                        475,028                                      $0

Ron Lipstein                       473,128*                                      0

Alain Klapholz                     152,300                                       0

William D. Schaeffer                19,688                                       0

William D. Schaeffer                41,062 (not exercisable)                     0
</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, 2000, as listed on
      the Nasdaq SmallCap Market, was less than the exercise price of all the
      options

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.


                                       26





<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, 2001 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*                        693,690(1)                6.8%

Mark Eisenberg*                     596,000                   6.1%

Ron Lipstein*                       761,599(2)                7.5%

Alain Klapholz*                     456,406(3)                4.6%

Costa Papastephanou*                    0

William D. Schaeffer*                21,688(4)                ***

Joseph Stechler                     817,666(5)                8.4%
   15 Engle Street
   Englewood, NJ 07631

Steven Lilien                        20,900(6)                ***
   19 Larchmont Street
   Ardsley, NY 10502

George Soros                       1,153,900(7)              11.9%
   888 Seventh Avenue,
   33rd Floor
   New York, NY 10106

Franklin Resources, Inc.             666,666(8)(9)            6.9%
   77 Mariners Island Boulevard
   San Mateo, CA 94404

Pequot Capital Management, Inc.    2,150,807(8)(9)           22.0%
   5000 Nyala Farm Road
   Westport, CT 06880

All officers and directors as      3,367,949(1-6)            30.6%
a group (eight persons)
</TABLE>

----------

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


                                       27





<PAGE>

**    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, 2001. 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 525,028 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 503,128 shares issuable to Mr. Lipstein and 15,000 to his minor
      children upon his and their exercise of outstanding options and warrants.

(3)   Includes 31,500 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
      disclaims any beneficial interest in such 31,500 shares. Also includes
      162,300 shares issuable to Mr. Klapholz upon his exercise of outstanding
      options.

(4)   Includes 19,688 shares issuable to Mr. Schaeffer upon his exercise of
      outstanding options.

(5)   Includes shares owned by Stechler & Company and 30,000 shares owned by a
      charitable foundation of which Mr. Stechler and another member of his
      family are the trustees. Also includes 75,500 shares issuable to Mr.
      Stechler upon his exercise of outstanding options or warrants.

(6)   Includes 20,500 shares underlying options granted under the Company's
      Stock Option Plan.

(7)   As reported by Mr. Soros on a Form 4 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 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


                                       28





<PAGE>

      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.

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

(9)   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 our four 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 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


                                       29





<PAGE>

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, 2000, 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.


                                       30





<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 filed one report on Form 8-K in the fourth quarter of 2000.

      (c)   Exhibits.

Exhibit No.   Description

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)
----------
(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.


                                       31





<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:  March 26, 2001

      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.

Signature                  Title                           Date
---------                  -----                           ----


/s/ Steven Katz            Chairman, Chief Executive       March 26, 2001
------------------------   Officer and Director
Steven Katz, Ph.D.         (Principal Executive Officer)


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


/s/ Ron Lipstein           Vice Chairman, Chief Financial  March 26, 2001
------------------------   Officer, Secretary,
Ron Lipstein               Treasurer and Director
                           (Principal Financial and
                           Accounting Officer)


/s/ Alain M. Klapholz      Vice President, Operations      March 27, 2001
------------------------   and Director
Alain M. Klapholz


                           Director
------------------------
Joseph Stechler


/s/ Steven Lilien          Director                        March 27, 2001
------------------------
Steven Lilien


                                       32





<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, 2000 and 1999                                  F-3

       Statements of Operations for the years ended December 31, 2000, 1999 and
          1998, and for the cumulative period from March 12, 1991 (inception) to
          December 31, 2000                                                             F-5

       Statement of Shareholders' Equity for the cumulative
          period from March 12, 1991 (inception) to
          December 31, 2000                                                             F-6

       Statements of Cash Flows for the years ended December 31, 2000, 1999 and
          1998, and for the cumulative period from March 12, 1991 (inception) to
          December 31, 2000                                                             F-10

       Notes to Financial Statements                                                    F-12 - F-36
</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, 2000 and 1999,
and the related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000, and for the
period from March 12, 1991 (inception) to December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, and for the
period from March 12, 1991 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.


GRANT THORNTON LLP

New York, New York
February 21, 2001


                                      F-2





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                                 BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                              ASSETS                          2000                 1999
                                                          ------------         ------------
<S>                                                       <C>                  <C>
CURRENT ASSETS
    Cash and cash equivalents                             $  9,292,478         $ 12,604,027
    Other current assets                                        88,878                1,701
                                                          ------------         ------------

           Total current assets                              9,381,356           12,605,728

PROPERTY AND EQUIPMENT, AT COST
    Laboratory equipment                                     1,768,872            1,345,367
    Office furniture and equipment                             857,031              778,364
    Leasehold improvements                                   1,333,144            1,283,686
                                                          ------------         ------------

                                                             3,959,047            3,407,417
    Less accumulated depreciation and amortization          (2,223,064)          (1,566,002)
                                                          ------------         ------------

                                                             1,735,983            1,841,415

OTHER ASSETS
    Patent application costs, net of accumulated
       amortization of $159,460 in 2000 and
       $107,594 in 1999                                        572,089              533,592
    Deposits and other assets                                   30,332               30,910
                                                          ------------         ------------

                                                          $ 11,719,760         $ 15,011,645
                                                          ============         ============
</TABLE>


                                      F-3





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                           BALANCE SHEETS (continued)

                                  December 31,

<TABLE>
<CAPTION>
                               LIABILITIES AND
                             SHAREHOLDERS' EQUITY                                       2000                 1999
                                                                                    ------------         ------------
<S>                                                                                 <C>                  <C>
CURRENT LIABILITIES
    Accounts payable and accrued expenses                                           $    872,760         $    886,388
    Accrued compensation                                                                 226,208              232,781
    Accrued professional fees                                                            176,528              341,716
    Accrued interest                                                                       7,081                7,935
    Capital lease obligation - current                                                                          5,151
    Loan payable - current                                                               132,369              122,097
                                                                                    ------------         ------------

           Total current liabilities                                                   1,414,946            1,596,068

LONG-TERM LIABILITIES

    Loan payable - noncurrent                                                            912,489            1,044,857

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
    Common stock, $.001 par value; authorized, 25,000,000 shares; 9,711,608
       shares issued, 9,691,608 shares outstanding, at December 31, 2000 and
       8,221,843 shares issued, 8,206,143 shares
       outstanding at December 31, 1999                                                    9,712                8,222
    Additional paid-in capital                                                        52,829,535           43,644,902
    Deficit accumulated during the development
       stage                                                                         (43,269,277)         (31,139,614)
    Treasury stock, at cost (20,000 shares at December 31, 2000
       and 15,700 shares at December 31, 1999)                                          (177,645)            (142,790)
                                                                                    ------------         ------------

                                                                                       9,392,325           12,370,720
                                                                                    ------------         ------------

                                                                                    $ 11,719,760         $ 15,011,645
                                                                                    ============         ============
</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,
                                                2000                 1999                 1998                 2000
                                           ------------         ------------         ------------         ------------
<S>                                        <C>                  <C>                  <C>                  <C>
Revenue
    Interest income                        $    586,623         $    368,711         $    572,549         $  2,057,700
                                           ------------         ------------         ------------         ------------

Expenses
    Research and development                  4,191,317            3,106,908            1,933,877           13,765,354
    Rent                                        535,443              473,010              252,397            1,590,297
    Consulting                                  838,383              834,180              908,495            3,813,362
    Personnel                                 4,763,662            3,742,632            4,060,629           16,343,730
    General and administrative                2,297,769            2,152,968            1,725,201            9,330,798
    Interest and other expense                   89,712               99,522              104,605              483,436
                                           ------------         ------------         ------------         ------------

                                             12,716,286           10,409,220            8,985,204           45,326,977
                                           ------------         ------------         ------------         ------------

       Net loss                            $(12,129,663)        $(10,040,509)        $ (8,412,655)        $(43,269,277)
                                           ============         ============         ============         ============

Net loss per share
    Basic and diluted                      $      (1.37)        $      (1.51)        $      (1.43)        $     (10.41)
                                           ============         ============         ============         ============

Weighted average shares outstanding
    Basic and diluted                         8,847,295            6,634,874            5,878,971            4,157,780
                                           ============         ============         ============         ============
</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

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

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

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

Issuance of stock
   Second private placement ($9.425 cash per share)                 49,320            49           465,424
   Stock purchase agreement with the Director ($9.425
     cash per share)                                                31,820            32           299,966
   Share issuance expenses                                                                         (35,477)
   Net loss                                                                                                        (785,941)
                                                               -----------   -----------       -----------      -----------
Balance at December 31, 1992                                     2,054,440         2,054         1,522,692       (1,067,585)

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

Balance at December 31, 1993 (carried forward)                   2,319,521         2,319         3,819,719       (2,513,209)

<CAPTION>


                                                                                 Total
                                                                Treasury      shareholders'
                                                                  stock          equity
                                                               -----------     -----------
<S>                                                            <C>             <C>
March 12, 1991 (inception) to December 31, 1991

Issuance of stock
    Founders                                                                 $       870
    First private placement ($.30 cash per share)                                 65,000
    The Director ($1.15 and $5.30 cash per share)                                250,000
    Second private placement ($9.425 cash per share)                             500,000
    Share issuance expenses                                                      (21,118)
    Net loss                                                                    (281,644)
                                                                             -----------

Balance at December 31, 1991                                                     513,108

Issuance of stock
   Second private placement ($9.425 cash per share)                              465,473
   Stock purchase agreement with the Director ($9.425
     cash per share)                                                             299,998
   Share issuance expenses                                                       (35,477)
   Net loss                                                                     (785,941)
                                                                             -----------
Balance at December 31, 1992                                                     457,161

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

Balance at December 31, 1993 (carried forward)                                 1,308,829
</TABLE>


                                      F-6





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                  STATEMENT OF SHAREHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
                                                                                                                  Deficit
                                                                                                                accumulated
                                                                     Common stock               Additional       during the
                                                               -------------------------         paid-in        development
                                                                 Shares        Amount            capital           stage
                                                               -----------   -----------       -----------      -----------
<S>                                                              <C>         <C>               <C>             <C>
         (brought forward)                                       2,319,521        $2,319      $  3,819,719     $ (2,513,209)
Issuance of stock
   Fourth private placement ($10.00 cash per share)                 39,451            40           397,672
   Stock purchase agreement with Home
     Insurance Company ($10.00 cash per share)                      50,000            50           499,950
   Share issuance expenses                                                                          (8,697)
   Net loss                                                                                                      (1,675,087)
                                                               -----------   -----------       -----------      -----------

Balance at December 31, 1994                                     2,408,972         2,409         4,708,644       (4,188,296)

Rent forgiveness                                                                                    40,740

Net loss                                                                                                         (1,022,723)
                                                               -----------   -----------       -----------      -----------

Balance at December 31, 1995                                     2,408,972         2,409         4,749,384       (5,211,019)

Initial public offering                                          1,200,000         1,200         5,998,800
Exercise of warrants                                                33,885            34            33,851
Fifth private placement ($6.49 cash per share)                     959,106           959         6,219,838
Share issuance costs                                                                            (1,580,690)
Stock options issued for services                                                                  152,000
Net loss                                                                                                         (2,649,768)
                                                               -----------   -----------       -----------      -----------

Balance at December 31, 1996 (carried forward)                   4,601,963         4,602        15,573,183       (7,860,787)

<CAPTION>


                                                                                   Total
                                                                  Treasury    shareholders'
                                                                    stock        equity
                                                                 -----------   -----------
<S>                                                              <C>           <C>
         (brought forward)                                                     $ 1,308,829
Issuance of stock
   Fourth private placement ($10.00 cash per share)                                397,712
   Stock purchase agreement with Home
     Insurance Company ($10.00 cash per share)                                     500,000
   Share issuance expenses                                                          (8,697)
   Net loss                                                                     (1,675,087)
                                                                               -----------

Balance at December 31, 1994                                                       522,757

Rent forgiveness                                                                    40,740

Net loss                                                                        (1,022,723)
                                                                               -----------

Balance at December 31, 1995                                                      (459,226)

Initial public offering                                                          6,000,000
Exercise of warrants                                                                33,885
Fifth private placement ($6.49 cash per share)                                   6,220,797
Share issuance costs                                                            (1,580,690)
Stock options issued for services                                                  152,000
Net loss                                                                        (2,649,768)
                                                                               -----------

Balance at December 31, 1996 (carried forward)                                   7,716,998
</TABLE>


                                      F-7





<PAGE>

                           Ortec International, Inc.
                        (a development stage enterprise)

                  STATEMENT OF SHAREHOLDERS' EQUITY (continued)

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

Exercise of warrants                                             1,158,771         1,159        10,821,632
Share issuance costs                                                                              (657,508)
Stock options and warrants issued for services                                                     660,000
Net loss                                                                                                         (4,825,663)
                                                               -----------   -----------       -----------      -----------

Balance at December 31, 1997                                     5,760,734         5,761        26,397,307      (12,686,450)

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

Balance at December 31, 1998                                     6,182,220         6,182        31,550,954      (21,099,105)

Exercise of warrants                                                14,103            14            14,089
Stock options and warrants issued for services                                                      64,715
Seventh private placement ($8.75 cash per share)                   389,156           389         3,168,396
Warrants issued in Seventh private placement                                                       468,291
Eighth private placement ($5.50 cash per share)                  1,636,364         1,637         8,998,365
Share issuance costs                                                                              (619,908)
Purchase of 9,100 shares of treasury stock (at cost)
Net loss                                                                                                        (10,040,509)
                                                               -----------   -----------       -----------      -----------

Balance at December 31, 1999 (carried forward)                   8,221,843         8,222        43,644,902      (31,139,614)

<CAPTION>


                                                                                 Total
                                                                 Treasury    shareholders'
                                                                  stock        equity
                                                               -----------   -----------
<S>                                                            <C>          <C>
         (brought forward)                                                  $   7,716,998

Exercise of warrants                                                           10,822,791
Share issuance costs                                                             (657,508)
Stock options and warrants issued for services                                    660,000
Net loss                                                                       (4,825,663)
                                                                            -------------

Balance at December 31, 1997                                                   13,716,618

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

Balance at December 31, 1998                                     (67,272)      10,390,759

Exercise of warrants                                                               14,103
Stock options and warrants issued for services                                     64,715
Seventh private placement ($8.75 cash per share)                                3,168,785
Warrants issued in Seventh private placement                                      468,291
Eighth private placement ($5.50 cash per share)                                 9,000,002
Share issuance costs                                                             (619,908)
Purchase of 9,100 shares of treasury stock (at cost)             (75,518)         (75,518)
Net loss                                                                      (10,040,509)
                                                               ---------    -------------

Balance at December 31, 1999 (carried forward)                  (142,790)      12,370,720
</TABLE>


                                      F-8





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                  STATEMENT OF SHAREHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
                                                                                                                  Deficit
                                                                                                                accumulated
                                                                     Common stock               Additional       during the
                                                               -------------------------         paid-in        development
                                                                 Shares        Amount            capital           stage
                                                               -----------   -----------       -----------      -----------
<S>                                                              <C>         <C>               <C>              <C>
         (brought forward)                                       8,221,843   $     8,222       $43,644,902      (31,139,614)

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

Balance at December 31, 2000                                     9,711,608        $9,712       $52,829,535      (43,269,277)
                                                               ===========   ===========       ===========      ===========

<CAPTION>


                                                                                  Total
                                                                  Treasury    shareholders'
                                                                   stock        equity
                                                                -----------   -----------
<S>                                                              <C>           <C>
         (brought forward)                                       $ (142,790)  $12,370,720

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

Balance at December 31, 2000                                     $ (177,645)  $ 9,392,325
                                                                ===========   ===========
</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,
                                                               2000              1999              1998             2000
                                                          ------------      ------------      ------------     ------------
<S>                                                       <C>               <C>               <C>              <C>
Cash flows from operating activities
   Net loss                                               $(12,129,663)     $(10,040,509)     $ (8,412,655)    $(43,269,277)
   Adjustments to reconcile net loss to net cash
     used in operating activities
       Depreciation and amortization                           708,928           597,528           438,778        2,392,761
       Unrealized loss on marketable securities                                                                      11,404
       Realized loss on marketable securities                                                                         5,250
       Non-cash stock compensation and interest                 56,265            64,715         1,920,111        2,853,091
       Purchases of marketable securities                                         (6,298)      (17,540,589)     (19,075,122)
       Sales of marketable securities                                            771,956        18,358,964       19,130,920
       (Increase) decrease in assets
         Prepaid expenses                                                            588              (588)
         Other current assets                                  (87,177)             (625)            6,001          (88,876)
       Increase (decrease) in liabilities
         Accounts payable and accrued liabilities             (186,243)          762,650           253,727        1,370,404
                                                          ------------      ------------      ------------     ------------

       Net cash used in operating activities               (11,637,890)       (7,849,995)       (4,976,251)     (36,669,445)
                                                          ------------      ------------      ------------     ------------

Cash flows from investing activities
   Purchases of property and equipment, excluding
       capital leases                                         (551,630)         (705,277)       (1,099,666)      (3,871,981)
   Payments for patent applications                            (90,363)         (124,917)          (79,056)        (731,549)
   Organization costs                                                                                               (10,238)
   Deposits                                                        578               787            22,517          (28,349)
   Purchases of marketable securities                                                                              (594,986)
   Sale of marketable securities                                                                                    522,532
                                                          ------------      ------------      ------------     ------------

       Net cash used in investing activities                  (641,415)         (829,407)       (1,156,205)      (4,714,571)
                                                          ------------      ------------      ------------     ------------
</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,
                                                             2000              1999              1998             2000
                                                         ------------      ------------      ------------      ------------
<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      $  5,700,393        53,527,522
    Share issuance expenses                                  (618,500)         (387,908)          (48,000)       (3,582,105)
    Purchase of treasury stock                                (34,855)          (75,518)          (67,272)         (177,645)
    Proceeds from issuance of loans payable                                      20,379           600,000         1,446,229
    Repayment of capital lease obligations                     (5,151)          (30,706)          (41,853)         (107,204)
    Repayment of loan payable                                (122,096)         (111,678)          (93,390)         (430,303)
    Repayment of notes payable                                                                                     (515,500)
                                                         ------------      ------------      ------------      ------------

       Net cash provided by financing activities            8,967,756        11,833,750         6,049,878        50,676,494
                                                         ------------      ------------      ------------      ------------

       NET INCREASE (DECREASE) IN
          CASH AND CASH EQUIVALENTS                        (3,311,549)        3,154,348           (82,578)        9,292,478

Cash and cash equivalents at beginning of period           12,604,027         9,449,679         9,532,257                --
                                                         ------------      ------------      ------------      ------------

Cash and cash equivalents at end of period               $  9,292,478      $ 12,604,027      $  9,449,679      $  9,292,478
                                                         ============      ============      ============      ============

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

   Cash paid for interest                                      90,565           100,418           153,677           407,336
   Cash paid for income taxes                                  41,286            53,671            38,442           155,048
</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, 2000 and 1999

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
      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, and has neither realized
      any operating revenue nor has any assurance of realizing any future
      operating revenue. Successful future operations depend upon the successful
      development and marketing of the Composite Cultured Skin.

      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-12





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

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.    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.

      2.    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
            I).

            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.

      3.    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 FDA approval for use on the underlying technology as a
            medical device.


                                      F-13





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE B (continued)

      4.    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.

      5.    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.

      6.    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.

      7.    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 $25,000 and $9,900, at
            December 31, 2000 and 1999, respectively of bank balances
            denominated in Australian dollars.


                                      F-14





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE B (continued)

      8.    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 G and H.)

         The amount of options and warrants excluded are as follows:

<TABLE>
<CAPTION>
                                       Years ended December 31,
                                       ------------------------
                                      2000        1999        1998
                                   ---------   ---------     -------
<S>                                <C>         <C>           <C>
            Warrants                 609,773     764,091     678,609
                                   =========   =========     =======

            Stock options          1,524,106   1,122,500     944,500
                                   =========   =========     =======
</TABLE>

      9.    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, 2000.

      10.   New Accounting Pronouncements

            In June 1998, the Financial Accounting Standards Board issued
            Statement of Financial Accounting Standards No. 133 ("SFAS No.
            133"), "Accounting for Derivative Instruments and Hedging
            Activities", which establishes accounting and reporting standards
            for derivative instruments and for hedging activities. SFAS No. 133,
            as amended by SFAS No. 138, is effective for all fiscal quarters of
            fiscal years beginning after June 15, 2000. The Company does not
            anticipate that the adoption of the statement will have a material
            impact on its financial statements.


                                      F-15





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE C - CONCENTRATION OF CREDIT RISK

      The Company maintains cash and cash equivalent balances at four financial
      institutions located in New York City. The accounts are insured by the
      Securities Investors Protection Corporation up to $500,000 and the FDIC up
      to $100,000. Uninsured balances aggregate to approximately $8,681,000 and
      $11,458,000 at December 31, 2000 and 1999, 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.

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, 2000 and 1999, the Company has recorded $118,903 in
      equipment purchased under capital leases and $118,903 and $113,856 in
      accumulated amortization, respectively.


                                      F-16





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE F - LOAN PAYABLE

      During 1996, the Company obtained a loan from the landlord of its new
      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>
            2001                                          $  212,503
            2002                                             212,503
            2003                                             212,503
            2004                                             212,503
            2005                                             212,503
            2006 and thereafter                              283,676
                                                          ----------

                                                           1,346,191
            Less amount representing interest                301,333
                                                          ----------

            Net present value of future loan payments     $1,044,858
                                                          ==========

            Current portion                               $  132,369
            Noncurrent portion                               912,489
                                                          ----------

                                                          $1,044,858
                                                          ==========
</TABLE>


                                      F-17





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G - 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 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-18





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (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-19





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (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 expire at various dates through
      November 2001.


                                      F-20





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (continued)

      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 $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.


                                      F-21





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (continued)

      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
      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.


                                      F-22





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (continued)

      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 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.


                                      F-23





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (continued)

      The following table summarizes warrant activity during the period from
      March 12, 1991 (inception) through December 31, 2000 (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-24





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE G (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
</TABLE>

The following table summarizes warrant data as of December 31, 2000:

<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>              <C>
      $7.70 to $10.50          148,976         1.44 years          $8.58            148,976           $8.58
      $12.00 to $12.50         383,218         1.55 years         $12.05            383,218          $12.05
      $14.00 to $15.00          77,579         1.96 years         $14.32             77,579          $14.32
</TABLE>


                                      F-25





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE H - 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, 2000:

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

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


                                      F-26





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE H (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
                                                         =========
</TABLE>

      The following data has been provided for exercisable options:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                          ------------
                                                         2000                 1999                 1998
                                                     -----------          -----------          -----------
<S>                                                  <C>                  <C>                  <C>
            Number of options                          1,237,706              947,950              793,700
            Weighted average exercise price               $12.02               $10.74               $11.19
            Weighted remaining contractual life       3.95 years           4.18 years            4.7 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, 2000 was $4.37.

      The following table summarizes option data as of December 31, 2000:

<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>
      $5.75 to $7.50                        547,800          5.6 years          $6.42            340,100           $6.40
      $8.00 to $10.44                       362,806          5.1 years           9.57            289,606            9.55
      $10.50 to $14.25                      597,500          2.7 years          12.46            593,000           12.47
      $14.25 to $21.38                       16,000          2.4 years          20.75             15,000           19.66
                                          ---------                                            ---------
                                          1,524,106                            $12.30          1,237,706          $12.02
                                          =========                            ======          =========          ======
</TABLE>


                                      F-27





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE H (continued)

      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
      31,2000, 1999 and 1998. The following assumptions were made in estimating
      fair value.

<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                                 -----------------------
                                              2000         1999         1998
                                            -------       -------      -------
<S>                                         <C>             <C>          <C>
            Risk-free interest rate         4.5%            5%           5%
            Expected option life            7 years         3 years      3 years
            Expected volatility             65%             65%          65%
</TABLE>


                                      F-28





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE H (continued)

      Had compensation cost been determined under SFAS No. 123 for the years
      ended December 31, 2000, 1999 and 1998, net loss and loss per share would
      have been increased as follows:

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                               -----------------------
                                              2000                     1999                     1998
                                          ------------             ------------             ------------
<S>                                       <C>                      <C>                      <C>
            Net loss
                As reported               $(12,129,663)            $(10,040,509)            $ (8,412,655)
                Pro forma                 $(13,948,132)            $(11,149,970)            $(11,609,531)

            Net loss per share
                As reported               $      (1.37)            $      (1.51)            $      (1.43)
                Pro forma                 $      (1.58)            $      (1.68)            $      (1.97)
</TABLE>

      In addition, the Company recognized approximately $56,000, $65,000 and
      $160,000 in consulting expenses in 2000, 1999 and 1998, respectively, for
      options and warrants granted to independent consultants and investment
      bankers for services rendered to the Company.

NOTE I - 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 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, 2000, 1999 and 1998, Dr. Eisenberg earned approximately
      $73,000 for consulting services and approximately $688,000 for the period
      from inception to December31, 2000, which is included in research and
      development expense. Included in accrued professional fees at December 31,
      2000 and 1999 are $21,411 and $37,494, respectively, representing unpaid
      consulting fees to Dr. Eisenberg.


                                      F-29





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE I (continued)

      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 the Company's Composite
      Cultured Skin. 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.

      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 the Composite Cultured Skin 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 $26,000 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.

      Total rent expense under the lease for the years ended December 31, 2000,
      1999 and 1998, was approximately $30,000, $33,000 and $32,000,
      respectively.


                                      F-30





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE I (continued)

      In March 1996, the Company entered into a five-year lease with Columbia
      University for the Company's new laboratory and offices in Columbia's new
      Audubon Biomedical Science and Technology Park in New York City.
      Construction of the new 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 expiring 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. The Company utilizes its
      laboratory facilities to produce its Composite Cultured Skin for use in
      the remaining FDA-approved human clinical trials and for further research
      to develop the Company's proprietary technology for treatment of other
      wounds.

      The Company conducts a major portion of its operations at a leased
      facility in New York, New York. The lease term for the original lease is
      five years, expiring in June 2001 and one year for the additional three
      leases. The minimum rental payments due over the term of the leases at
      December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                        Year ending December 31,
                             <S>                              <C>
                             2001                             $304,108
                                                              ========
</TABLE>

      Total rent expense under the lease for the years ended December 31, 2000,
      1999 and 1998 was approximately $505,100, $454,700 and $241,800,
      respectively.

      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 Food and Drug Administration
      ("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-31





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE J - 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 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.


                                      F-32





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE K - 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, 2000, the Company had net operating loss carryforwards of
      approximately $10,699,000 for Federal and New York State income tax
      purposes expiring through 2020. 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
      $18,206,000 and $12,760,000 at December 31, 2000 and 1999, 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.

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                -----------------------------------
                                                     2000                   1999
                                                ------------           ------------
<S>                                             <C>                    <C>
      Net operating loss carryforwards          $  4,922,000           $  3,295,000
      Deferral of start-up costs                  13,284,000              9,465,000
                                                ------------           ------------

                                                  18,206,000             12,760,000

      Valuation allowance                        (18,206,000)           (12,760,000)
                                                ------------           ------------

      Net deferred tax asset                    $         --           $         --
                                                ============           ============
</TABLE>


                                      F-33





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE K (continued)

      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>
                                                            Year ended December 31,                      Cumulative from
                                            ---------------------------------------------------     March 12, 1991 (inception)
                                                 2000                1999              1998            to December 31, 2000
                                            ------------        ------------      ------------     --------------------------
<S>                                         <C>                 <C>               <C>                    <C>
            Income tax benefit at the
             Statutory rate                 $ (4,124,000)       $ (3,414,000)     $ (2,860,000)          $(14,712,000)
            State and local income
             taxes, net of Federal
             benefit                            (961,000)           (795,000)         (666,000)            (3,494,000)
            Effect of valuation
             allowance                         5,085,000           4,209,000         3,526,000             18,206,000
                                            ------------        ------------      ------------           ------------

                Total                       $         --        $         --      $         --           $         --
                                            ============        ============      ============           ============
</TABLE>

      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
                                       -----------

                                       $10,699,000
                                       ===========
</TABLE>


                                      F-34





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE L - OPERATIONS IN OTHER GEOGRAPHIC AREAS

      Long-lived assets which consists of fixed assets and patents are as
      follows as of December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                       2000                1999
                                   ----------          ----------
<S>                                <C>                 <C>
            United States          $2,246,423          $2,325,036

            Australia                  61,649              49,971
                                   ----------          ----------

                                   $2,308,072          $2,375,007
                                   ==========          ==========
</TABLE>

NOTE M - 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 and loan payable.

      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

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


                                      F-35





<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           December 31, 2000 and 1999

NOTE N - QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial for the years ended December 31, 2000 and
      1999, is as follows:

<TABLE>
<CAPTION>
                                             Quarter Ended
                                             -------------

                                 March 31,                     June 30,
                        --------------------------    --------------------------
                            2000           1999           2000           1999
                        -----------    -----------    -----------    -----------
<S>                     <C>            <C>            <C>            <C>
Total revenue           $   164,467    $   111,894    $   139,328    $   106,198

Net loss                $(2,650,531)   $(2,248,479)   $(2,811,949)   $(2,453,741)

Net loss per share
    Basic and diluted   $      (.32)   $      (.36)   $      (.33)   $      (.37)

<CAPTION>
                                             Quarter Ended
                                             -------------

                                September 30,                  December 31,
                         --------------------------    --------------------------
                             2000           1999           2000           1999
                         -----------    -----------    -----------    -----------
<S>                      <C>            <C>            <C>            <C>
Total revenue            $   103,810    $    90,981    $   179,018    $    59,638

Net loss                 $(3,408,097)   $(2,812,363)   $(3,259,086)   $(2,525,926)

Net loss per share
    Basic and diluted    $      (.38)   $      (.43)   $      (.34)   $      (.35)
</TABLE>


                                      F-36





                               EXHIBIT INDEX

Exhibit No.   Description

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)
----------
(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.