<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                               AMENDMENT NO. 1 TO


                                    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, 2002

                                       OR

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

For the transition period from ________ to _________

                         Commission file number 0-27046

                            ORTEC INTERNATIONAL, INC.
             (Exact name of registrant 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, New York                                10032
(Address of principal executive offices                   (Zip Code)

Registrant's telephone number, including area code: (212) 740-6999

<TABLE>
<S>                                                           <C>
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
</TABLE>

          Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 [_]

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ('SS' 229.405 of this chapter) is not contained
herein, and will not 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
26,547,768 (as of 4/7/03). The aggregate market value of the voting stock held
by nonaffiliates of the Registrant was approximately $5,107,487 (as of 4/7/03,
based upon a closing price of the Company's Common Stock on the Nasdaq Bulletin
Board on such date of $0.20).

                       DOCUMENTS INCORPORATED BY REFERENCE

None.



<PAGE>


                            ORTEC INTERNATIONAL, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                               ITEMS IN FORM 10-K



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Facing page

Part I
           Item 1.  Business............................................................1
           Item 2.  Properties.........................................................10
           Item 3.  Legal Proceedings..................................................11
           Item 4.  Submission of Matters to a Vote of Security Holders...............N/A

Part II
           Item 5.  Market for the Registrant's Common Equity and Related
                       Stockholder Matters.............................................12
           Item 6.  Selected Financial Data............................................17
           Item 7.  Management's Discussion and Analysis of Financial
                       Condition and Results of Operations.............................18
           Item 7A. Quantitative and Qualitative Disclosures About
                       Market Risk....................................................N/A
           Item 8.  Financial Statements and Supplementary Data........................28
           Item 9.  Changes in and Disagreements with Accountants
                       on Accounting and Financial Disclosure.........................N/A
Part III
           Item 10. Directors and Executive Officers of the Registrant.................28
           Item 11. Executive Compensation.............................................31
           Item 12. Security Ownership of Certain Beneficial Owners
                       and Management and Related Stockholder Matters..................34
           Item 13. Certain Relationships and Related Transactions.....................38
           Item 14. Controls and Procedures............................................39
Part IV
           Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....41

Signatures.............................................................................43
</TABLE>





<PAGE>

PART I

Item 1. BUSINESS

Overview

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


     In 2001 the FDA granted our application for the commercial sale of OrCel
for the treatment of donor site wounds. A donor site wound is created in an area
of the patient's body from which the patient's skin was taken to cover a wound
at another part of such patient's body. In 2001 the FDA also granted our
application for the commercial sale of OrCel for use on patients with recessive
dystrophic epidermolysis bullosa undergoing hand reconstruction, as well as to
treat the donor site wounds created during the surgery. Recessive dystrophic
epidermolysis bullosa is a condition in which a newborn infant's skin instantly
blisters and can peel off at the slightest touch and leave painful ulcerations
and permanent scarring resulting in deformity of the hands and feet. From
December 2001 through December 2002, our gross revenues from the sale of OrCel
were $265,665. We discontinued our sales efforts and the manufacture of OrCel
for commercial sale because of our need to use our limited financial resources
for the completion of our clinical trial for the use of OrCel in the treatment
of venous stasis ulcers, which is a much larger potential market.

     We are currently conducting a pivotal clinical trial for the use of OrCel
in its cryopreserved form for the treatment of venous stasis ulcers. Venous
stasis ulcers are open lesions on the legs which result from the poor
circulation of the blood returning from the legs to the heart. The study is
being conducted at 13 clinical sites, and as of March 14, 2003, over 80 patients
were enrolled to participate in the trial. We are targeting an enrollment of 102
patients in the trial after which the trial can be considered completed upon our
demonstrating that there is a significant positive statistical difference in the
treatment of enrolled patients with OrCel as compared with the treatment of
other enrolled patients, in a control group, with standard of care. We can then
file a pre-market application with the FDA for the FDA's approval of the
commercial sale of OrCel for the treatment of venous stasis ulcers.


     We have developed the technology for the cryopreservation of OrCel without
diminishing its effectiveness. Cryopreservation is the freezing of our product
which gives it a minimum shelf life of six months, as opposed to only a few days
when our product is not cryopreserved.


                                      1


<PAGE>


     Due to budgetary constraints we are encountering in this difficult
investment climate, we have deferred conducting a pivotal clinical trial for the
use of OrCel in the treatment of diabetic foot ulcers (although the FDA granted
its approval for us to conduct that pivotal trial) until after we have completed
our pivotal clinical trial, now in progress, for the use of OrCel in the
treatment of venous stasis ulcers. We completed a pilot clinical trial for the
use of OrCel in the treatment of diabetic foot ulcers in the latter part of
2001. We reported the results of that pilot clinical trial in our annual report
on Form 10-K for the fiscal year ended December 31, 2001. People with diabetic
foot ulcers also constitute a large patient population and therefore also a
large potential market for OrCel.

     We have already secured approval for Medicare payments for the use of OrCel
under Medicare's Outpatient Prospective Payment System (OPPS). This approval
covers the use of OrCel in hospitals, other hospital-owned facilities and for
hospital out patient treatment. This reimbursement procedure is not limited to
the use of OrCel for the treatment of any particular medical condition.

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


     Our cash on hand at the end of March 2003 will enable us to continue our
operations through May, 2003, assuming that we will not incur unexpected costs
and that we are able to manage payments, over a period of time, of obligations
we have accumulated. Before the end of May, 2003, we will be required to raise
additional funds (through the sale of our securities or debt financing) to
complete our clinical trials, to produce and market OrCel and to pay our
accumulated debt. Our failure to receive additional financing or our failure
to secure FDA clearance for sale of OrCel to treat venous stasis ulcers will
result in our discontinuing our operations.


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


                                       2




<PAGE>

The Product

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

Original Research

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

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 insurance companies to reimburse their insured patients for
the cost of the use of new medical products used in medical treatments.



                                       3




<PAGE>


The FDA Approval Process

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

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

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

     o    The protocol also has to establish the safety of the use of the
          medical device to be studied in the trial. Safety can be established
          in a number of ways. One is by showing the results of use of the
          medical device in treatments in other clinical trials, in hospital
          approved treatments elsewhere in the world or by use in animal
          clinical trials and/or in an FDA cleared "pilot" clinical trial in
          which far fewer patients are treated than in the definitive "pivotal"
          clinical trial.

     o    The sponsor submits the protocol to the FDA.

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

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

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

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

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



                                       4




<PAGE>


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

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

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

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

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

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

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

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

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


Production and Supply

     We believe that the production capacity at our facility in the Audubon
Biomedical Science and Technology Park in New York City is sufficient to supply
the amount of OrCel we need for our clinical trials and for limited amounts of
commercial sales. If we achieve a significant volume of sales we will need
production facilities capable of producing much larger quantities of OrCel. We
initially planned to construct our own manufacturing facilities for the
production of OrCel for commercial sales. However, due to the difficulty in
securing investment capital in this difficult investment climate, and the large
amount we would have to invest to construct our own production facilities, our
current plans call for the manufacture of


                                       5




<PAGE>

OrCel in large quantities by a third party contract manufacturer experienced in
production of cell based medical products, whose production facilities are in
compliance with the good manufacturing processes and quality system regulations
mandated by the FDA. We are now negotiating with such third party contract
manufacturers to produce OrCel. Based on our discussions we believe that the
production of OrCel by such a third party manufacturer will allow us to produce
OrCel at a lower cost, particularly considering the significant investment we
would otherwise have to make in creating our own manufacturing facility. Our
production facility in the Audubon Biomedical Science and Technology Park was
inspected and approved by the FDA in September 2000 for the manufacture of
OrCel. We anticipate that even when we use third party production facilities we
may still be required to make a financial contribution, over a period of time,
to modify those production facilities for our use and, if we are successful in
our marketing efforts, to expand those third party manufacturing facilities.

Competition

     We are aware of several companies that are actively engaged in the research
and development of products for the repair and regeneration of skin. There are
currently three primary and distinct approaches to the repair and regeneration
of skin: the acellular (no cell) approach, including the use of cadaver based
products; the cell-based unilayered (epidermal or dermal cell) approach, and the
cell based bi-layered (epidermal and dermal cell) approach. The approach we
believe to be the most advanced and effective is the bi-layered approach, which
we use.

     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.

     We previously considered Organogenesis, Inc. and Advanced Tissue Sciences,
Inc. to be our principal competitors because each of them was previously
manufacturing and selling a tissue engineered product approved by the FDA for
the treatment, in the case of Organogensis' Apligraf, of both venous stasis and
diabetic foot ulcers, and in the case of Advanced Tissue Sciences' Dermagraft
for the treatment of diabetic foot ulcers. Advanced Tissue Sciences' Dermagraft
was manufactured in a cryopreserved form while Organogenesis' Apligraf was not.
However, in 2002 both Organogenesis and Advanced Tissue Sciences filed for
bankruptcy protection. Advanced Tissue Sciences had entered into a joint venture
agreement with Smith & Nephew, a major pharmaceutical company, for the
distribution of Dermagraft. According to publicly available information Smith &
Nephew has purchased Advanced Tissue Sciences' half interest in their joint
venture. We believe that Smith & Nephew will resume manufacturing and selling
Dermagraft, if it has not already done so. Organogenesis had entered into an
agreement with Novartis Pharmaceuticals, also a major pharmaceutical company,
for Novartis to distribute Organogenesis' Apligraf. As a result of
Organogenesis' bankruptcy that distribution agreement was modified to terminate
on June 30, 2003. Organogensis announced that it planned to resume manufacturing
and selling its Apligraf product and it may have already done so. Smith &
Nephew, and any pharmaceutical company that may distribute


                                       6




<PAGE>

Apligraf in the future, is substantially larger than we are and has
significantly greater financial, marketing and other resources than we have.
Such greater financial and other resources will put us at a disadvantage in
marketing OrCel despite what we believe are certain advantages OrCel has (such
as ease of application and greater mix of growth factors which appear to enable
a quicker healing process, and in the case of Organogenesis' Apligraf, the fact
that OrCel can be sold in a cryopreserved form and Apligraf cannot). We can give
no assurance that we will be able to enter into joint venture or distribution
agreements with pharmaceutical or health product distribution companies that are
strong financially and in their marketing capabilities, on terms, if at all,
that will make our operations profitable.

     The biomedical field is continually undergoing rapid and significant
technological changes. Other companies may succeed in developing other products
that are more effective than OrCel. If such new products are accepted by the
medical community, or if those products receive FDA approval for treatment of
venous stasis and diabetic foot ulcers before OrCel does, or if other companies
develop products that are more effective than OrCel, any such developments may
have a material adverse effect on our business, results of operations and
financial condition.

Patents and Proprietary Rights


     We have four United States patents, one European patent covering thirteen
countries and nine international patents in nine other countries, and one United
States and four international patent applications (three of which are
applications filed under the Patent Cooperation Treaty) pending, for our
technology and processes:

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

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

     o    Another United States patent covers a manufacturing process which,
          when implemented, can reduce the cost of producing OrCel. These new
          manufacturing processes create an improvement over our collagen
          structures described above in that



                                       7




<PAGE>


          a third layer of collagen which is hospitable to cell growth is
          deposited on the non-porous collagen layer. This patent expires on
          December 28, 2020.

     o    Our fourth United States patent covers a process for the
          cryo-preservation of OrCel. This patent expires on December 26, 2021.

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

     Our European patent was granted to us by the European Patent Office.

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

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

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



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<PAGE>


Paul Capital Agreements

     In August 2001 and in 2002 we entered into agreements with Paul Capital
Royalty Acquisition Fund, L.P. pursuant to which we agreed in consideration of
Paul Capital paying us $10,000,000, to pay to Paul Capital 3 1/3% of the end
user sales prices paid for our OrCel product in the United States, Canada and
Mexico through the period ending in 2011. Such percentage interest in our
revenues in those three countries may be adjusted upward or downward based on
the volume of sales to end users of OrCel in those three countries. As security
for the performance of our obligations to Paul Capital, we have granted Paul
Capital a security interest in all of our U.S. patents, patent applications and
trademarks. Our agreement with Paul Capital provides that in certain events Paul
Capital may, at its option, compel us to repurchase the interest in our revenues
that we sold to Paul Capital for a price equal to the $10,000,000 Paul Capital
paid us plus an amount that would yield Paul Capital a 30% per annum return on
its $10,000,000 investment. Among the events that would entitle Paul Capital to
compel us to repurchase its interest in our revenues at that price is if we are
insolvent or if we are unable to pay our debts as they become due. Our agreement
with Paul Capital provides that in determining such insolvency any amount we owe
to Paul Capital is excluded in calculating our net worth (or negative net
worth). As defined in our agreement with Paul Capital we are currently
insolvent. In addition, although we are currently trying to manage our debt we
are not paying our debts as they become due. Although Paul Capital has had the
right for well over a year to compel us to repurchase its interest in our
revenues at the price provided in our agreement, Paul Capital has so far not
exercised that right. If Paul Capital



                                       9




<PAGE>


does exercise its right to compel us to repurchase its interest in our revenues
we would be unable to pay the purchase price and Paul Capital could foreclose
its security interest in our U.S. patents, patent applications and trademarks
and in such event we will have to discontinue our business operations.

     In February 2003, Paul Capital purchased 50 shares of our Series B
convertible preferred stock, and in connection therewith we issued to Paul
Capital 73,077 shares of our common stock and granted Paul Capital warrants to
purchase an aggregate of 50,000 shares of our common stock, at exercise prices
of $15.00 per share for 25,000 shares and at $20.00 per share for the other
25,000 shares. The February 2003 amendments to our agreements with Paul Capital
provided, among other things, for (a) the election of one director designated by
Paul Capital, (b) the right of one observer (other than such director) selected
by Paul Capital to attend and observe all meetings of Ortec's Board of
Directors, (c) for us to use our best efforts to have independent directors who
are acceptable to both Ortec and Paul Capital, including the director designated
by Paul Capital, as a majority of Ortec's Board of Directors, and (d) restricts
our right to pay cash dividends on, or redeem, shares of our common or preferred
stock.


Employees

     We presently employ 35 people on a full-time basis, including three
executive officers. We also have 5 part time employees. We anticipate hiring
additional employees in the areas of quality assurance, manufacturing, marketing
and research and development as our needs arise.

Item 2. PROPERTIES


     We occupy an aggregate of approximately 14,000 sq. ft. of space in Columbia
University's Audubon Biomedical Science and Technology Park in New York City,
pursuant to lease agreements, for laboratory and office space. We use our
laboratories for assay development, wound healing research, biomaterial
development, bioprocess



                                       10




<PAGE>


development, histology, quality assurance testing and for two clean rooms where
we produce OrCel. As of March 1, 2003 we were paying rent of approximately
$400,000 per year for use of all our space at the Audubon facility. In
connection with our leases, Columbia University made loans to us for
improvements to our leased space as well as for construction and set up costs
for the laboratory in that space. We are repaying such loans in monthly
installments aggregating annual payments of $212,503 for each of 2004 and 2005,
$161,988 in 2006, $91,265 in 2007 and $30,422 in 2008.


     In December 2001 we entered into a ten-year lease with the New Jersey
Economic Development Agency to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. The
leased premises were to be located in two buildings. 26,000 square feet in an
existing building were to be renovated to our specifications. The other 32,000
square feet was to be a building specifically constructed for us. We planned to
equip that space primarily for the production and manufacturing of OrCel in
large quantities for commercial sale. However, as we noted above, because our
financial resources are significantly more limited than we anticipated when we
signed the lease, we were able to terminate our obligation for the leasing of
the 32,000 square feet building that was to be constructed and we have had
discussions with the New Jersey Economic Development Agency to terminate the
remainder of our obligation to lease the other 26,000 square feet. We can give
no assurance that we will be able to terminate our obligation with respect to
the 26,000 square feet portion of that lease or what damages, if any, incurred
by the New Jersey Economic Development Agency because of our failure to perform
our obligations relating to the 26,000 square feet portion of that lease, we
will have to pay.


     Before we changed our plans and decided not to build production facilities
in North Brunswick, we also leased from the same landlord approximately 3,200
square feet in another building in North Brunswick, for a 16 month term, at an
initial base rent of $96,000 for the first year, increasing to an annual rate of
$100,800 during the last four months of the lease. That lease expires June 30,
2003. We are currently using that space for process development operations and
offices.


Item 3 LEGAL PROCEEDINGS

     ClinTrials Networks, LLC (ClinTrials) has claimed that we have breached an
agreement with them, which provided for ClinTrials to arrange and manage a
portion of the FDA mandated clinical trials for use of our OrCel product for the
treatment of venous stasis ulcers, and for other services. During the quarter
ended September 30, 2002, ClinTrials commenced an arbitration proceeding against
us, claiming that we owe ClinTrials $165,936 and that ClinTrials reserves the
right to claim additional amounts from us, based on continuing additional
monthly fees ClinTrials claims that it is entitled to receive under its
agreement with us. We have denied ClinTrials' claim and have advised ClinTrials
that we are not in breach of our agreement. We have reserved our right to file a
counterclaim in the arbitration proceeding for overpayments under the terms of
our agreement with ClinTrials.


                                       11




<PAGE>

     During the quarter ended September 30, 2002, PDI, Inc. commenced an action
against us in the Superior Court of New Jersey, Bergen County, claiming that we
owe $205,000 to PDI for services that they have performed for us. We are in the
process of discussing a settlement of the amount claimed with PDI.

     In December 2002 Amarex LLC commenced an action against us in the Circuit
Court for Montgomery County, Maryland. Amarex provided statistical programming
and data management services for us for the data generated in our clinical
trials. Although in its complaint Amarex claims we owe it $2,457,875, that
amount is the additional amount we would have had to pay Amarex if Amarex had
performed all the work needed for all our contemplated clinical trials. We have
answered Amarex's complaint denying Amarex's claim. We are negotiating with
Amarex to establish the amount of services Amarex performed for us for which it
has not already been paid and to arrange for payment of that amount.


     We have entered into agreements with some of our creditors providing for
payment of our obligations to them over extended periods of time. Our accounts
payable to trade creditors aggregated approximately $3,800,000 as of December
31, 2002 of which 75%, or approximately $2,400,000, is owed by twenty-five
vendors. Of the twenty-five vendors, the three vendors referred to above for
whom we accrued approximately $600,000 in aggregate as of December 31, 2002 have
commenced legal proceedings against us.


PART II

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

Market Information

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


                                       12




<PAGE>

<TABLE>
<CAPTION>
                                       HIGH    LOW
                                      -------------
<S>                                   <C>     <C>
Fiscal Year Ended December 31, 2001

First Quarter                         $8.75   $5.81
Second Quarter                         6.98    5.75
Third Quarter                          7.75    6.00
Fourth Quarter                         6.94    4.45

Fiscal Year Ended December 31, 2002

First Quarter                         $6.99   $4.96
Second Quarter                         5.05    2.00
Third Quarter                          2.00    0.30
Fourth Quarter                         0.54    0.27
</TABLE>


                                       13




<PAGE>

Security Holders

     To the best of our knowledge, at March 7, 2003, there were 139 record
holders of our common stock. We believe there are more than 1,000 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

     In our quarterly report on Form 10-Q for the three month period ended
September 30, 2002, in a registration statement we filed with the Securities and
Exchange Commission which became effective January 31, 2003, and in our proxy
statement for our stockholders meeting held on February 11, 2003, we described a
series of private placements arranged by H.C. Wainwright & Co., Inc. in which we
received gross proceeds of $8.2 million. At the conclusion of those series of
financings we issued, in November and December of 2002, to the investors in
those private placements, 938.2742 shares of our Series B convertible preferred
stock, 13,135,857 shares of our common stock (including 3,753,315 shares which
were dividends payable on our Series B convertible preferred stock, which
dividends we can pay in our common stock and which dividends for the first year
were paid in advance), and warrants to purchase an additional 10,076,579 shares
of our common stock, of which warrants to purchase 5,429,891 shares are
exercisable at $1.50 per share, and warrants to purchase 4,691,386 shares are
exercisable at $2.00 per share. In November 2002, in addition to cash
compensation we also granted to H.C. Wainwright & Co., Inc. for its services in
arranging such Series B financing, and to Wainwright's designees, warrants to
purchase 1,300,000 shares of our common stock, of which warrants to purchase
800,000 shares were exercisable at $0.001 per share, and of which warrants to
purchase 500,000 shares are exercisable at $1.50 per share. The warrants to
purchase 800,000 shares at an exercise price of $0.001 per share were all
exercised in January 2002 and as a result we issued an additional 797,227 shares
of our common stock to the holders of those warrants. The 797,227 shares were
2,773 shares less than the 800,000 shares issuable upon exercise of those
warrants because of cashless exercise provisions in those warrants which were
utilized by all except one of the holders.

     In February 2003 we received additional gross proceeds of $2 million from
five of the investors who had purchased our Series B convertible preferred stock
in November and December 2002, and from one new investor. We issued to such six
investors 200 shares of our Series B convertible preferred stock, 2,923,077
shares of our common stock (including 923,077 shares of our common stock
constituting the first year's dividends on such 200 shares of Series B
convertible preferred stock, which dividends were paid in advance) and warrants
to purchase an additional 2,000,000 shares of our common stock, of which
warrants to purchase 1,000,000 shares are exercisable at $1.50 per share and
warrants to purchase the other 1,000,000 shares are exercisable at $2.00 per
share. In March 2003, in addition to cash compensation, we also granted to
Wainwright for its services in arranging such February 2003


                                       14




<PAGE>
Series B financing, and to one designee of Wainwright's, warrants to purchase an
aggregate of 376,923 shares of our common stock, exercisable at $0.001 per
share.

     Each share of the Series B preferred stock is convertible into so many
shares of our common stock as determined by dividing the $10,000 liquidation
preference amount of one Series B preferred share by the conversion price. There
is a fixed conversion price and an alternative conversion price. The fixed
conversion price is $1.00 per share. The holders of the Series B preferred stock
may elect an alternative conversion price, equal to 90% of the average of the
five lowest volume weighted average prices for our common stock during the
twenty trading days immediately prior to conversion. At no time will the
alternative conversion price be less than $0.25 per share. The certificate of
designations of the relative rights and preferences of the Series B convertible
preferred stock provides for customary adjustments to the conversion price in
the event of stock splits, combinations, dividends, distributions,
reclassification and other corporate events. If we issue or sell any additional
shares of common stock at a price per share less than $0.50, or without
consideration, or options or warrants to purchase, or other securities
convertible into, shares of our common stock, in effect giving the holders of
those options, warrants or convertible securities the right to purchase our
common stock at a price per share less than $0.50, the fixed conversion price
will be reduced (except in certain specified events, some of which would also
increase the alternative conversion price to $1.00) to a price equal to the
consideration per share paid or payable for such additional shares of common
stock, and the number of shares of our common stock into which the Series B
preferred stock can be converted will be proportionately increased.

     Each holder of Series B preferred stock is entitled to receive dividends at
the rate of 12% of the Series B preferred stock's stated $10,000 per share
liquidation preference, payable by us semi-annually and at our option in either
cash or shares of our common stock that have been registered pursuant to an
effective registration statement. The formula for determining the number of
shares of our common stock to be paid as a dividend on each Series B preferred
share is the number equal to the quotient of (i) the dividend payment divided by
(ii) the conversion price.

     The relative rights and preferences of our Series B convertible preferred
stock are described in greater detail in our prospectus dated January 21, 2003,
which can be viewed on the SEC's internet site, http://www.sec.gov.

     All of the purchasers of our Series B convertible preferred stock
represented to us that they were "accredited investors" as such term is defined
in the rules promulgated by the Securities and Exchange Commission. The sale of
such Series B convertible preferred stock, the issuance of such common stock and
the grant of such warrants, in our Series B financings, were all exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
Section 4(2) of the Act and Regulation D promulgated under the Act because such
sales did not involve any public offering


                                       15




<PAGE>

     During the fourth quarter of 2002 we granted to 12 employees (including
four executive officers), two non-employee directors and two consultants,
options both under and outside our Employee Stock Option Plan, to purchase an
aggregate of 4,400,500 shares of our common
stock, at exercise prices ranging from $0.30 to $0.45 per share. The grant of
such options was exempt from the registration requirements of the Act pursuant
to the provisions of Section 4(2) thereof because such option grants did not
involve any public offering and because such option grants did not constitute
sales of securities.


                                       16



<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 included in Item 8 and
Management's Discussion and Analysis included elsewhere in this Annual Report:


<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                          -----------------------------------------------------------------------
                                              1998          1999           2000           2001           2002
                                          -----------   ------------   ------------   ------------   ------------
<S>                                       <C>           <C>            <C>            <C>            <C>
Product revenue                                   --    $         --   $         --   $     21,890   $    243,775
                                          -----------   ------------   ------------   ------------   ------------
Expenses
   Production and laboratory costs          1,933,877      3,106,908      4,191,317      4,283,038      3,147,515
   Rent                                       252,397        473,010        535,443        589,238        683,116
   Consulting                                 908,495        834,180        838,383      1,413,153        490,826
   Personnel                                4,060,629      3,742,632      4,763,662      6,605,630      6,440,959
   General and administrative               1,725,201      2,152,968      2,297,769      2,671,887      2,781,896
   Interest and other expense                 104,605         99,522         89,712        536,070      7,281,104
   Interest income                           (572,549)      (368,711)      (586,623)      (191,749)        (7,647)
   Loss on extinguishment of debt
      and Series A preferred shares                --             --             --             --      1,004,027
                                          -----------   ------------   ------------   ------------   ------------
                                            8,412,655     10,040,509     12,129,663     15,907,267     21,821,796
                                          -----------   ------------   ------------   ------------   ------------

Net loss                                   (8,412,655)   (10,040,509)   (12,129,663)   (15,885,377)   (21,578,021)

Preferred stock dividends                          --             --             --             --      1,125,934
                                          -----------   ------------   ------------   ------------   ------------
Net loss applicable to common
   shareholders                           $(8,412,655)  $(10,040,509)  $(12,129,663)  $(15,885,377)  $(22,703,955)
                                          ===========   ============   ============   ============   ============

Net loss per share of common stock
   Basic and diluted                      $     (1.43)  $      (1.51)  $      (1.37)  $      (1.64)  $      (2.01)

Weighted average common stock
   outstanding
   Basic and diluted                        5,878,971      6,634,874      8,847,295      9,691,608     11,305,956
                                          ===========   ============   ============   ============   ============

<CAPTION>
                                                   Cumulative
                                                 March 12, 1991
                                          Statement of operations data
                                                 (inception) to
                                                  December 31,
                                          ----------------------------
                                                      2002
                                                  ------------
<S>                                               <C>
Product revenue                                   $    265,665
                                                  ------------
Expenses
   Production and laboratory costs                  21,195,907
   Rent                                              2,862,651
   Consulting                                        5,717,341
   Personnel                                        29,390,319
   General and administrative                       14,784,581
   Interest and other expense                        8,300,610
   Interest income                                  (2,257,096)
   Loss on extinguishment of debt
      and Series A preferred shares                  1,004,027
                                                  ------------
                                                    80,998,340
                                                  ------------

Net loss                                           (80,732,675)
                                                  ------------

Preferred stock dividends                            1,125,934
                                                  ------------

Net loss applicable to common
   shareholders                                   $(81,858,609)
                                                  ============

Net loss per share of common stock
   Basic and diluted                              $     (15.54)

Weighted average common stock
   outstanding
   Basic and diluted                                 5,269,187
                                                  ============
</TABLE>


<TABLE>
<CAPTION>
Balance sheet data                            1998          1999          2000          2001          2002
------------------                        -----------   -----------   -----------   -----------   ------------
<S>                                       <C>           <C>           <C>           <C>           <C>
Working capital/(deficiency)              $ 9,368,901   $11,009,660   $ 7,966,410   $(2,529,159)  $(17,787,545)
Total assets                               12,391,039    15,011,645    11,719,760     4,038,601      3,698,366
Long-term debt, excluding current
   maturities                               1,152,180     1,044,857       912,489     6,768,983        828,498
Shareholders' equity/(deficit)             10,390,759    12,370,720     9,392,325    (6,304,972)   (15,801,132)
</TABLE>


                                       17









<PAGE>

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

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

Forward Looking Information May Prove Inaccurate

This Report on Form 10-K contains certain forward looking statements and
information relating to Ortec, that are based on the beliefs of management, as
well as assumptions made by 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 Ortec, are intended to identify
forward looking statements. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including those described in this discussion and elsewhere in this
Annual Report on Form 10-K. 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.

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 tissue engineered skin regeneration product, for use in the
treatment of chronic and acute wounds, such as venous and diabetic skin ulcers,
and autograft donor site wounds for burn victims. We call our product OrCel'TM'
and in June 2001 we filed a trademark application for such name with the United
States Patent and Trademark Office.

In February 2001, we received FDA approval to make commercial sales of OrCel for
use on patients with recessive dystrophic epidermolysis bullosa, followed by FDA
approval in September 2001 for use of the product in the treatment of donor site
wounds in burn patients. With these approvals, though we are still a development
stage enterprise, in December 2001 we began commercial sales of our product,
generating revenues of $22,000 and $244,000 in 2001 and 2002, respectively.
During 2002, we engaged a sales force organization to actively pursue the sales
of our product, but due to a reduction in anticipated financing, we had to
curtail these activities in the second half of the year.

From inception to date, we have incurred cumulative net losses of approximately
$81.9 million. We expect to continue to incur substantial losses through 2004,
due to continued spending on research and development programs, the funding of
clinical trials and regulatory activities and the increased costs of
manufacturing, marketing and sales, distribution and administrative activities.


                                       18









<PAGE>


We are currently conducting a pivotal clinical trial using OrCel in the
treatment of venous stasis ulcers. Venous stasis ulcers are open lesions on the
legs, which result from the poor circulation of blood returning from the legs to
the heart. As of March 14, 2003, we have enrolled over 80 patients to
participate in the pivotal clinical trial and we are anticipating a total
enrollment of 102 patients to complete the trial. We expect to complete the
venous stasis pivotal clinical trials during the second quarter of 2003, with
submission of the FDA filing in September 2003.


In June 2002, we received approval from the FDA to initiate a pivotal clinical
trial using OrCel in the treatment of diabetic foot ulcers. Diabetic ulcers are
open sores that remain after the destruction of surface tissue. We have deferred
the implementation of the diabetic foot ulcers pivotal clinical trial and expect
to resume this trial in the second half of 2003 dependent on obtaining
sufficient additional financing, with FDA approval anticipated by the end of
2004.

We are investigating and currently are in discussions with a third party
manufacturer for the production of OrCel. If these discussions are successful,
we will be able to produce the large quantities of OrCel that will be required
upon the anticipated receipt of FDA approval for the sale of our product for use
in the treatment of patients with venous stasis ulcers. If we conclude an
agreement with the third party manufacturer, we will be able to defer or
terminate the costlier plan of constructing our owned manufacturing facility. We
are also concurrently in the process of evaluating various sales and marketing
collaborative arrangements.

We anticipate that future revenues and results of operations may continue to
fluctuate significantly depending on, among other factors, the timing and
outcome of applications for additional regulatory approvals, our ability to
successfully manufacture, market and distribute OrCel and/or the establishment
of collaborative arrangements for the manufacturing, marketing and distribution
of our product. We anticipate that our operating activities will result in
substantial net losses through 2004.

Critical Accounting Estimates


Revenue Recognition. Product revenue is recognized upon shipment of OrCel when
title and risk of loss pass to the customer, which occurs when the product is
received by the end user hospital.

Research and Development Costs. As we are still engaged in clinical trials of
our product and remain a development stage enterprise, the cost of producing
product for clinical trials and for sale, is included in Research and
Development costs. Additionally, all research and development costs, which
comprise of Product Production and laboratory costs, Rent, Consulting, Personnel
and Depreciation and Amortizaton expenses, are expensed as incurred.


                                       19









<PAGE>

Long Term Obligations. We account for our Revenue Interest Assignment Agreement
in a manner similar to that of debt and provide for interest to reflect the
estimated cost of the funds anticipated under the terms of the agreement.
Pursuant to the default provisions under the agreement, interest is accrued at
30% per annum. At such time when the default provisions are no longer
applicable, interest will be accrued based upon the expected level of future
revenues, which may result in a lower imputed interest rate, with potential
material financial impact.

Impact of recently issued accounting pronouncements

On April 30, 2002, the Financial Accounting Standards Board (the FASB) issued
SFAS No.145, "Rescission of FASB Statements No.4, 44 and 64, Amendment of SFAS
No.13 and Technical Corrections". SFAS No.145 rescinds Statement No.4, which
requires all gains and losses from extinguishments of debt to be aggregated and,
if material, classified as an extraordinary item, net the related income tax
effect. Upon adoption of SFAS No.145, companies will be required to apply the
criteria in APB Opinion No.30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" in determining the
classification of gains and losses resulting from the extinguishment of debt.
SFAS No.145 is effective for fiscal years beginning after May 15, 2002. We are
currently evaluating the requirements and impact of the statement on our results
of operations and financial position.

On July 30, 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred, rather
than at a date of a commitment to an exit or disposal plan. Example of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activity. SFAS No.146 is to
be applied prospectively to exit and disposal activities initiated after
December 31, 2002. We will apply the provisions of this statement prospectively
to disposal activities commencing after December 31, 2002.

In December 2002, the FASB issued SFAS No.148, "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123". This statement requires companies to reflect the fair market value of
employee stock based compensation in their results of operations as an
additional expense or disclose the pro-forma impact of this adjustment to net
income and earnings per share, in the notes to the financial statements. The
Company has elected to continue to account for its stock-based compensation
under the rules of APB Opinion No.25, with footnote disclosure, as required by
SFAS No.148.

Results of Operations

Year Ended December 31, 2002, and December 31, 2001.


                                       20









<PAGE>

Revenues

We earned revenues of approximately $244,000 in 2002, and $22,000 in 2001 from
commercial shipments of products to customers. Sales to commercial customers
began in December 2001, and were curtailed in the second half of 2002.

Expenses

Expenses increased by approximately $5.9 million in 2002, from approximately
$15.9 million in 2001 to $21.8 million in 2002. Interest, which primarily
consisted of non-cash charges relating to the preferred stock and debentures
financings, accounted for $6.7 million of this increase, while the loss on
extinguishment of debt represented $1.0 million of the increase. Other expenses
incurred in 2002, decreased by $1.8 million, compared with 2001.


Production and laboratory costs. These expenses decreased by approximately $1.1
million, from $4.3 million in 2001 to $3.2 million in 2002. Additionally, 2001
costs included a $0.4 million credit to expenses as a result of an insurance
recovery for damaged Orcel, which costs were incurred in 2000. All other
research and development costs decreased by $1.5 million in 2002, compared with
2001. This decrease in research and development expenses was due to the fact
that the costs incurred in 2002 included only one clinical trial, the venous
ulcer pivotal trial, whereas in 2001 there were three trials conducted and
concluded, the donor site pivotal trial, and the venous and diabetic ulcers
pilot trials. We expect to conclude the venous ulcer pivotal trial in 2003.

Personnel. Personnel costs decreased by approximately $.2 million from $6.6
million in 2001 to $6.4 million in 2002. Personnel costs initially increased in
the first half of 2002 due to the additional personnel required to conduct and
manage clinical trial programs, to manufacture the increased quantity of product
required by our clinical trial programs and for commercial sales and to initiate
our sales and marketing program for our FDA approved products. In July 2002,
management implemented a cost reduction plan and deferred the implementation of
the diabetic clinical trial, as well as, reduced production of product for
commercial sales, which resulted in significant reductions in personnel costs in
the second half of 2002. As a result of our cost reduction plan, 34 employees
were terminated and the Company paid $40,000 in termination benefits in July
2002. No other costs were incurred as a result of these terminations.


Consulting. These fees decreased by $.9 million from $1.4 million in 2001 to $.5
million in 2002. This was due to the increased costs in 2001 related to the
specific requirements for concluding the clinical trials for donor site wounds
and FDA submissions, noted above, as well as, the costs of conducting the pilot
clinical trials for venous leg stasis and diabetic foot ulcers. In 2002, only
the costs of beginning the pivotal clinical trials for venous leg stasis ulcers
were incurred.

General and Administrative. These expenses increased by $.1 million from $2.7
million in 2001 to $2.8 million in 2002. The increase in 2002 was primarily due
to increased marketing expenses incurred early in the year, as we prepared for
commercial sales of our product. As noted above, the decision to reduce fresh
OrCel production in the third quarter resulted in a curtailment of marketing
expense in the second half of the year. In 2002, we also incurred


                                       21









<PAGE>

higher expenses, as we continued our intense financing efforts. These increases
were partially offset by a reduction of travel expenses in 2002, as we focused
on reducing our overall spending.

Rent. This expense increased by $.1 million in 2002 compared with 2001,
primarily due to the charges incurred for the New Jersey leases in 2002, which
expense was not incurred in 2001.

Interest Expense. Interest expense increased by $6.7 million, from $.5 million
in 2001 to $7.2 million in 2002. This increase was due to the imputed non-cash
interest resulting from the convertible debenture and convertible preferred
financings, which occurred in 2002. Interest of $3.6 million was recorded as a
result of these financings, $.2 million in coupon rate interest on the
debentures and $3.4 million recorded as the fair market value of the conversion
features and warrants issued with the financings. Additionally, non-cash
interest of $3.5 million was accrued in 2002, relating to the Paul Capital
Royalty obligation, as compared to $.5 million in 2001.

Interest Income. Interest income declined by approximately $.2 million in 2002,
compared with 2001, primarily due to the smaller average cash balances
outstanding during 2002 compared with 2001.

Loss on extinguishment of debt and series A preferred shares. We incurred a loss
of $1.0 million due to the conversion of debt into preferred shares in 2002.

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

Revenues

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

Expenses

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

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

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


                                       22









<PAGE>


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


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

Interest Expense. Ortec incurred increased interest expense of $.4 million in
2001, compared with the expense incurred in 2000. On August 29, 2001, Ortec
entered into a Royalty Revenue Interest Assignment agreement with Paul Capital
and as part of this agreement, was entitled to receive $10.0 million in 2001.
$6.0 million of this amount was received in 2001 and the remaining $4.0 million
was received in January 2002. As of December 31, 2001, management anticipated
that the effective cost of these funds based on the anticipated revenue stream,
over the term of this agreement, which terminates in December 2011, may range
between 20% to 35% per annum and as such, approximately $455,000 in interest
expense had been accrued in 2001.

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

Liquidity and Capital Resources

Since inception (March 12, 1991) through December 31, 2002, we have accumulated
a deficit of approximately $81.9 million and we expect to continue to incur
substantial operating losses through 2004. We have financed our operations
primarily through private placements of our common stock, preferred stock and
convertible debentures, our initial public offering and the exercise of our
publicly traded Class A warrants at the end of 1997. From inception to December
31, 2002, we received cash proceeds from the sale of common equity securities,
net of share issuance expenses, of approximately $49.0 million, we received net
proceeds from the issuance of debentures and preferred stock of $8.2 million,
and we have received a total of $10 million from the sale of a percentage
interest in our future revenues from the sale of our product in North America.


                                       23









<PAGE>

Subsequent to December 31, 2002, the Company has continued with its convertible
preferred stock financing and on February 26, 2003, closed on an additional $2.0
million investment in preferred equity.

For the year ended December 31, 2002, we used net cash for operating activities
of approximately $10.9 million. Cash used in operating activities resulted
primarily from our net loss of $21.6 million, offset by depreciation and
amortization of approximately $715,000, approximately $6.9 million of non-cash
interest expense, a loss on extinguishment of debt on series A preferred stock
of $1.0 million and an increase in accounts payable and accrued expenses of
approximately $1.4 million.

During the year ended December 31, 2002 we invested approximately $192,000 in
property, plant, equipment and patent application costs. In January 2002, we
received a $1,300,000 line of credit from GE Capital for equipment lease
financing, with which we financed $450,000 of additional purchases of fixed
assets. This line of credit was available for eligible manufacturing equipment
purchases in 2002.

We repaid $246,000 of our loans payable and long-term debt during the year ended
December 31, 2002. We received $4.0 million under our agreement with Paul
Capital Royalty Acquisition Fund, L.P. and $8.2 million from issuance of our
convertible debentures, notes and preferred stock financing through H.C.
Wainwright, as noted above. As a result of the aforementioned preferred stock
financing, common shares outstanding increased by 13.5 million shares, due to
the conversion of warrants granted and the issuance of common stock dividends.

In December 2001, we entered into a ten-year lease with New Jersey Economic
Development Authority ("NJEDA") to lease approximately 58,000 square feet of
manufacturing and office space located in North Brunswick, New Jersey. On August
5, 2002, we reached an agreement with NJEDA to terminate the December 2001 lease
and enter into a new lease for approximately 26,000 square feet of manufacturing
and office space. The new lease began on August 1, 2002 and terminates on
December 31, 2005, with rental payments beginning in January 2003. A security
deposit of $623,000, which was paid by us on the original lease, has been
applied as a security deposit on the new lease. All construction costs advanced
by NJEDA for the renovation of the premises, approximately $420,000, has been
included as a construction allowance in the new lease and is reflected in the
rent base. Due to the lower level of financing received in 2002 than had
originally been planned, the Company is currently engaged in discussions with
the NJEDA to defer or terminate the lease entered into in August 2002. In the
event that we reach an agreement with the NJEDA to terminate the lease, the
security deposit of $623,000 may be partially or wholly utilized as part of the
termination settlement.


Under the August 29, 2001 Revenue Interest Assignment agreement, as amended, in
consideration for the investment of $10.0 million, Paul Capital received 3-1/3%
of end user revenues from the sale of our products in the United States, Canada
and Mexico. These percentage payments may be further adjusted upward or
downward, based on the volume of net sales to end users of our products in



                                       24









<PAGE>


those three countries. As of December 31, 2002, we have provided for the
effective cost of the amounts received from Paul Capital at 30% per annum,
pursuant to default provisions of the agreement and we have accrued interest
accordingly. However, at such time when the default provisions are no longer
applicable, interest will be accrued based upon the expected level of future
revenues, which may result in a lower imputed interest rate, with potential
material financial impact. Under the August 29, 2001 agreement, as amended,
beginning on January 1, 2003, Paul Capital will be entitled to receive each year
advances from the first proceeds to us from end user sales of our products. The
agreement provides for quarterly and annual accountings between Paul Capital and
us for those advance payments, compared to amounts owed based on actual sales.
Such annual amounts Paul Capital will be able to draw in advance will range from
$.6 million in 2003, $1.0 million in 2004 to $7.5 million in 2005 and
thereafter.


At December 31, 2002, our liabilities exceeded the value of our assets and as
such, we were technically in default of the solvency requirement under the Paul
Capital agreement. Paul Capital is aware of this breech and based on our
discussions regarding this issue, has indicated to us that it presently does not
intend to exercise its option to require us to repurchase its revenue interest.
Additionally, in February 2003, Paul Capital amended its agreement with us,
restating and updating certain provisions of the original agreement. On February
26, 2003, Paul Capital invested an additional $500,000 in our Series B preferred
stock, in concurrence with this amendment.

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

We have granted Paul Capital a security interest in all our United States
patents and trademarks relating to our technology for our product, to secure
payments we are required to make to Paul Capital, based on sales generated under
the Royalty Revenue Interest Assignment agreement, as described above.

The original agreement and modifications to the agreement terminate on December
31, 2011, unless terminated earlier by either party, as permitted by the terms
of the agreement.

On March 27, 2002, we engaged H.C. Wainwright & Co., Inc. an investment banking
firm, to act as our financial advisor in connection with raising capital for the
Company through debt and/or equity financing. Wainwright has assisted us in
raising financing of approximately $8.2 million in 2002 and has continued its
financing efforts on our behalf in 2003. On May 13, 2002, we secured the first
$2.3 million of this financing, in the form of 12% convertible debentures, which
was convertible into common shares. On June 28, 2002, $0.6 million of these
debentures were converted into Series-A convertible preferred stock. We also
issued 291,000 warrants to purchase common stock as part of this May 13, 2002
financing. On June 28, 2002, an additional $1.5 million of financing was
secured, which consisted of $1.2 million in Series A convertible preferred stock
and $.3 million in 12% convertible debentures. We also issued 655,000 stock
purchase warrants as part of the June 28, 2002 financing. In the third and


                                       25









<PAGE>

fourth quarters of 2002, we raised an additional $3.3 million in convertible
debentures and $1.1 million in convertible preferred stock.

On November 13 and December 13, 2002, the investors converted all their
outstanding convertible debentures and Series-A convertible preferred stock into
Series-B convertible preferred stock, thereby acquiring 938.2742 shares of
preferred shares, at a stated value of $9,382,742. In addition, these investors
were granted Series A warrants, to purchase 9,382,742 shares of the Company's
common stock at an exercise price of $.001. These Series-A warrants vested
immediately and were exercised immediately, upon grant. The investors were also
granted Series B-1 and Series B-2 warrants, which can be used to purchase
5,429,891 and 4,691,386 shares of common stock at an exercise price of $1.50 and
$2.00 per share, respectively. The Series B-1 and B-2 warrants are exercisable
nine and twelve months, respectively, after issue. The warrants previously
granted with the issuance of the convertible debentures and Series-A preferred
stock, were exchanged for Series B-1 warrants. In conjunction with this
preferred stock financing, the investors were also paid a common stock dividend,
whereby they were granted 3,753,116 shares of common stock.

The Series B preferred stock is convertible into common shares at any time at
the option of the investor, based on a fixed conversion rate of $1.00 or
commencing after February 1, 2003, based on an alternative conversion rate equal
to 90% of the average of the five lowest volume weighted average prices for the
common stock for the twenty trading days immediately prior to conversion,
subject to a floor price of $0.25. The fixed conversion rate may be adjusted
downward if the Company subsequently issues common stock at a purchase price
less than $0.50. In that event, the fixed conversion rate will be adjusted
downward to the price of the new issuance. Conversion is mandatory, upon the
occurrence of certain financial events, such as, beginning six months from the
date of issue, if the closing bid price of common shares exceeds $2.00 for a
period of 20 consecutive trading days, or if within nine months from the date of
issue, the Company completes a public offering, raising a minimum of $8 million.
The alternative conversion price is adjustable or cancelable under certain
circumstances, such as, in the event that the Company receives a licensing fee
and/or a strategic investment of at least $5.0 million, within six months of
closing, the alternative conversion rate is adjusted to the common share price
of the investment or is cancelled if the share price exceeds the fixed rate of
$1.00. If within six months from date of issue, the Company receives a licensing
fee with an upfront payment of at least $5.0 million, the alternative conversion
rate is adjusted to the quoted closing stock price on the day of the public
announcement or is cancelled if this closing price exceeds $1.00. Similarly, if
the Company completes a subsequent public or private financing of a least $5.0
million, within six months of closing, the alternative conversion rate is
adjusted to the closing price or the fixed rate of $l.00, if lower. Dividends
were paid in advance in common shares at the rate of 12% in the first year after
issue and will be paid semiannually in subsequent years, in either cash or
common shares, at the election of the Company, until at such time as the
preferred stock is converted to common shares. Along with the convertible
preferred stock, the Company also issued warrants to purchase common shares, as
noted above. The Series B-1 and B-2 warrants are redeemable by the Company at
$0.10 per share, twelve months and twenty-four months after issuance,
respectively, if the Company's common shares closes above $3.00 and $4.00,
respectively, for 15 consecutive trading days.


A summary of our contractual obligation requirements as of December 31, 2002 is
as follows:

<TABLE>
<CAPTION>
                                                    Payments due by period
                                       -------------------------------------------------
                                                        Less
                                                       than 1         1-3         3-5
                                          Total         Year         years       years
                                       ----------   -----------   -----------   --------
<S>                                    <C>          <C>            <C>          <C>
Loan Payable                           $  921,185   $   212,503    $  586,994   $121,688
Capital Lease Obligation                  409,029       175,156       233,873
Operating Leases                        1,779,000       820,000       959,000
Other Obligation:
Agreement with Dr. Eisenberg              109,800                    109,800
Obligation under Revenue Interest
   Assignment (1)                                    13,959,541
                                       -------------------------------------------------
                                       $3,219,014   $15,167,200   $ 1,889,667   $121,688
                                       =================================================
</TABLE>

(1) See Note 7 to the financial statement for repayment terms.



                                       26









<PAGE>

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

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

We require substantial funding to continue our research and development
activities, clinical trials, manufacturing, sales, distribution and
administrative activities. We believe that our cash and cash equivalents on hand
at December 31, 2002, (approximately $0.8 million) and the financing of $2.0
million received in February 2003, will enable us to continue our operations
until May 31, 2003. We are continuing our equity financing efforts with H.C.
Wainwright and we expect to raise an additional $5.0 million from investors,
some of whom have previously participated in the $10.2 million raised to date.
This will enable us to complete our venous clinical pivotal trial, file our PMA
with the FDA and execute on our plan to engage the services of a third party
manufacturer. Accomplishing these milestones will also enable us to raise an
additional $5.0 million in 2003 through other potential collaborative
arrangements with companies for sales, marketing and distribution of our product
and through other equity investments. Based on these efforts, management
believes that the Company will be able to continue its operations for at least
the next 12 months.

We continue to explore and, as appropriate, enter into discussions with other
companies regarding the potential for equity investment, collaborative
arrangements, license agreements or other funding programs with us, in exchange
for manufacturing, marketing, distribution or other rights to our product.
However, we can give no assurance that discussions with other companies will
result in any additional investments, collaborative arrangements, agreements or
other funding, or that the necessary additional financing through debt or equity
financing will be available to us on acceptable terms, if at all. Further, we
can give no assurance that any arrangements resulting from these discussions
will successfully reduce our funding requirements. If additional funding is not
available to us when needed, we may not be able to continue operations.


                                       27




<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Financial Statements contained in this Form 10-K
report, setting forth the financial statements of Ortec International, Inc.,
together with the report of Grant Thornton LLP, dated March 31, 2003.


PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

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

<TABLE>
<CAPTION>
Name                             Age                          Position
----                             ---                          --------
<S>                               <C>  <C>
Steven Katz, Ph.D.                58   Chairman of the Board of Directors
Mark Eisenberg, M.D.              65   Senior Vice President, Research and Development, and
                                       Director
Ron Lipstein                      47   Chief Executive and Chief Financial Officer, Vice
                                       Chairman of the Board of Directors, Secretary and
                                       Treasurer
Costantin Papastephanou, Ph.D.    57   President
Steve Lilien, Ph.D.               55   Director
Allen I. Schiff, Ph.D.            57   Director
Gregory B. Brown, M.D.            49   Director
</TABLE>

Directors

     Steven Katz, one of our founders, has been a director since our inception
in 1991 and was elected Chairman of our Board of Directors in September 1994. 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 "Certain Relationships and Related Transactions - Eisenberg Consulting
Agreement". He has been a physician in private practice in Sydney, Australia
since 1967. He is a member and co-founder of the dystrophic epidermolysis
bullosa clinic at the Prince of Wales Hospital for children in Sydney,
Australia. He has done extensive research on epidermolysis bullosa disease.


                                       28




<PAGE>

     Ron Lipstein, one of our founders, has been the Secretary, Treasurer, Chief
Financial Officer and a director of Ortec since 1991. Mr. Lipstein was elected
Vice Chairman of our Board of Directors in January 2001 and as our Chief
Executive Officer in March 2003. He has been employed by us since 1991. Mr.
Lipstein is a certified public accountant.

     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 fifteen years and is currently the Weinstein Professor of
Accounting there. He is a certified public accountant and has a Ph.D. in
accounting and finance and an MS, both from New York University.

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

     Gregory B. Brown has been a director of our Company since March 2003. Since
January 2003 Dr. Brown has been a partner at Paul Capital Investors and serves
as the director selected by Paul Capital Royalty Acquisition Fund, L.P., an
affiliate of Paul Capital Investors. Pursuant to our agreement with Paul Capital
Royalty Acquisition Fund, L.P., we are required to elect a person designated by
Paul Capital Royalty Acquisition Fund, L.P. as a director of Ortec. From 1997 to
2002 Dr. Brown served as a managing director of Adams, Harness & Hill, an
investment banking firm, and from April 2001 to December 2002 as head of its
Healthcare and co-head of investment banking. Prior to 1997 Dr. Brown was a
thoracic and vascular surgeon. He received a B.A. degree from Yale University,
an M.D. from Upstate Medical School and an M.B.A. from Harvard Business School.

     All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Drs. Steven Lilien, Allen I.
Schiff and Gregory B. Brown are non-employee directors. For Dr. Steven Lilien's
services in 2002 as a director and as chairman of our audit committee, we
granted Dr. Lilien 7 year options to purchase 48,500 shares of common stock. For
his services in 2002 as a director and as a member of our audit committee, we
paid Dr. Schiff an aggregate of $3,000 and granted Dr. Schiff 7 year options to
purchase an aggregate of 20,000 shares of common stock. Such options were
granted under our Employee Stock Option Plan and are exercisable at prices
ranging from $0.30 to $0.60 per share. Dr. Gregory B. Brown was not a director
in 2002.


                                       29




<PAGE>

Executive Officers

     Officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Two of our executive officers, Steven Katz
and Ron Lipstein, are also members of our Board of Directors. Information with
regard to such persons is set forth above under the heading "Directors." The
remaining executive officer is Costantin Papastephanou, our President.

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

The Committees

     The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee. The Board of Directors does not have a Nominating
Committee and the usual functions of such committee are performed by the entire
Board of Directors.

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

     Compensation Committee. The function of the Compensation Committee is to
make recommendations to the Board of Directors with respect to the compensation
of our executive officers, including salary, bonus and other incentives. The
current members of the Compensation Committee are Messrs. Katz, Eisenberg and
Lilien.

     Stock Option Committee. The Stock Option Committee determines the
employees, (other than our executive officers), consultants and advisors, to
whom options should be granted under our Stock Option Plan and the number of
options to be granted to each such employee, consultant and advisor. The current
members of the Stock Option Committee are Messrs. Katz and Lipstein. The Board
of Directors determines any other persons (our executive officers and directors)
to whom options should be granted and the number of options to be granted to
each such person.


                                       30




<PAGE>

Attendance at Meetings

     During 2002, the Board of Directors, Audit Committee, Compensation
Committee and Stock Option Committee each met or acted without a meeting
pursuant to unanimous written consent 7 times, 6 times, 1 time and 16 times,
respectively. In 2002 all of the directors attended all of the meetings of the
Board of Directors except for Dr. Lilien who attended six of the seven meetings.
Dr. Lilien attended all six meetings and Dr. Schiff attended three meetings of
the Audit Committee. Messrs. Katz, Eisenberg and Lilien all attended the one
meeting of the Compensation Committee and Messrs. Katz and Lipstein attended all
meetings of the Stock Option Committee.

Section 16(a) Beneficial Ownership Reporting Compliance

     To the best of our knowledge, during 2002 the following individuals who
were executive officers and/or directors of Ortec did not file a Form 4 report
in time: Steven Katz, Mark Eisenberg and Costantin Papastephanou, once each, and
Ron Lipstein, Alain Klapholz, William Schaeffer, Steven Lilien and Allen Schiff,
twice each. To the best of our knowledge, all other Forms 3, 4 and 5 required to
be filed during 2002 were done so on a timely basis.

Item 11. EXECUTIVE COMPENSATION

     The following table sets forth the compensation paid by us for our fiscal
years ended December 31, 2002, 2001 and 2000 to (i) our Chief Executive Officer;
(ii) our other executive officers; and (iii) up to two additional individuals
for whom disclosure would have been provided under the above clause (ii) but for
the fact that the individuals were not serving as executive officers at the end
of the last completed fiscal year (the "Named Officers").


                                       31




<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                          2002    225,058     150,850                       2,100,825
Chairman
                                     2001    236,392      92,000                         200,000
                                     2000    209,807      94,605        9,000*           129,278
-------------------------------------------------------------------------------------------------
Ron Lipstein                         2002    201,115     150,850                       2,100,825
CEO, Vice Chairman, Secretary,
Treasurer and CFO                    2001    214,447      86,000                         185,000
                                     2000    179,712      78,105        9,000*           118,128
-------------------------------------------------------------------------------------------------
Costantin Papastephanou              2002    205,784                                     190,000
Presiden
                                     2001    181,625                                      60,000
-------------------------------------------------------------------------------------------------
Alain Klapholz                       2002    162,884                                     100,000
Former Vice President
and former Director (1)              2001    170,604      20,000                          60,000
                                     2000    159,808      30,000                          23,300
-------------------------------------------------------------------------------------------------
William Schaeffer                    2002    181,733                                      34,220
Former Chief Operating Officer (1)
                                     2001    188,688                                      10,000
                                     2000    167,308                                      17,000
-------------------------------------------------------------------------------------------------
</TABLE>

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

(1)  Mr. Klapholz resigned as our Vice President and as a member of our Board of
     Directors in March 2003, and Mr. Schaeffer resigned as our Chief Operating
     Officer on February 14, 2003.

Board Compensation

     Drs. Steven Lilien and Allen I. Schiff were our only non-employee directors
in 2002. For Dr. Steven Lilien's services in 2002 as a director and as chairman
of our audit committee, we granted Dr. Lilien 7 year options to purchase 48,500
shares of common stock. For his services in 2002 as a director and as a member
of our audit committee, we paid Dr. Schiff an aggregate of $3,000 and granted
Dr. Schiff 7 year options to purchase an aggregate of 20,000 shares of common
stock. Such options were granted under our Employee Stock Option Plan and are
exercisable at prices ranging from $0.30 to $0.60 per share.

Option Grants in Last Fiscal Year

     The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2002 by us to the Named
Officers:


                                       32




<PAGE>

<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                 2,100,000          43.4           $0.35       11/11/09    $294,000    $693,000
                                  825            *             5.95         1/3/09       1,997       4,653
----------------------------------------------------------------------------------------------------------
Ron Lipstein                2,100,000          43.4            0.35       11/11/09     294,000     693,000
                                  825            *             5.95         1/3/09       1,997       4,653
----------------------------------------------------------------------------------------------------------
Costantin Papastephanou        25,000           0.5            0.30        11/7/09       3,000       7,000
                               50,000           1.0            1.00        7/15/04      20,500      47,500
                               40,000           0.8            6.05        1/15/09      98,400     229,600
----------------------------------------------------------------------------------------------------------
Alain Klapholz                 50,000           1.0            0.30        11/7/09       3,000       7,000
                               50,000           1.0            0.60        8/13/09      12,000      28,500
----------------------------------------------------------------------------------------------------------
William D. Schaeffer(2)        10,000           0.2            0.30        11/7/09       3,000       7,000
                               15,431           0.3            0.31        12/5/05         823       1,743
                                8,789           0.2            1.00        7/15/04         879       1,846
----------------------------------------------------------------------------------------------------------
</TABLE>

*    Less than one percent

(1)  Options to purchase a total of 4,831,609 shares of common stock were
     granted to our employees, including the Named Officers, during the fiscal
     year ended December 31, 2002.

     The following table sets forth certain information regarding options
exercised and exercisable during the fiscal year ended December 31, 2002 and the
value of the options held as of December 31, 2002 by the Named Officers. None of
the Named Officers exercised any options during the fiscal year ended December
31, 2002.


                                       33




<PAGE>

                 Aggregated Option Exercises In Last Fiscal Year
                        and Fiscal Year-End Option Value

<TABLE>
<CAPTION>
                               Number of Securities            Value of Unexercised
                              Underlying Unexercised           In-the-Money Options
                          Options At Fiscal Year-End (#)    at Fiscal Year-End (1)($)
                          ------------------------------   ---------------------------
Name                       Exercisable     Unexercisable   Exercisable   Unexercisable
----                      -------------   --------------   -----------   -------------
<S>                         <C>               <C>            <C>            <C>
Steven Katz                 2,710,853               0        $273,000            0
Ron Lipstein                2,658,953               0         273,000            0
Costantin Papastephanou        20,000         155,000               0       $4,500
Alain Klapholz                262,300               0           9,000            0
William D. Schaeffer           35,064          69,906               0        4,423
</TABLE>

(1)  The product of (x) the difference between $0.48 (the closing price of our
     Common Stock at December 31, 2002, as reported by Nasdaq) and the exercise
     price of the unexercised options, multiplied by (y) the number of
     unexercised options.

Compensation Committee Interlock and Insider Participation

     None of our 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 our 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.

Item 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information, as of March 21, 2003, based
upon information obtained from the persons named below, regarding beneficial
ownership of our common stock by (i) each person who is known by us to own
beneficially more than 5% of the outstanding shares of our common stock, (ii)
each of our directors, (iii) each of the Named Officers, and (iv) all of our
executive officers and directors as a group.


                                       34




<PAGE>


<TABLE>
<CAPTION>
                                              Amount and         Percentage of
           Name and Address              Nature of Beneficial     Outstanding
         of Beneficial Owner                 Ownership**        Shares Owned**
------------------------------------------------------------------------------
<S>                                        <C>                        <C>
Steven Katz*                                    2,902,915(1)          9.92
------------------------------------------------------------------------------
Mark Eisenberg*                                   598,500(2)          2.25
------------------------------------------------------------------------------
Ron Lipstein*                                   2,881,224(3)          9.86
------------------------------------------------------------------------------
Alain Klapholz*                                   548,906(4)          2.05
------------------------------------------------------------------------------
Costantin Papastephanou*                          110,500(5)           ***
------------------------------------------------------------------------------
William D. Schaeffer [address]                      2,500              ***
------------------------------------------------------------------------------
Steven Lilien                                      55,525(6)           ***
   19 Larchmont Street
   Ardsley, NY  10502
------------------------------------------------------------------------------
Allen I. Schiff                                    27,500(7)           ***
   Fordham University
   Graduate School of Business
   113 West 60th Street
   New York, NY 10023
------------------------------------------------------------------------------
Gregory B. Brown                                        0
   140 E. 45th Street, 44th Floor
   New York, NY  10017
------------------------------------------------------------------------------
Pequot Capital Management, Inc.                 9,573,645(9)(10)     29.75
   5000 Nyala Farm Road
   Westport, CT  06880
------------------------------------------------------------------------------
DMG Advisors LLC                                9,523,994(9)(10)     28.35
   53 Forest Avenue, Suite 202
   Old Greenwich, CT 06870
------------------------------------------------------------------------------
Sargon Capital International Fund Ltd.          9,315,524(9)(10)     28.87
   6 Louis Drive
   Montville, NJ  07045
------------------------------------------------------------------------------
SDS Merchant Fund L.P.                         13,884,087(9)(10)     37.73
   53 Forest Avenue, Suite 201
   Old Greenwich, CT  06870
------------------------------------------------------------------------------
Stonestreet Limited Partnership                 7,960,480(9)(10)     23.07
   c/o Canaccord Capital Corp.
   32 Bay Street, Suite 1250
   Toronto, ON  M5H4A6
------------------------------------------------------------------------------
Paradigm Group                                  1,483,693(9)(10)      5.37
   3000 Dundee Road, Suite 105
   Northbrook, IL  60062
------------------------------------------------------------------------------
All officers and directors as a group           7,127,570(1-8)       22.18
   (eight person)
------------------------------------------------------------------------------
</TABLE>

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

**   The number of shares of common stock beneficially owned by each person or
     entity is determined under rules promulgated by the Securities and Exchange
     Commission. Under such


                                       35




<PAGE>

     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 March 21, 2003. 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 2,710,853 shares issuable to Dr. Katz upon his exercise of
     outstanding options and warrants.

2.   Includes 2,500 shares issuable to Dr. Eisenberg upon his exercise of
     outstanding options.

3.   Includes 33,600 shares owned by Mr. Lipstein's minor children. Mr. Lipstein
     disclaims any beneficial interest in such 33,600 shares. Also includes
     2,658,953 shares issuable to Mr. Lipstein upon his exercise of outstanding
     options and warrants.

4.   Includes 24,000 shares owned by Mr. Klapholz' minor children. Mr. Klapholz
     disclaims any beneficial interest in such shares. Also includes 262,300
     shares issuable to Mr. Klapholz upon his exercise of outstanding options.

5.   Includes 108,750 shares issuable to Mr. Papastephanou upon his exercise of
     outstanding options.

6.   Includes 55,125 shares issuable to Dr. Lilien on his exercise of
     outstanding options.

7.   All 27,500 shares are issuable to Dr. Schiff on his exercise of outstanding
     options.

8.   Does not include 30,769 shares of common stock and 50 shares of Series B
     convertible preferred stock which are convertible into shares of common
     stock, held by Paul Capital Royalty Acquisition Fund, L.P. Dr. Brown was
     selected by Paul Capital Royalty Acquisition Fund, L.P. to serve as a
     director of Ortec pursuant to Ortec's agreement giving Paul Capital Royalty
     Acquisition Fund, L.P. the right to name one director.


9.   Shares held by investment funds. These have sole or shared investment
     and/or voting power for these shares. The individuals at each of these
     entities who have voting, dispositive or investment powers with respect
     to these securities are the following:

     Pequot Capital Management, Inc.--Arthur Samberg
     DMG Advisors LLC--Tom McCauley
     Sargon Capital International Fund Ltd.--Margaret Chu
     SDS Merchant Fund, L.P.--Steve Derby
     Stonestreet Limited Partnership--Michael Finkelstein and Elizabeth Leonard
     Paradigm Group--Sheldon Drobny.


10.  Includes the following number of shares of Series B convertible preferred
     stock and assuming the conversion of such preferred shares into the
     following number of shares of our common stock, which is determined by
     dividing the liquidation preference amount of $10,000 per share by an
     assumed conversion price of $0.25.


                                       36




<PAGE>

<TABLE>
<CAPTION>
                                         Number of Shares of    Shares of Common
                                         Series B Convertible    Stock Assuming
                                            Preferred Stock        Conversion
                                         --------------------   ----------------
<S>                                            <C>                 <C>
Pequot Capital Management Fund, Inc.           140.8146             5,632,584
DMG Advisors LLC                               176.1422             7,045,688
Sargon Capital International Fund Ltd.         171.9399             6,877,596
SDS Merchant Fund L.P.                         256.2010            10,248,040
Stonestreet Limited Partnership                199.0120             7,960,480
Paradigm Group                                  27.4758             1,099,032
</TABLE>

Equity Compensation Plan Information

     The table below sets forth the following information as of the fiscal year
ended December 31, 2002 for (i) all compensation plans previously approved by
our stockholders and (ii) all compensation plans not previously approved by our
stockholders, if any:

          (a)  the number of securities to be issued upon the exercise of
               outstanding options, warrants and rights;

          (b)  the weighted-average exercise price of such outstanding options,
               warrants and rights; and

          (c)  other than securities to be issued upon the exercise of such
               outstanding options, warrants and rights, the number of
               securities remaining available for future issuance under the
               plans.


                                       37




<PAGE>

<TABLE>
<CAPTION>
                                                                                                 (c)
                                                                                              Number of
                                                                                        Securities Remaining
                                               (a)                     (b)              Available for Future
                                     Number of Securities to     Weighted-Average       Issuance Under Equity
                                     be Issued Upon Exercise     Exercise Price of       Compensation Plans
                                     of Outstanding Options,   Outstanding Options,     (excluding securities
                                      Warrants and Rights       Warrants and Rights   reflected in column (a))
                                     -----------------------   --------------------   ------------------------
<S>                                         <C>                        <C>                     <C>
Plan Category(1)
----------------
Equity Compensation Plans Approved
by Securityholders                          2,872,117                  $5.73                   127,883

Equity Compensation Plans Not
Approved by Securityholders                 3,874,832                  $0.56                         0
                                            ---------                                          -------
   Total                                    6,746,949                                          127,883
</TABLE>

(1)  The only equity compensation plan approved by our stockholders is our Third
     Amended and Restated 1996 Stock Option Plan. The equity compensation plans
     that have not been approved by our stockholders consists of stock options
     outside of that Stock Option Plan granted to our executive officers to
     purchase 3,800,000 shares of our common stock at an exercise price of $0.35
     per share, and warrants issued for services and to a lender whose loan is
     secured by our equipment.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Termination of Employment Agreements

     We have entered into agreements with Messrs. Katz, Lipstein and Alain
Klapholz that provide for payments to them in the event that their employment is
terminated by us, including "constructive termination" as defined in those
agreements. We will pay to such terminated individuals in the event it is Dr.
Katz or Mr. Lipstein an amount equal to 2.99 times, and in the event it is Mr.
Klapholz 1.99 times, the average annual compensation paid by us to such person
in the five tax years prior to termination of his employment. The agreements
with Messrs. Katz, Lipstein and Klapholz also provide that in the event of such
termination of employment, the expiration dates of all options and warrants
which have been granted to such persons and which expire less than three years
after such termination of employment, will be extended so that such options and
warrants expire three years after such termination of employment. The agreements
further provide that in the event of the death or disability of Messrs. Katz,
Lipstein or Klapholz, or the voluntary termination of Messrs. Katz' or
Lipstein's employment, and in certain events the voluntary termination of Mr.
Klapholz'


                                       38




<PAGE>

employment, we will pay to such executive an amount equal to the compensation
received by such executive from us in the previous 12 months.

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

     One of our directors, Dr. Gregory Brown, was selected by Paul Capital
Royalty Acquisition Fund, L.P. as provided by an amendment in February 2003 of
an agreement between us and Paul Capital. In August 2001 and in 2002 we
originally entered into agreements with Paul Capital pursuant to which we agreed
to pay to Paul Capital 3 1/3% of the end user sales prices paid for our product
in the United States, Canada and Mexico through the period ending in 2011. As
security for the performance of our obligations to Paul Capital, we granted Paul
Capital a security interest in all of our U.S. patents, patent applications and
trademarks. If there are defaults on our part in our performance of our
agreements with Paul Capital, including defaults occasioned by events beyond our
control (such as our insolvency), and we are unable to pay Paul Capital the
large amounts required to be paid by us because of our default, Paul Capital may
foreclose its security interest in our U.S. patents, patent applications and
trademarks and it is most likely that in such event we will have to discontinue
our operations. In February 2003, Paul Capital purchased 50 shares of our Series
B convertible preferred stock, 30,769 shares of our common stock and warrants to
purchase an aggregate of 500,000 shares of our common stock, at exercise prices
of $1.50 per share for 250,000 shares and at $2.00 per share for the other
250,000 shares. The February 2003 amendments to our agreements with Paul Capital
provided, among other things, for (a) the election of one director designated by
Paul Capital, (b) the right of one observer (other than such director) selected
by Paul Capital to attend and observe all meetings of Ortec's Board of Directors
and (c) that after June 30, 2003 Ortec has to use its best efforts to have
independent directors who are acceptable to both Ortec and Paul Capital,
including the director designated by Paul Capital, as a majority of Ortec's
Board of Directors.

Item 14. CONTROLS AND PROCEDURES

     (a)  Evaluation of disclosure controls and procedures.

     Our Principal Executive Officer and Principal Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90
days of the filing date of the Annual Report (the


                                       39




<PAGE>

"Evaluation Date") have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to us and them by others within those entities, particularly during the period
in which this Annual Report was being prepared.

     (b)  Changes in internal controls.

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

                           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, 2002, 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, or other securities convertible into 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.


                                       40




<PAGE>

PART IV

Item 15. 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.

          On December 12, 2002, we filed a Current Report on Form 8-K reporting
our entering into the Termination of Employment Agreements with Messrs. Katz,
Lipstein and Klapholz, as described above under the heading "Certain
Relationships and Related Transactions - Termination of Employment Agreements."
Other than the foregoing, we did not file any report on Form 8-K in the fourth
quarter of 2002.


                                       41




<PAGE>

     (c)  Exhibits.


<TABLE>
<CAPTION>
Exhibit No.                               Description
-----------                               -----------
<S>           <C>
     3.1      Restated Certificate of Incorporation (1)

     3.2      Amendment to Restated Certificate of Incorporation (2)

     3.3      Amendment to Certificate of Incorporation adopted June 28, 2002,
              being a Certificate of Designation of the Relative Rights and
              Preferences of the Series A Convertible Preferred Stock (3)

     3.4      Amendment to Certificate of Incorporation filed on
              August 26, 2002, being an Amended Certificate of Designation of
              the Relative Rights and Preferences of the Series B Convertible
              Preferred Stock(4)

     3.5      By-Laws (5)

    10.1      Agreement with Paul Capital Royalty Acquisition Fund L.P.,
              redacted. (2) (7)

    10.2      Lease between the Trustees of Columbia University in the
              City of New York and Ortec International, Inc. (2)

    10.3      Termination of Employment Agreements with Messrs. Steven Katz
              and Ron Lipstein, both executive officers of the Registrant,
              and Mr. Alain Klapholz, an employee and former executive officer
              of the Registrant (6)

    10.4      Equipment Leasing Agreement with General Electric Capital
              Corporation (2)

     23.      Consent of Grant Thornton LLP (2)

    99.1      Certificate of Principal Executive Officer (2)

    99.2      Certification of Principal Financial Officer (2)
</TABLE>

----------
(1)  Filed as an Exhibit to our Form 10-Q filed for the quarter ended September
     30, 2001, and incorporated herein by reference.

(2)  Filed herewith or heretofore.

(3)  Filed as an Exhibit to our Form 10-Q for the quarter ended June 30, 2002.

(4)  Filed as an Exhibit to our Form 10-QA for the quarter ended September 30,
     2002.

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

(6)  Filed as an Exhibit to our Current Report on Form 8-K, filed on
     December 12, 2002.

(7)  Certain portions marked by asterisks have been omitted subject to a
     confidential treatment request and filed separately with The
     Securities and Exchange Commission.


                                       42




<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned thereunto duly authorized.


Dated: February 12, 2004                              Ortec International, Inc.



                                                  By: /s/ Steven Katz
                                                      --------------------------
                                                      Steven Katz, Ph.D.
                                                      Chairman



     Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



<TABLE>
<CAPTION>

    Signature                         Title                          Date
    ---------                         -----                          ----
<S>                 <C>                                      <C>
/s/ Steven Katz
------------------
Steven Katz         Chairman (Principal Executive Officer)   February 12, 2004

/s/ Mark Eisenberg
------------------
Dr.Mark Eisenberg   Senior Vice President, Research and      February 12, 2004
                    Development and Director

/s/ Ron Lipstein
------------------
Ron Lipstein        Vice Chairman, Chief Executive and       February 12, 2004
                    Financial Officer, Secretary,
                    Treasurer and Director (Principal
                    Financial and Accounting Officer)

/s/ Steven Lilien
------------------
Steven Lilien       Director                                 February 12, 2004

/s/ Allen Schiff
------------------
Allen I. Schiff     Director                                 February 12, 2004

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



                                       43





<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, 2002 and 2001                               F-3

   Statements of Operations for the years ended December 31, 2002, 2001 and
      2000, and for the cumulative period from March 12, 1991 (inception) to
      December 31, 2002                                                          F-5

   Statement of Shareholders' Equity/(Deficit) for the cumulative period from
      March 12, 1991 (inception) to December 31, 2002                            F-6

   Statements of Cash Flows for the years ended December 31, 2002, 2001 and
      2000, and for the cumulative period from March 12, 1991 (inception) to
      December 31, 2002                                                         F-11

   Notes to Financial Statements                                                F-14 - F-42
</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, 2002 and 2001,
and the related statements of operations, shareholders' equity/(deficit) and
cash flows for each of the three years in the period ended December 31, 2002,
and for the period from March 12, 1991 (inception) to December 31, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, and for the
period from March 12, 1991 (inception) to December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
incurred a net loss of $21,578,021 during the year ended December 31, 2002, and,
as of that date, the Company's current liabilities exceeded its current assets
by $17,787,545, its total liabilities exceeded its total assets by $15,801,132,
and the Company has a deficit accumulated in its development stage of
$81,858,609. These factors, among others, as discussed in Note 1 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

GRANT THORNTON LLP

New York, New York
March 31, 2003


                                       F-2




<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                                 BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                        ASSETS                                2002          2001
                                                          -----------   -----------
<S>                                                       <C>           <C>
CURRENT ASSETS
   Cash and cash equivalents                              $   826,227   $   854,025
   Accounts receivable                                         15,324        21,890
   Due from New Jersey Economic Development Authority                        82,433
   Other current assets                                        41,904        87,083
                                                          -----------   -----------
      Total current assets                                    883,455     1,045,431

PROPERTY AND EQUIPMENT, AT COST
   Laboratory equipment                                     1,671,075     2,126,771
   Office furniture and equipment                           1,350,985       982,948
   Leasehold improvements                                   1,567,513     1,367,784
                                                          -----------   -----------
                                                            4,589,573     4,477,503

   Less accumulated depreciation and amortization          (3,207,977)   (2,894,782)
                                                          -----------   -----------
                                                            1,381,596     1,582,721

OTHER ASSETS
   Patent application costs, net of accumulated
      amortization of $279,037 in 2002 and
      $213,105 in 2001                                        682,885       619,676
   Deferred financing costs, net of accumulated
      amortization of $7,933 in 2002 and $1,983 in 2001        78,207        57,517
   Security deposit - New Jersey location                     639,000       598,000
   Other deposits and other assets                             33,223       135,256
                                                          -----------    ----------
                                                          $ 3,698,366   $ 4,038,601
                                                          ===========   ===========
</TABLE>


                                       F-3









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                           BALANCE SHEETS (continued)

                                  December 31,


<TABLE>
<CAPTION>
                                 LIABILITIES AND
                        SHAREHOLDERS' EQUITY/(DEFICIT)                               2002           2001
                                                                                 ------------   ------------
<S>                                                                              <C>            <C>
CURRENT LIABILITIES
   Accounts payable and accrued expenses                                         $  3,773,063   $  2,451,133
   Accrued compensation                                                               274,253        223,393
   Accrued professional fees                                                          365,945        301,783
   Capital lease obligation - current                                                 142,620
   Loan payable - current                                                             155,578        143,505
   Obligation under Revenue Interest Assignment                                    13,959,541        454,776
                                                                                 ------------   ------------
      Total current liabilities                                                    18,671,000      3,574,590

LONG-TERM LIABILITIES
   Loan payable - noncurrent                                                          613,405        768,983
   Capital lease obligation - noncurrent                                              215,093
   Other long-term obligations                                                                     6,000,000

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY/(DEFICIT)
   Common stock, $.001 par value; authorized,
      35,000,000 shares; 23,204,693 shares issued, 23,184,693 shares
      outstanding, at December 31, 2002 and 9,711,608 shares issued, 9,691,608
      outstanding, at December 31, 2001                                                23,205          9,712
   Redeemable Convertible Preferred stock - Series B stated value $10,000
      per share; authorized 1,000,000 shares;
      938 shares issued and outstanding, at December 31, 2002,
      liquidation preference at December 31, 2002 is $9,382,942                     5,037,087
   Additional paid-in capital                                                      61,174,830     53,017,615
   Deficit accumulated during the development stage                               (81,858,609)   (59,154,654)
   Treasury stock, at cost (20,000 shares at December 31, 2002 and 2001)             (177,645)      (177,645)
                                                                                 ------------   ------------
                                                                                  (15,801,132)    (6,304,972)
                                                                                 ------------   ------------
                                                                                 $  3,698,366   $  4,038,601
                                                                                 ============   ============
</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,
                                                 2002           2001           2000            2002
                                             ------------   ------------   ------------   --------------
<S>                                          <C>            <C>            <C>             <C>
Product revenue                              $    243,775   $     21,890   $         --    $    265,665
                                             ------------   ------------   ------------    ------------
Expenses
   Production and laboratory costs              3,147,515      4,283,038      4,191,317      21,195,907
   Rent                                           683,116        589,238        535,443       2,862,651
   Consulting                                     490,826      1,413,153        838,383       5,717,341
   Personnel                                    6,440,959      6,605,630      4,763,662      29,390,319
   General and administrative                   2,781,896      2,671,887      2,297,769      14,784,581
   Interest and other expense                   7,281,104        536,070         89,712       8,300,610
   Interest income                                 (7,647)      (191,749)      (586,623)     (2,257,096)
   Loss on extinguishment of debt
      and series A preferred shares             1,004,027             --             --       1,004,027
                                             ------------   ------------   ------------    ------------
                                               21,821,796     15,907,267     12,129,663      80,998,340
                                             ------------   ------------   ------------    ------------
Net loss                                      (21,578,021)   (15,885,377)   (12,129,663)    (80,732,675)

Preferred stock dividends                       1,125,934             --             --       1,125,934
                                             ------------   ------------   ------------    ------------

Net loss applicable to common shareholders   $(22,703,955)  $(15,885,377)  $(12,129,663)   $(81,858,609)
                                             ============   ============   ============    ============

Net loss per share
   Basic and diluted                         $      (2.01)  $      (1.64)  $      (1.37)   $     (15.54)
                                             ============   ============   ============    ============

Weighted average shares outstanding
   Basic and diluted                           11,305,956      9,691,608      8,847,295       5,269,187
                                             ============   ============   ============    ============
</TABLE>


The accompanying notes are an integral part of these statements.


                                       F-5









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

                   STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)


<TABLE>
<CAPTION>


                                               Common stock                  Additional
                                            ------------------   Preferred    paid-in
                                             Shares     Amount     stock      capital
                                            ---------   ------   ---------   ----------
<S>                                         <C>         <C>      <C>         <C>
March 12, 1991 (inception) to
   December 31, 1991

Issuance of stock
   Founders ($.001 cash per share)          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
                                            ---------   ------               ----------
Balance at December 31, 1991                1,973,300    1,973                  792,779

      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
                                            ---------   ------               ----------
      Balance at December 31, 1992          2,054,440    2,054                1,522,692

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

<CAPTION>
                                              Deficit
                                            accumulated
                                             during the                   Total
                                             development   Treasury   shareholders'
                                                stage        stock    equity/(deficit)
                                            ------------   --------   ----------------
<S>                                          <C>           <C>          <C>
March 12, 1991 (inception) to
   December 31, 1991

Issuance of stock
   Founders ($.001 cash per share)                                      $       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)                  (281,644)
                                             -----------                -----------
Balance at December 31, 1991                    (281,644)                   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)                  (785,941)
                                             -----------                -----------
      Balance at December 31, 1992            (1,067,585)                   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)                (1,445,624)
                                             -----------                -----------
      Balance at December 31, 1993
         (carried forward)                    (2,513,209)                 1,308,829
</TABLE>



                                       F-6









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

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


<TABLE>
<CAPTION>
                                              Common stock                   Additional
                                           ------------------   Preferred     paid-in
                                            Shares     Amount     stock       capital
                                           ---------   ------   ---------   -----------
<S>                                        <C>         <C>      <C>         <C>
         (brought forward)                 2,319,521   $2,319               $ 3,819,719

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
                                           ---------   ------               -----------
Balance at December 31, 1994               2,408,972    2,409                 4,708,644

Rent forgiveness                                                                 40,740

Net loss
                                           ---------   ------               -----------
Balance at December 31, 1995               2,408,972    2,409                 4,749,384

Initial public offering ($5.00 cash
   per share)                              1,200,000    1,200                 5,998,800
Exercise of warrants ($1.00 cash
   per share)                                 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
                                           ---------   ------               -----------
Balance at December 31, 1996 (carried
   forward)                                4,601,963    4,602                15,573,183

<CAPTION>
                                             Deficit
                                           accumulated
                                            during the                   Total
                                            development   Treasury   shareholders'
                                               stage        stock    equity/(deficit)
                                           ------------   --------   ----------------
<S>                                         <C>           <C>          <C>
         (brought forward)                  $(2,513,209)               $ 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)                (1,675,087)
                                            -----------                -----------
Balance at December 31, 1994                 (4,188,296)                   522,757

Rent forgiveness                                                            40,740

Net loss                                     (1,022,723)                (1,022,723)
                                            -----------                -----------
Balance at December 31, 1995                 (5,211,019)                  (459,226)

Initial public offering ($5.00 cash
   per share)                                                            6,000,000
Exercise of warrants ($1.00 cash
   per share)                                                               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)                (2,649,768)
                                            -----------                -----------
Balance at December 31, 1996 (carried
   forward)                                  (7,860,787)                 7,716,998
</TABLE>



                                       F-7









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

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


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

Exercise of warrants ($1.00-
   $9.425 cash per share)        1,158,771   1,159                     10,821,632                               10,822,791
Share issuance costs                                                     (657,508)                                (657,508)
Stock options and warrants
   issued for services                                                    660,000                                  660,000
Net loss                                                                             (4,825,663)                (4,825,663)
                                 ---------  ------                    -----------  ------------               ------------
Balance at December 31, 1997     5,760,734   5,761                     26,397,307   (12,686,450)                13,716,618
Exercise of warrants ($1.00-
   $12.00 cash per share)          221,486     221                      1,281,736                                1,281,957
Stock options and warrants
   issued for services                                                  1,920,111                                1,920,111
Sixth private placement            200,000     200                      1,788,498                                1,788,698
Warrants issued in Sixth
   private placement                                                      211,302                                  211,302
Share issuance costs                                                      (48,000)                                 (48,000)
Purchase of 6,600 shares of
   treasury stock (at cost)                                                                      $ (67,272)        (67,272)
Net loss                                                                             (8,412,655)                (8,412,655)
                                 ---------  ------                    -----------  ------------  ---------    ------------
Balance at December 31, 1998     6,182,220   6,182                     31,550,954   (21,099,105)   (67,272)     10,390,759

Exercise of warrants ($1.00
   cash per share)                  14,103      14                         14,089                                   14,103

Stock options and warrants
   issued for services                                                     64,715                                   64,715

Seventh private placement
   ($8.75 cash per share)          389,156     389                      3,168,396                                3,168,785
Warrants issued in Seventh
   private placement                                                      468,291                                  468,291
Eighth private placement
   ($5.50 cash per share)        1,636,364   1,637                      8,998,365                                9,000,002
Share issuance costs                                                     (619,908)                                (619,908)
Purchase of 9,100 shares
   of treasury stock (at cost)                                                                     (75,518)        (75,518)
Net loss                                                                            (10,040,509)               (10,040,509)
                                 ---------  ------                    -----------  ------------  ---------    ------------
Balance at December 31, 1999
   (carried forward)             8,221,843   8,222                     43,644,902   (31,139,614)  (142,790)     12,370,720
</TABLE>



                                       F-8









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

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


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

Exercise of options and
   Warrants ($1.00-$12.00
   cash per share)               175,532     175                       327,107                                  327,282
Stock options and warrants
   issued for services                                                  56,265                                   56,265
Ninth private placement
   ($15.00 cash per share)        66,667      67                       999,938                                1,000,005
Warrants issued in Ninth
   private placement                                                    23,000                                   23,000
Tenth private placement
   ($6.75 cash per share)      1,247,566   1,248                     8,419,823                                8,421,071
Share issuance costs                                                  (641,500)                                (641,500)
Purchase of 4,300 shares of
   treasury stock (at cost)                                                                     (34,855)        (34,855)
Net loss                                                                         (12,129,663)               (12,129,663)
                               ---------  ------                   -----------  ------------  ---------    ------------
Balance at December 31, 2000   9,711,608   9,712                    52,829,535   (43,269,277)  (177,645)      9,392,325

Stock options issued for
   services                                                            188,080                                  188,080
Net loss                                                                         (15,885,377)               (15,885,377)
                               ---------  ------                   -----------  ------------  ---------    ------------

Balance at December 31, 2001   9,711,608   9,712                    53,017,615   (59,154,654)  (177,645)     (6,304,972)
</TABLE>



                                       F-9









<PAGE>

                            Ortec International, Inc.
                        (a development stage enterprise)

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


<TABLE>
<CAPTION>
                                                                                     Deficit
                                                                                   accumulated
                                   Common stock                       Additional   during the                    Total
                               -------------------                     paid-in     development   Treasury    shareholders'
                                 Shares     Amount  Preferred stock    capital        stage       stock    equity/(deficit)
                               ----------  -------  ---------------  -----------  ------------  ---------  ----------------
<S>                            <C>         <C>         <C>            <C>          <C>           <C>          <C>
   (brought forward)            9,711,608  $ 9,712                   $53,017,615  $(59,154,654) $(177,645)   $ (6,304,972)

Exercise of options and
   Warrants ($.001 cash per
   share)                         357,227      357                                                                    357
Stock options and warrants
   issued for services                                                   113,060                                  113,060
Warrants issued with
   convertible debentures                                                440,523                                  440,523
Warrants issued with
   convertible redeemable
   preferred stock                                                       559,289                                  559,289
Convertible debenture
   conversion benefit                                                  1,042,663                                1,042,663
Redeemable convertible
   preferred stock
   conversion benefit                                                  1,097,886                                1,097,886
Issuance of 938 shares of
   preferred stock ($10,000
   cash per share)                                    $ 9,382,742                                               9,382,742
Warrants issued and exercised
   with preferred stock
   ($.001 cash per share)       9,382,742    9,383     (3,479,043)     3,476,998                                    7,338
Share issuance costs -
   preferred stock                                       (866,612)       304,615                                 (561,997)
Preferred stock dividends       3,753,116    3,753                     1,122,181    (1,125,934)                        --
Net loss                                                                           (21,578,021)               (21,578,021)
                               ----------  -------    -----------    -----------  ------------  ---------    ------------
Balance at December 31, 2002   23,204,693  $23,205    $ 5,037,087    $61,174,830  $(81,858,609) $(177,645)   $(15,801,132)
                               ==========  =======    ===========    ===========  ============  =========    =============
</TABLE>


The accompanying notes are an integral part of this statement.


                                      F-10









<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,
                                                        2002           2001           2000            2002
                                                    ------------   ------------   ------------   --------------
<S>                                                 <C>            <C>            <C>             <C>
Cash flows from operating activities
   Net loss                                         $(21,578,021)  $(15,885,377)  $(12,129,663)   $(80,732,675)
   Adjustments to reconcile net loss to net cash
      used in operating activities
      Depreciation and amortization                      714,692        725,567        708,928       3,833,020
      Amortization of deferred financing costs           323,225                                       323,225
      Unrealized loss on marketable securities                                                          11,404
      Realized loss on marketable securities                                                             5,250
      Loss on sale of property and equipment               8,364                                         8,364
      Non-cash stock compensation                        113,060        188,080         56,265       3,154,231
      Non-cash imputed interest                        6,857,650        454,775                      7,312,425
      Loss on extinguishment of debt & Series A
         preferred stock                               1,004,027             --                      1,004,027
      Purchases of marketable securities                                                           (19,075,122)
      Sales of marketable securities                                                                19,130,920
      Changes in operating assets and liabilities
         Accounts receivable                               6,566        (21,890)                       (15,324)
         Other current assets and other assets           188,645        (80,638)       (87,177)         19,131
         Accounts payable and accrued liabilities      1,436,952      1,634,233       (186,243)      4,441,589
                                                    ------------   ------------   ------------    ------------
      Net cash used in operating activities          (10,924,840)   (12,985,250)   (11,637,890)    (60,579,535)
                                                    ------------   ------------   ------------    ------------

Cash flows from investing activities
   Purchases of property and equipment, excluding
      capital leases                                     (63,460)      (518,456)      (551,630)     (4,453,897)
   Proceeds from sale of property and equipment           56,901                                        56,901
   Payments for patent applications                     (129,140)       (99,453)       (90,363)       (960,142)
   Organization costs                                                                                  (10,238)
   Deposits                                                            (702,924)           578        (731,273)
   Purchases of marketable securities                                                                 (594,986)
   Sale of marketable securities                                                                       522,532
                                                    ------------   ------------   ------------    ------------
      Net cash used in investing activities             (135,699)    (1,320,833)      (641,415)     (6,171,103)
                                                    ============   ============   ============    ============
</TABLE>


                                      F-11









<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,
                                                           2002          2001          2000            2002
                                                       -----------   -----------   -----------   --------------
<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     53,550,522
   Proceeds from exercise of warrants                  $     7,694                                      7,694
   Share issuance expenses and other financing costs      (906,571)                   (618,500)    (4,511,676)
   Purchase of treasury stock                                                          (34,855)      (177,645)
   Proceeds from issuance of loans payable                                                          1,446,229
   Proceeds from other obligations                       4,000,000     6,000,000                   10,000,000
   Proceeds from issuance of convertible debentures      5,908,000                                  5,908,000
   Proceeds from issuance of redeemable preferred
      stock - series A                                   1,200,000                                  1,200,000
   Proceeds from issuance of  preferred
      stock - series B                                   1,070,000                                  1,070,000
   Repayment of capital lease obligations                  (91,728)                     (5,151)      (198,932)
   Repayment of loan payable                              (143,505)     (132,370)     (122,096)      (706,178)
   Repayment of other obligations                          (11,149)                                   (11,149)
   Repayment of notes payable                                                                        (515,500)
                                                       -----------   -----------   -----------    -----------

      Net cash provided by financing activities         11,032,741     5,867,630     8,967,756     67,576,865
                                                       -----------   -----------   -----------    -----------

      NET INCREASE (DECREASE) IN CASH AND CASH
         EQUIVALENTS                                       (27,798)   (8,438,453)   (3,311,549)       826,227

Cash and cash equivalents at beginning of period           854,025     9,292,478    12,604,027             --
                                                       -----------   -----------   -----------    -----------

Cash and cash equivalents at end of period             $   826,227   $   854,025   $ 9,292,478    $   826,227
                                                       ===========   ===========   ===========    ===========
</TABLE>


                                      F-12









<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,
                                                          2002        2001      2000         2002
                                                       ----------   -------   -------   --------------
<S>                                                    <C>          <C>       <C>        <C>
Supplemental disclosures of cash flow information:
   Noncash financing activities
      Capital lease obligations                        $  449,441   $    --   $    --    $  568,344
      Deferred offering costs included in
         accrued professional fees                             --        --        --       314,697
      Financing costs - other long-term obligations
         included in accrued expenses                          --    59,500        --        59,500
      Forgiveness of rent payable                              --        --        --        40,740
      Share issuance expenses - warrants                       --        --    23,000       255,000
      Dividends on series B preferred stock paid in
         common shares                                  1,125,934        --        --     1,125,934
      Share issuance expenses for series B preferred
         stock incurred through issuance of warrants      304,615        --        --       304,615

   Cash paid for interest                                  57,317    80,205    90,565       544,858
   Cash paid for income taxes                                  --    44,528    41,286       199,576
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-13









<PAGE>

                            ORTEC INTERNATIONAL, INC.
                        (a development stage enterprise)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000,
  and for the period from March 12, 1991 (Inception) through December 31, 2002

NOTE 1 - FORMATION OF THE COMPANY AND BASIS OF PRESENTATION

Formation of the Company

Ortec International, Inc. ("Ortec" or the "Company") was incorporated in March
1991 as a Delaware corporation to secure and provide funds for the further
development of the technology developed by Dr. Mark Eisenberg of Sydney,
Australia, to replicate in the laboratory, a tissue engineered skin substitute
for use in skin regeneration procedures (the "Technology"). Pursuant to a
license agreement dated September 7, 1991, Dr. Eisenberg had granted 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.

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

Basis of Presentation

Ortec is a development stage enterprise, which had no operating revenue prior to
December 2001. During 2001, the Company received Food and Drug Administration
("FDA") approval for the use of OrCel for treatment of patients with recessive
dystrophic epidermolysis bullosa and donor sites in burn patients. The Company
then began marketing and selling its product for use on patients with these
indications. Revenues to date have not been significant, as the Company has been
focusing its effort and resources towards its clinical trial for the use of
OrCel for the treatment of venous stasis ulcers.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$21,578,021 during the year ended December 31, 2002, and, as of that date, the
Company's current liabilities exceeded its


                                      F-14









<PAGE>

current assets by $17,787,545, its total liabilities exceeded its total assets
by $15,801,132 and the Company has a deficit accumulated in its development
stage of $81,858,609. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern.

On March 27, 2002, the Company engaged H.C. Wainwright & Co., Inc. an investment
banking firm, to act as its financial advisor in connection with raising capital
for the Company through debt and/or equity financing. During 2002, Wainwright
assisted the Company in raising financing of approximately $8.2 million. During
2003, the Company has raised an additional $2.0 million in Preferred Series B
financing, as of February 26, 2003.

The Company requires substantial funding to continue its research and
development activities, clinical trials, manufacturing, sales, distribution and
administrative activities. The Company believes that its cash and cash
equivalents on hand at December 31, 2002, (approximately $0.8 million) and the
financing of $2.0 million received in February 2003, will enable it to continue
its operations until May 31, 2003. The Company is continuing its equity
financing efforts with H.C. Wainwright and expects to raise an additional $5.0
million from investors, some of whom have previously participated in the $10.2
million raised through February 26, 2003. This will enable the Company to
complete its venous clinical pivotal trial, file its PMA with the FDA and
execute its plan to engage the services of a third party manufacturer.
Accomplishing these milestones will also enable the Company to raise an
additional $5.0 million in 2003 through other potential collaborative
arrangements with companies for sales, marketing and distribution of its product
and through other equity investments. Based on these efforts, management
believes that the Company will be able to continue its operations for at least
the next 12 months.

Additionally, the Company continues to explore and, as appropriate, enter into
discussions with other companies regarding the potential for equity investment,
collaborative arrangements, license agreements or other funding programs with
the Company, in exchange for manufacturing, marketing, distribution or other
rights to its products. However, the Company can give no assurances that
discussions with other companies will result in any additional investments,
collaborative arrangements, agreements or other funding, or that the necessary
additional financing through debt or equity will be available to the Company on
acceptable terms, if at all. If additional funding is not available when needed,
the Company may not be able to continue operations.

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

Initial Public Offering

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


                                      F-15









<PAGE>

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 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition


Product revenue is recognized upon shipment of OrCel when title and risk of loss
pass to our customers, which normally occurs when the product is received by the
end user hospital.


Research and Development Costs


The Company is in the business of research and development and therefore, all
research and development costs, including payments relating to products under
development, research, consulting agreements and personnel costs, are expensed
when incurred, and for 2001 and 2002, include the costs of production related to
sales, as such costs are not readily separable. Research and Development Costs
aggregated $10,134,740, $12,409,954 and $10,127,428 for the years ending 2002,
2001 and 2000, respectively. Research and Development costs are comprised of
Product Production and laboratory costs, Rent, Consulting, Personnel, and
Depreciation and Amortization expenses.


Depreciation and Amortization

Property and equipment are carried at cost, less any grants received for
construction. In 1996, 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.

Office furniture and equipment and laboratory equipment are depreciated on the
straight-line basis over the estimated lives of the assets (5 years). Leasehold
improvements are amortized over the shorter of the term of the related lease or
the life of the asset. Depreciation and amortization expense for the years ended
December 31, 2002, 2001 and 2000, was approximately $649,000, $672,000 and
$657,000, respectively.

Intangible Assets and Impairment of Long - Lived Assets

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

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 provisions are necessary for the
impairment of long-lived assets at December 31, 2002 and 2001.


                                      F-16









<PAGE>

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets. Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
will be reviewed at least annually for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be amortized
over their useful lives.

As of January 1, 2002, the Company does not have any goodwill or intangible
assets with indefinite useful lives. The Company continues to amortize its
patent application costs over their estimated useful lives. Additionally, the
Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. Adoption of SFAS No.142 and SFAS No.144
did not have a material effect on financial position or results of operation.

Foreign Currency Translation

The Company had conducted some of its research and development at its laboratory
in Sydney, Australia. However, because all Australian expenditures were 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 measured using the average rate
in effect for the year. Gains and losses arising from the remeasurement of
foreign currency are included in the results of operations for all periods
presented.

As of December 31, 2002, the Company terminated all of its research and
development activities at its laboratory in Sydney.

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 effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for the tax effects of net operating loss carryforwards. 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.
The Company records a valuation allowance against its deferred tax assets when
there is doubt about the realizability of such assets.


                                      F-17









<PAGE>

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. Cash and cash equivalents includes approximately $15,000 and
$2,000 at December 31, 2002 and 2001, respectively, of bank balances denominated
in Australian dollars.

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 8
and 9.)

The amount of options and warrants excluded are as follows:

<TABLE>
<CAPTION>
Years ended December 31,             2002         2001        2000
                                  ----------   ---------   ---------
<S>                               <C>          <C>         <C>
Warrants                          11,172,109     395,412     509,773
                                  ----------   ---------   ---------

Stock Options - in plan            2,872,117   2,033,306   1,524,106
                                  ----------   ---------   ---------

Stock Options - outside of plan    3,800,000
                                  ----------
</TABLE>

Additionally, the effects of conversion of the preferred stock were excluded
from the computation of diluted net loss per share as the effect would be
antidilutive. An aggregate of 9,382,742 shares of common stock would be issuable
upon conversion of the preferred stock outstanding at December 31, 2002.

Basic loss per share for the year ended December 31, 2002 includes the 800,000
warrants exercisable at $.001 per share granted to Wainwright as outstanding
from the date of grant.

Employee Stock Option Plan

The Company accounts for its employee stock options under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income for the years ended December 31, 2002, 2001 and
2000, as all options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No.123, "Accounting for Stock-Based Compensation".


                                      F-18









<PAGE>

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                           ------------------------------------------
                                               2002           2001           2000
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
Net loss, as reported                      ($22,703,955)  ($15,885,377)  ($12,129,663)
Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method                   (1,965,592)    (2,893,720)    (1,818,469)
                                           ------------   ------------   ------------

Pro forma net loss                         ($24,669,547)  ($18,779,097)  ($13,948,132)
                                           ------------   ------------   ------------

Loss per share:
   Basic and Diluted - as reported               ($2.01)        ($1.64)        ($1.37)
   Basic and Diluted - pro forma                 ($2.18)        ($1.94)        ($1.58)
</TABLE>

Compensatory Options and Warrants

Compensatory Options and Warrants include issuances to non-employees in return
for services based on the fair value of the services received in accordance
with SFAS 123. Accounting for Stock-Based Compensation and EITF 96-18 Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services. The fair value of
compensatory stock options and warrants is determined using the Black-Scholes
option-pricing model.

NOTE 3 - CONCENTRATION OF CREDIT RISK

The Company maintains cash and money market accounts at four financial
institutions located in New York City and one in Australia. Cash accounts are
insured by the FDIC for amounts up to $100,000. Uninsured balances aggregate to
approximately $628,000 and $725,000 at December 31, 2002 and 2001, respectively.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk.

NOTE 4 - PATENTS

Patent application costs are stated at cost less amortization computed by the
straight-line method over the useful life of the patent, approximately 8 years
remaining at December 31, 2002. The Company's U.S. patent was issued in 1994 and
expires in 2011.

There can be no assurance that any patent will provide commercial benefits to
the Company. The Company has determined that no provision for impairment is
necessary at December 31, 2002.

The Company has granted a security interest in its United States and Canadian
patents and trademarks relating to OrCel to collateralize payments it will be
required to make to satisfy its other obligation (see Note 7).

NOTE 5 - CAPITAL LEASE OBLIGATIONS

Prior to 2002, 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.


                                     F-19









<PAGE>

In January 2002, the Company secured a $1,300,000 lease line of credit to be
used for the acquisition of additional manufacturing, laboratory and other
equipment required to expand its manufacturing capacity. During 2002, the
Company has drawn $449,000 against this line of credit for the acquisition of
eligible fixed assets.

As of December 31, 2002 and 2001, the Company has recorded $541,000 and $119,000
in equipment purchased under capital leases and $209,000 and $119,000 in
accumulated amortization, respectively. See Note 11 for commitments under
capital leases.

NOTE 6 - LOAN PAYABLE

During 1996, the Company obtained a loan from the landlord of its laboratory for
the construction of, and equipment for, the leased facility. During 1997, the
Company modified the terms of the loan as a result of increased build-out costs
incurred in the construction of the facility. An adjustment was 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 these loans are as follows:

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

                                             921,185
Less amount representing interest            152,202
                                            --------

Net present value of future loan payments   $768,983
                                            ========

Current portion                             $155,578
Non-current portion                          613,405
                                            --------

                                            $768,983
                                            ========
</TABLE>


NOTE 7 - OBLIGATION UNDER REVENUE INTEREST ASSIGNMENT


On August 29, 2001, the Company entered into a Revenue Interests Assignment
agreement with Paul Capital Royalty Acquisition Fund L.P. ("Paul Capital"),
which terminates on August 29, 2011. Under such agreement the Company was
eligible to receive $10,000,000 during 2001. The Company received $6,000,000
during 2001 and the remaining $4,000,000 in January 2002. In February 2003, Paul
Capital and the Company signed an amendment to the agreement, restating and
updating certain provisions of the original agreement, including removing
additional funding requirements by Paul Capital. On February 26, 2003, Paul
Capital invested an additional $500,000 in Series B preferred stock, in
concurrence with this amendment.


                                      F-20









<PAGE>


In consideration for the $10,000,000, Paul Capital will receive a minimum of
3.33% of end user sales of the Company's products in the United States, Canada
and Mexico. Such percentage may be further adjusted upward or downward, based on
the volume of net sales to end users of the Company's products in those three
countries. Beginning on January 1, 2003, Paul Capital will be entitled to
receive each year advances from the first proceeds to the Company from end user
sales of its products in North America. The agreement provides for quarterly and
annual accountings between Paul Capital and the Company for those advance
payments. Such annual amounts that Paul Capital will be able to draw in advance
will range from $600,000 in 2003 to $7,500,000 in 2005 and thereafter. The
amounts received from Paul Capital have been classified as debt. Pursuant to the
default provisions under the agreement which entitles Paul Capital to compel us
to repurchase its interest in our revenues at a price equal to hundred thirty
(130) percent of $10,000,000, the purchase price paid to Ortec by Paul Capital,
interest has been accrued at 30% per annum. At such time when the default
provisions are no longer applicable, the effective interest rate imputed on the
obligation will be determined using the interest method and payments to Paul
Capital will be recorded as a reduction of the Company's obligation under the
revenue interest assignment. This may result in an imputed interest rate, which
is significantly below 30% and could have a potential material financial impact.
However, no assurances can be given that such lower rate could be achieved.


In the event of a change in control of the Company or upon the occurrence of
certain other events, including insolvency, as defined in the agreement, Paul
Capital has the option to put its revenue interest back to the Company for an
amount of cash flows which will generate a 30% internal rate of return to Paul
Capital. The Company also has the option to repurchase Paul Capital's interest
upon the occurrence of a change in control of the Company or a complete
divestiture by the Company of its interests in its products, for an amount of
cash flows which will generate a 35% internal rate of return to Paul Capital.

At December 31, 2002, the Company's liabilities exceeded the value of its assets
and as such, the Company was technically in default of the solvency requirement
under the Paul Capital agreement. Paul Capital is aware of this breech and in
discussions with management regarding this issue, has indicated to the Company
that it does not intend to exercise its option to require the Company to
repurchase its revenue interest.

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

NOTE 8 - 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.


                                      F-21









<PAGE>

Pursuant to an agreement between Dr. Eisenberg and the other founders (the
"Other Founders"), a business relationship was formed by the founders for the
manufacture and sale of products derived from the Technology (the "Business
Agreement"). Under the terms of the Business Agreement, Dr. Eisenberg, who was
the owner of all the capital stock of Ortec (600,000 shares) agreed to license
the Technology to Ortec and sell 70% of Ortec's shares for a purchase price of
$1,000,000 to the Skin Group. Dr. Eisenberg was paid $85,000 in connection with
this agreement as reimbursement for his expenses ($35,000 during the period from
inception (March 12, 1991) to December 31, 1991 and $50,000 during the year
ended December 31, 1992).

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

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

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

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.


                                      F-22









<PAGE>

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.

On January 19, 1996, the Company completed an initial public offering ("IPO") of
1,200,000 units for aggregate proceeds of $6,000,000. Each unit consisted of one
share of the Company's common stock, one Class A warrant to purchase one share
of common stock at $10 and one Class B warrant to purchase one share of common
stock at $15. As of December 31, 1998, 1,083,780 Class A warrants were exercised
and the balance expired unexercised. The Class B warrants were originally set to
expire in January 1999. The Company extended the expiration date to March 31,
2000. The Class B warrants are subject to redemption by the Company at $.01 per
warrant. The Company received gross proceeds of approximately $1,282,000 and
$10,823,000 and net proceeds of approximately $1,262,000 and $10,165,000 as a
result of the exercise of warrants in 1998 and 1997, respectively.

In November 1996, the Company completed a private placement of its securities
from which it received gross proceeds of $6,220,797 and net proceeds of
approximately $5,733,000 (after deducting approximately $487,000 in placement
fees and other expenses of such private placement). The Company sold 959,106
shares of common stock in such private placement at average prices of $6.49 per
share. In addition, the Company granted five-year warrants to placement agents
to purchase such number of shares equal to 10% of the number of shares of common
stock sold by such placement agents, exercisable at prices equal to 120% of the
prices paid for such shares. Pursuant to the purchasers' request, the Company
registered all 959,106 shares.

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


                                      F-23









<PAGE>

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.

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.


                                      F-24









<PAGE>

The balance of the warrants became vested upon the exercise of warrants owned by
a director in December 1998 in accordance with the terms of certain compensation
provisions as approved by the Company's Board of Directors.

In consideration for services rendered by him as a director of the Company in
the five-year period from 1992 to 1996 for which he never received compensation,
the Company extended by one year to December 31, 1998 the expiration date of
warrants owned by a director to purchase an aggregate of 86,930 shares,
exercisable at $9.425 per share. As a result, the Company recorded compensation
expense of approximately $420,000, during the fourth quarter of 1997. All of
these warrants were exercised on December 29, 1998.

During the fourth quarter of 1998, the Company granted five-year options to its
three executive officers to purchase an aggregate of 520,750 shares of common
stock, at exercise prices ranging from $12.13 to $12.44 per share. The exercise
of such options was contingent upon the occurrence of certain events. All of
these options became vested upon the exercise of warrants owned by a director in
December 1998 in accordance with the terms of certain compensation provisions as
approved by the Company's Board of Directors. As a result, the Company recorded
compensation expense of approximately $495,000 in December 1998.

In December 1998, the Company completed a private placement of its securities
from which it received proceeds of $2,000,000. In addition, the Company granted
three-year warrants to the Purchaser to purchase 50,000 shares at $12 per share.
The Company sold 200,000 shares of common stock in such private placement. The
Company assigned value to the common stock and warrants issued of $1,788,698 and
$211,302 based upon the relative fair market value of the stock at the date of
issuance and the estimated fair value of the warrants using the Black-Scholes
option pricing model.

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


                                      F-25






<PAGE>

In March 2000, the Company completed a private placement of 66,667 shares of its
common stock to one fund from which it received proceeds of approximately
$1,000,000. In addition, the Company paid a placement agent who introduced the
Company to the fund a fee of approximately $43,400 and granted such placement
agent a five year warrant to purchase 2,667 shares of the Company's common stock
at an exercise price of $15.00 per share. The value assigned to the warrant was
$23,000, which was reflected as share issuance costs. Other share issuance costs
amounted to $3,200.

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

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

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

During 2002, the Company completed a private placement with several investors,
in which the Company raised cash proceeds of $8.2 million through the issuance
of debentures and preferred stock, which were ultimately converted into Series B
redeemable convertible preferred shares, which were issued with warrants to
purchase common shares and common stock dividends paid in advance. (See Note 9)

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

The following table summarizes warrant activity during the period from March 12,
1991 (inception) through December 31, 2002 (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)
                                                                  --------
</TABLE>


                                      F-26





<PAGE>

<TABLE>
<S>                                               <C>               <C>
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                          1.00 - 14.25       678,609

   Granted                                         12.50 - 14.50       116,745
   Exercised                                            1.00           (14,103)
   Expired                                          6.00 - 9.425       (17,160)
                                                                    ----------

Balance, December 31, 1999                          1.00 - 14.25       764,091

   Granted                                             15.00             2,667
   Exercised                                           12.00            (2,000)
   Expired                                          1.00 -10.00       (154,985)
                                                                    ----------

Balance, December 31, 2000                          7.70 - 15.00       609,773

   Expired                                          7.70 - 12.00      (214,361)
                                                                    ----------

Balance, December 31, 2001                        $ 7.70 - 15.00       395,412

   Granted                                        $.001 - $6.2475   22,210,148
   Exercised                                            $.001       (9,739,969)
   Expired                                        $.001 - $14.50    (1,693,482)
                                                                    ----------

Balance, December 31, 2002                        $.001 - $15.00    11,172,109
                                                                    ==========
</TABLE>

The following table summarizes warrant data as of December 31, 2002:

<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>
     $.001             440,000     .08 years    $ .001      440,000      $ .001
$1.50 to $2.00      10,621,277    6.87 years    $ 1.72           --          --
$4.50 to $6.25          44,250    1.01 years    $ 4.83       44,250      $ 4.83
$7.70 to $10.50         38,915    1.23 years    $10.50       38,915      $10.50
$14.00 to $15.00        27,667    1.01 years    $14.10       27,667      $14.10
</TABLE>


                                      F-27





<PAGE>

NOTE 9- AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND ISSUANCES OF
12% CONVERTIBLE DEBENTURES, SERIES A PREFERRED STOCK AND SERIES B PREFERRED
STOCK

Amendment of Certificate of Incorporation-

On June 25, 2002, the Company's board of directors unanimously adopted an
amendment to the Company's certificate of incorporation designating 2,000 shares
out of the 1,000,000 shares of preferred stock that the Company is authorized to
issue, as Series A Convertible Preferred Stock, and designating the relative
rights and preferences of the Series A Convertible Preferred Stock. The stated
value, which is also the Liquidation Preference of the Series A Convertible
Preferred Stock, is $10,000 per share. The Company is required to pay dividends
on the Series A Preferred shares, at the rate of 6% per annum of the $10,000
Liquidation Preference per share, through June 30, 2003; at the rate of 9% per
annum thereafter until June 30, 2004; and thereafter at the rate of 12% per
annum. At the Company's option such dividends may be paid in the Company's
common stock at the "conversion price" for the conversion of such dividends if
such shares of common stock have been registered under the Securities Act of
1933 for sale in the public securities markets. The conversion price is fixed
initially at $1.50 per share of the Company's common stock.

On November 7, 2002, the Company's board of directors adopted an amendment to
the Company's certificate of incorporation designating 2,000 shares out of the
1,000,000 shares of preferred stock, as Series B Convertible Preferred Stock at
a stated value of $10,000 per share. Dividends on the Series B Preferred shares
is payable at the rate of 12% per annum, in cash or shares of common stock, at
the option of the Company, except that in the first year, dividends are payable,
in advance, in shares of common stock.

The Series B preferred stock is convertible into common shares at any time at
the option of the investor, based on a fixed conversion rate of $1.00, or
commencing after February 1, 2003, based on an alternative conversion rate equal
to 90% of the average of the five lowest volume weighted average prices for the
common stock for the twenty trading days immediately prior to conversion,
subject to a floor price of $0.25. The fixed conversion rate may be adjusted
downward if the Company subsequently issues common stock at a purchase price
less than $0.50. In that event, the fixed conversion rate will be adjusted
downward to the price of the new issuance. Conversion is mandatory upon the
occurrence of certain financial events, such as, beginning six months from the
date of issue, if the closing bid price of common shares exceeds $2.00 for a
period of 20 consecutive trading days, or if within nine months from the date of
issue, the Company completes a public offering, raising a minimum of $8 million.
The alternative conversion price is adjustable or cancelable under certain
circumstances, such as, in the event that the Company receives a licensing fee
and/or a strategic investment of at least $5.0 million within six months of
closing, the alternative conversion rate is adjusted to the common share price
of the investment or is cancelled if the share price exceeds the fixed rate


                                      F-28





<PAGE>

of $1.00. If within six months from date of issue, the Company receives a
licensing fee with an upfront payment of at least $5.0 million, the alternative
conversion rate is adjusted to the quoted closing stock price on the day of the
public announcement or is cancelled if this closing price exceeds $1.00.
Similarly, if the Company completes a subsequent public or private financing of
a least $5.0 million within six months of closing, the alternative conversion
rate is adjusted to the closing price or the fixed rate of $l.00, if lower.

The preferred stock has redemption provisions, where upon occurrence of certain
events, the holders can require the Company to redeem the shares. Such
provisions include:


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

     o    the sale or transfer of more than 20% of the Company's assets other
          than inventory in the ordinary course of business; or

     o    consummation of a purchase, tender or exchange offer made to the
          holders of more than 30% of the outstanding shares of Common Stock.


The redemption price is payable, at the option of the Company, in cash or in
common stock. If the Company does not have sufficient authorized shares to
effect the redemption payment in common stock, the Company may pay the remainder
of the redemption in non-redeemable preferred stock with a dividend rate of 18%.

Issuance of 12% Convertible Debentures, Series A Preferred Stock and Series B
Preferred Stock:

On March 27, 2002, the Company engaged H.C. Wainwright, an investment-banking
firm, to act as its advisor and to assist with raising capital for the Company
in the form of either debt or equity financing.

On May 13, 2002, the Company sold $2,333,000 of 12% convertible debentures,
which were convertible into common shares at the lesser of $3.36 or the price
per share of the equity securities to be issued in a subsequent financing. These
debentures, bear interest at the rate of 12% per annum, up to October 10, 2002
and 18% thereafter and are due on April 10, 2003. The Company also issued
291,625 stock purchase warrants as part of this May 13, 2002 financing,
exercisable at $4.50 per share for up to 5 years from the date of grant. The
warrants had price protection features whereby the price of the warrants can be
reduced to the prices at which common stock or common stock equivalents are
thereafter sold by Ortec.

On June 28, 2002, $600,000 of these debentures sold on May 13, 2002 were
converted into Series A Preferred Stock at 110% of face value plus accrued
interest. Additionally, on June 28, 2002, the Company issued an additional
$250,000 of 12% convertible debentures and $1,200,000 in Series A convertible
preferred stock. The total face value of the preferred stock issued was
$1,870,120 which consisted of the $1,200,000 of cash proceeds received, the
$600,000 face value of converted debentures and the $70,120 of additional
conversion face value and accrued interest. Additionally, the Series A preferred
stock was convertible into common shares at a rate of $1.50 per share. The
Series A preferred stock had provisions whereby redemption was out of the
control of the Company, therefore, the preferred stock was classified in a
manner similar to debt.

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


                                      F-29






<PAGE>

The relative estimated fair value of the warrants issued in connection with the
debentures of $422,000 was recorded as debt discount, as well as the estimated
fair value of the beneficial conversion features of $1,042,663. Both of these
values were being amortized over the remaining life of the convertible
debentures, or through April 10, 2003.

The relative estimated fair value of the warrants issued in connection with the
Series A Preferred stock of $559,289 was recorded as a discount to the preferred
stock and was accreted to interest expense, on the date of issuance.
Additionally, the estimated fair value of the beneficial conversion feature of
$1,097,886 has been recorded as an additional discount and accreted to interest
expense. The Series A preferred stock has no redemption date, and therefore the
charge to interest expense was reflected immediately as the conversion privilege
was excercisable immediately.

During the 3rd quarter of 2002, the Company issued $1,425,000 in convertible
debentures, with terms comparable to those issued in the 2nd quarter.
Additionally, 178,127 warrants were issued with similar terms to warrants issued
on May 13, 2002. Additional debt discount of $18,523 related to the warrants was
recorded in the third quarter, which was being amortized over the remaining
useful life of the convertible debentures.

In October and November 2002, the Company issued an additional $1,900,000 in
convertible debentures and 237,501 warrants, with terms comparable to those
issued on May 13, 2002. Upon conversion of all outstanding debentures into
Series B preferred stock as discussed below, the remaining unamortized debt
discounts relating to warrants and beneficial conversion features were charged
to interest expense.

These debentures along with the accrued interest were convertible into equity
securities if the Company completed the sale of at least $5,000,000 in equity
securities by July 12, 2002, which date was extended through November 13, 2002.
On November 13, 2002, all outstanding debentures and accrued interest were
converted into preferred stock with the closing of the Series B Preferred Stock
financing. These were converted at the rate of 110% of the debentures plus
accrued interest into $10,000 par value Series B Convertible preferred shares.


In November and December 2002, the Company issued 938.2742 shares of Series B
convertible preferred stock to several investors in a private placement, which
was funded by an aggregate of $8,178,000 of financing received, which included
$1,070,000 of new Series B preferred stock and the conversion of the
aforementioned convertible debentures and convertible Series A preferred stock.
The Company recorded a loss on extinguishment of debentures and preferred shares
of $1,004,027, principally due to the additional buying power granted to the
investors resulting from the difference between the present value of the
original debt and the revised present value. The convertible debentures and
convertible Series A preferred were converted at 110% of face value, plus
accrued interest. In addition, these investors were granted Series A warrants,
to purchase 9,382,742 shares of the Company's common stock at an exercise price
of $.001. These Series A warrants vested immediately and were exercised
immediately, upon grant. The investors were also granted Series B-1 and Series
B-2 warrants, which can be used to purchase 5,429,891 and 4,691,386 shares of
common stock at an exercise price of $1.50 and $2.00 per share, respectively.
These B-1 are exercisable beginning August 13, 2003 and expire seven years from
the date of grant and the B-2 warrants are exercisable beginning November 13,
2003 and expire 7 years from date of grant. The Company assigned values to the
preferred stock and the Series A, Series B-1 and Series B-2 warrants issued to
the investors of $5,903,699, $2,245,206, $694,447 and $539,390, based upon the
relative fair market



                                      F-30




<PAGE>

value of the stock at the date of issuance and the estimated fair market value
of the warrants, using the Black-Scholes option pricing model.

The warrants issued with the second quarter and third quarter financings were
exchanged for B-1 warrants, issued in the fourth quarter and are included in the
number of warrants issued in the prior paragraph.

Dividends on the Series B preferred stock were paid in advance in November and
December in common shares at the rate of 12% upon issue of the preferred shares
and will be paid semiannually in subsequent years, in either cash or common
shares, at the election of the Company, until at such time as the preferred
stock is converted to common shares. In conjunction with this preferred stock
financing the investors were paid a common stock dividend, whereby the investors
were granted 3,753,116 shares of common stock, of which 2,934,888 shares were
issued in November 2002 and 818,228 shares in January 2003.

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

H.C. Wainwright & Company, Inc. ("Wainwright") acted as placement agent in this
private placement. For its services as placement agent, the Company paid
Wainwright $601,490 and granted Wainwright and its agents warrants to purchase
800,000 and 500,000 shares of common stock, at an exercise price of $.001 and
$1.50, vesting immediately upon issue and November 13, 2003, respectively. These
warrants will expire on January 31, 2003 and seven years from issue,
respectively. In December 2002, the Company issued 357,227 shares of common
stock relative to the $.001 warrants granted to Wainwright. The fair market
value assigned to the Wainwright warrants was $280,000 and $24,615 for the $.001
warrants and the $1.50 warrants, respectively. Other share issuance costs,
including non-cash costs, amounted to $155,997. Issuance costs for the Series B
Preferred Stock are reflected as a reduction of the proceeds of the preferred
stock. An additional 440,000 of warrants with an exercise price of $.001 were
exercised in January 2003. An aggregate of 797,227 shares were issued pursuant
to these warrants, which were substantially exercised using cashless exercise
provisions in such warrants.

Under EITF 00-19, "Accounting for Derivative Instruments Indexed to and
Potentially Settled in the Company's Own Stock", as of December 31, 2002, the
Series B Preferred stock is reflected as equity.

NOTE 10 - 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, non-employee 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.


                                      F-31





<PAGE>

In February 2003, the stockholders and Board of Directors ratified and approved
an amended and restated Stock Option Plan, increasing the maximum number of
shares of the Company's common stock for which stock options may be granted from
3,000,000 to 4,500,000 shares. As of December 31, 2002, 120,133 options were
available for grant under the plan.

The following table summarizes the stock option activity through December 31,
2002:

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

Balance, December 31, 1996                       156,000          7.08

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

Balance, December 31, 1997                       276,000          9.25

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

Balance, December 31, 1998                       944,500         11.17

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

Balance, December 31, 1999 (carried forward)   1,122,500         10.33

Balance, December 31, 1999 (brought forward)   1,122,500        $10.33

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

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

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

Balance, December 31, 2001                     2,033,306        $ 8.54

Granted                                        1,155,109          1.29
Forfeited, expired                              (316,298)         7.68
                                               ---------
</TABLE>

<TABLE>
<S>                                            <C>              <C>
Balance, December 31, 2002                     2,872,117        $ 5.73
                                               =========
</TABLE>


                                      F-32






<PAGE>

     The following data has been provided for exercisable options:

<TABLE>
<CAPTION>
                                              December 31,
                                  ------------------------------------
                                     2002         2001         2000
                                  ----------   ----------   ----------
<S>                               <C>          <C>          <C>
Number of options                  2,235,544    1,686,707    1,237,706
Weighted average exercise price      $6.57        $8.93       $12.02
Weighted remaining contractual
   life                           4.26 years   4.71 years   3.95 years
</TABLE>

The exercise price for all stock options awarded within the plan are determined
in accordance with the provisions of the Stock Option plan, as approved by the
shareholders and Board of Directors of the Company.

The weighted average fair value at the date of grant for options granted during
the years ended December 31, 2002, 2001 and 2000 was $1.29, $3.83 and $4.37,
respectively.

The following table summarizes option data as of December 31, 2002:

<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>
$.30 to $.60          763,353     6.36 years    $ 0.36       548,500     $ 0.38
$1.00 to $3.53        216,258     1.92 years    $ 1.51        35,000     $ 3.53
$4.50 to $7.50      1,006,000     4.90 years    $ 5.72       778,425     $ 5.64
$8.00 to $10.44       332,006     4.69 years      9.49       319,119       9.47
$10.50 to $14.25      540,500     0.89 years     12.30       540,500      12.30
$14.25 to $21.38       14,000     0.37 years     21.06        14,000      21.06
                    ---------                              ---------

                    2,872,117     4.26 years    $ 5.73     2,235,544     $ 6.57
                    =========     ----------    ======     =========     ------
</TABLE>

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 non-employees 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, 2002, 2001 and
2000. The following weighted average assumptions were made in estimating fair
value.


                                      F-33





<PAGE>

<TABLE>
<CAPTION>
                            Year ended December 31,
                          ---------------------------
                            2002      2001      2000
                          -------   -------   -------
<S>                       <C>       <C>       <C>
Risk-free interest rate     3.5 %     4.6 %     4.5 %
Expected option life      7 years   7 years   7 years
Expected volatility       120.2 %    65.8 %      65 %
</TABLE>

During the year ended December 31, 2002, the Company issued 3,800,000 options to
senior executives, which were not included in the Plan. The exercise price of
these options was $0.35, the market price on the date of grant. These options
are vested immediately and expire seven years from date of issue.

In addition, the Company recognized approximately $113,000, $188,000 and $56,000
in consulting expenses in 2002, 2001 and 2000, respectively, for options and
warrants granted to independent consultants and investment bankers for services
rendered to the Company.

NOTE 11 - 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, 2002 and for the cumulative period since inception,
no bonuses have been earned by Dr. Eisenberg. For each of the years ended
December 31, 2002, 2001 and 2000, Dr. Eisenberg earned approximately $73,000 for
consulting services and approximately $834,000 for the period from inception to
December 31, 2002, which is included in research and development expense.
Included in accrued compensation at December 31, 2002 and 2001 are $109,822 and
$36,826, respectively, representing unpaid consulting fees to Dr. Eisenberg.


                                      F-34





<PAGE>

Sales Force

In December 2001, the Company entered into an agreement with PDI, Inc. ("PDI"),
a pharmaceutical and medical device and diagnostics sales and marketing company
to provide a dedicated sales force to the Company to target the donor site burn
market. The agreement provides for a monthly fee based on the number of sales
representatives engaged plus commissions based upon sales of OrCel.

During the quarter ended September 30, 2002, PDI commenced legal action against
the Company, claiming that the Company owes them $205,000 for services that they
have performed for the Company. The Company is in the process of discussing a
settlement of the amount claimed with PDI. The Company has provided for
estimated amounts due to PDI.

Supply Agreements

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

Research Agreement

In January 1997, the Company entered into an agreement with the New Jersey
Center for Biomaterials and Medical Devices (the "New Jersey Center"), whereby
the Company and the New Jersey Center will collaborate on research focusing on
the development of collagen-based biomaterials for soft tissue repair,
specifically targeting the development of a second generation collagen matrix to
be used for the production of OrCel. The 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. This agreement was terminated as of December 31, 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 OrCel used in the operations conducted in Australia. The Company pays
rent in Australian dollars, which at the current rate of exchange, amounts to
approximately US $25,000 per year. This space is rented from Dr. Mark
Eisenberg's father on terms that the Company believes are not less favorable to
it than for rental of similar space in Sydney, Australia, from non-related third
parties. The Company terminated this agreement effective December 31, 2002.


                                      F-35





<PAGE>

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

In March 1996, the Company entered into a five-year lease with Columbia
University for the Company's laboratory and offices in Columbia's new Audubon
Biomedical Science and Technology Park in New York City. Construction of the
laboratory and office facility was completed in July 1996 and became fully
operational in November 1996. In 1996, the Company also granted Columbia a
warrant, which expired in March 2001, to purchase 5,000 shares of common stock
at an exercise price of $10 per share. In addition, Columbia had agreed to
provide the Company with a grant of $400,000 and a ten-year self-amortizing loan
with interest at the rate charged by Columbia's bank for up to an additional
$600,000, to build and equip the Company's laboratory. During 1998, the Company
received the $600,000 loan and an additional grant of $130,000 and entered into
two leases with Columbia for additional space in the building. During 2000, the
Company extended the two leases for another year and entered into a new lease
for additional space in the building. During 2001, the Company extended two of
its leases, one for an additional two years and the other for one year and
entered into a new lease for additional space in the building. During 2002, the
Company terminated three of its leases, reducing the amount of space under lease
and extended the term on its primary lease to June 2004. The Company utilizes
its laboratory facilities to produce OrCel.

On December 31, 2002, the Company amended the lease agreement with Columbia
University, extending the lease term to June 2004, as mentioned above. With this
amendment, the Company also obtained a waiver of its default for non - payment
of past due rent and loan amounts, with an agreed payment plan of these past due
amounts in 2003.

Total rent expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $683,000, $589,000 and $535,000, respectively.

In December 2001, the Company entered into a ten-year lease with the New Jersey
Economic Development Authority ("NJEDA") to lease approximately 58,000 square
feet of manufacturing and office space, located in North Brunswick, New Jersey.
These premises would become available to the Company in two phases. The initial
space, consisting of approximately 26,000 square feet, is in an existing
building, which was to be renovated to the Company's specifications. The second
phase, approximately 32,000 square feet, would be newly constructed and
adjoining the initial space.

On August 5, 2002, the Company reached an agreement with the New Jersey Economic
Development Administration to terminate the December 2001 lease and to enter
into a new lease covering only the initial space of approximately 26,000 square
feet of production and office space. Due to the lower level of financing in 2002
than had originally been planned, the Company is currently engaged in
discussions with the NJEDA to defer or terminate the lease entered into in
August 2002. We can give no assurance that we will be able to defer or terminate
this obligation or what damages, if any, incurred by NJEDA because of our
failure to perform our obligations under this lease, we may have to pay.


                                      F-36





<PAGE>

The minimum rental payments on non-cancelable leases with terms exceeding one
year at December 31, 2002 are as follows:

<TABLE>
<CAPTION>
Year ending December 31,              Operating Leases   Capital Leases
------------------------              ----------------   --------------
<S>                                       <C>                <C>
2003                                        820,000          175,156
2004                                        543,000          175,156
2005                                        416,000           58,717
2006                                             --
2007                                             --
Thereafter                                       --
                                          =========          =======
Total                                     1,779,000          409,029
                                          =========
Less: Amounts representing interest                           51,316
                                                             =======
Principal Payments                                           357,713
                                                             =======

Current portion                                              142,620
Long-term portion                                            215,093
                                                             =======
                                                             357,713
                                                             =======
</TABLE>

Government Regulation

The Company is subject to extensive government regulation. Products for human
treatment are subject to rigorous pre-clinical and clinical testing procedures
as a condition for approval by the FDA and by similar authorities in foreign
countries prior to commercial sale. Presently, the Company is continuing its
clinical trials for the use of its product in the treatment of patients with
venous leg ulcers and 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.

NOTE 12 - LEGAL PROCEEDINGS

The Company has been notified by Columbia University, the landlord of premises
at 3960 Broadway in New York City, where we maintain our principal offices,
laboratory and production facilities, that we have been delinquent in payment of
rent. The Company has reduced the amount of the space leased from Columbia
University, as part of our program to reduce spending. The Company has
negotiated a pay out of the remainder of our unpaid obligations to Columbia. The
Company's ability to make such payment is dependent on our ability to continue
to secure additional equity financing.

ClinTrials Networks, LLC (ClinTrials) has claimed that the Company has breached
its agreement with them, which provided for ClinTrials to arrange and manage the
FDA mandated clinical trials for use of our OrCel product for the treatment of
venous stasis ulcers, and for other services. In October 2002, ClinTrials
commenced an arbitration proceeding against the Company, claiming that the
Company owes ClinTrials $165,936 and that ClinTrials reserves the right to claim
additional amounts from the Company, based on continuing additional monthly fees
ClinTrials claims that it is entitled to receive under their agreement with us.
The Company has denied ClinTrials' claim and has advised ClinTrials that it is
not in breach of its contract. In March 2003 the Company filed a counterclaim
for overpayment of $75,000 under the terms of the contract, and as such, the
Company has not provided for any additional amounts due under this contract.


                                      F-37





<PAGE>

During the quarter ended September 30, 2002, PDI, Inc. commenced an action
against the Company in the Superior Court of New Jersey, Bergen County, claiming
that the Company owes $205,000 to PDI for services that they have performed for
us. The Company is in the process of discussing a settlement of the amount
claimed with PDI. The Company has provided for estimated amounts owed to PDI.

In December 2002 Amarex LLC commenced an action against the Company in the
Circuit Court for Montgomery County, Maryland. Amarex provided statistical
programming and data management services for the Company for the data generated
in the Company's clinical trials. Although in its complaint Amarex claims the
Company owes it $2,457,875, that amount is the additional amount the Company
would have had to pay Amarex if Amarex had performed all the work needed for all
of the Company's contemplated clinical trials. The Company has answered Amarex's
complaint denying Amarex's claim. The Company is negotiating with Amarex to
establish the amount of services Amarex performed for the Company for which it
has not already been paid and to arrange for payment of that amount. The Company
has provided for estimated amounts due to Amarex.

On August 5, 2002, the Company reached an agreement with the New Jersey Economic
Development Administration to terminate the current lease of approximately
58,000 square feet and to enter into a new lease for approximately 26,000 square
feet of production and office space in North Brunswick, New Jersey. The Company
is currently in discussion with the NJEDA to defer or terminate this lease for
26,000 square feet. The Company is unable to estimate what amount may be payable
to NJEDA to defer or terminate this agreement and accordingly, no amounts have
been provided for in the accompanying financial statements.

By letter dated June 27, 2002, the staff of the Nasdaq Stock Market, Inc.,
advised the Company that it had not met Nasdaq's requirements for continued
listing of its common stock on the Nasdaq SmallCap market. On July 1, 2002, the
Company appealed that determination and requested an oral hearing before the
Nasdaq Listing Qualification Panel. At that hearing, which was held on August 8,
2002, the Company asked the panel to defer delisting the Company's common stock
for up to six months, in order to give the Company time to complete its plan to
raise sufficient capital to provide for the Company's cash needs for the next
twelve months and enable the Company to meet Nasdaq's requirements for continued
listing of its common stock on the Nasdaq SmallCap market. Nasdaq denied the
Company's request and the Company's stock was moved to the Nasdaq Buletin Board
and as such, still meets the listing requirements of the Company's preferred
stock holders.

NOTE 13 - 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 8).

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 8).


                                      F-38





<PAGE>

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 and Termination of Employment Agreements

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. On
December 5, 2002, these agreements, relating to three of the executive officers,
were modified by the Company's Board of Directors. As modified, each of the
three executive officers will receive certain benefits and compensation in the
event of the individual's death, disability, retirement or if terminated without
cause, as defined in the agreement.

NOTE 14 - 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, 2002, the Company had net operating loss carry-forwards of
approximately $17,877,000 for Federal and New York State income tax purposes
expiring through 2022. 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
$30,873,000 and $23,294,000 at December 31, 2002 and 2001, respectively, has
been recognized to offset entirely the Company's deferred tax assets, which
arose primarily from the Company's operating loss carry-forwards and the
deferral of start-up expenses for tax purposes and accrued interest, 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,
                                    -------------------------
                                       2002          2001
                                    -----------   -----------
<S>                                 <C>           <C>
Net operating loss carry-forwards   $ 7,508,000   $ 6,179,000
Deferral of start-up costs           21,029,000    16,757,000
Interest                              1,825,000            --
Other                                   511,000       358,000
                                    -----------   -----------
</TABLE>

<TABLE>
<S>                                 <C>            <C>
                                      30,873,000     23,294,000

Valuation allowance                  (30,873,000)   (23,294,000)
                                    ------------   ------------

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


                                      F-39





<PAGE>

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)
                                2002          2001          2000          to December 31, 2002
                            -----------   -----------   -----------   --------------------------
<S>                         <C>           <C>           <C>                  <C>
Income tax benefit at the
   Statutory rate           $(7,337,000)  $(5,401,000)  $(4,124,000)         $(27,450,000)
State and local income
   taxes, net of Federal
   benefit                   (1,443,000)   (1,270,000)     (961,000)           (4,624,000)
Permanent differences         1,201,000            --            --             1,201,000
Effect of valuation
   allowance                  7,579,000     6,671,000     5,085,000            30,873,000
                            -----------   -----------   -----------          ------------

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

The Company's net operating loss tax carry-forwards expire as follows:

<TABLE>
<S>                           <C>
December 31, 2006             $    76,000
December 31, 2007                 233,000
December 31, 2008                 511,000
December 31, 2009                 597,000
December 31, 2010                 440,000
December 31, 2011                 677,000
December 31, 2012                 839,000
December 31, 2018               1,189,000
December 31, 2019               2,602,000
December 31, 2020               3,535,000
December 31, 2021               4,014,000
December 31, 2022               3,164,000
                              -----------

                              $17,877,000
                              ===========
</TABLE>

The Company's ability to utilize its net operating losses may be limited by
changes in control, as defined in the Internal Revenue Code.

NOTE 15 - OPERATIONS IN OTHER GEOGRAPHIC AREAS

Long-lived assets, which consists of fixed assets and patents, are located as
follows as of December 31, 2002 and 2001

<TABLE>
<CAPTION>
                       2002         2001
                    ----------   ----------
<S>                 <C>          <C>
United States       $2,064,481   $2,139,341

Australia                   --       63,056
                    ----------   ----------
                    $2,064,481   $2,202,397
                    ==========   ==========
</TABLE>


                                      F-40





<PAGE>

NOTE 16 - 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, loans
payable and other long-term obligations.

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

Cash and Cash Equivalents

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

Loans Payable and Other Long-term Obligations

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

NOTE 17 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

On April 31, 2002, the FASB issued Statement of Financial Accounting Standard
No.145, "Rescission of FASB Statements No.4, 44 and 64, Amendment of SFAS No.13,
and Technical Corrections" ("SFAS no.145"). SFAS No.145 rescinds Statements
No.4, which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. Upon adoption of SFAS No.145, companies will be
required to apply the criteria in APB Opinion No.30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining the classification of gains and losses resulting from the
extinguishments of debt. SFAS No.145 is effective for fiscal years beginning
after May 15, 2002. The Company is currently evaluating the requirements and
impact of this statement on its results of operations and financial position.

On July 30, 2002, the FASB issued Statement of Financial Accounting Standard
No.146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
N0.146"). The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No.146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. This statement will be
applied prospectively to disposal activities initiated after December 31, 2002.


                                      F-41





<PAGE>

Stock-Based Employee Compensation

In December 2002, the FASB issued Statement 148 (SFAS 148), Accounting for
Stock-Based Compensation -- Transition and Disclosure: an amendment of FASB
Statement 123 (SFAS 123), to provide alternative transition methods for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in annual financial statements
about the method of accounting for stock-based employee compensation and the pro
forma effect on reported results of applying the fair value based method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures are also required to be prominently disclosed in interim period
financial statements. This statement is effective for financial statements for
fiscal years ending after December 15, 2002 and is effective for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002, with earlier application permitted. The Company does
not plan a change to the fair value based method of accounting for stock-based
employee compensation and has included the disclosure requirements of SFAS 148
in the accompanying financial statements.

NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial for the years ended December 31, 2002 and 2001,
is as follows:

Quarter Ended

<TABLE>
<CAPTION>
                             March 30th,                June 30,                September 30,             December 31,
                      ------------------------  ------------------------  ------------------------  ------------------------
                          2002         2001         2002         2001         2002         2001         2002        2001
----------------------------------------------------------------------------------------------------------------------------
<S>                   <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenues              $   116,415  $        --  $    92,535  $        --  $    34,825  $        --  $        --  $    21,890
----------------------------------------------------------------------------------------------------------------------------
Net loss              $(5,144,138) $(3,494,473) $(7,272,547) $(3,753,130) $(3,989,473) $(4,173,593) $(6,297,797) $(4,464,181)
----------------------------------------------------------------------------------------------------------------------------
Net loss per share
   Basic and diluted        $(.53)       $(.36)       $(.75)       $(.39)       $(.41)       $(.43)       $(.39)       $(.46)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 19 - SUBSEQUENT EVENTS

Issuance of Series B Convertible Preferred Stock

In February 2003, the Company received additional gross proceeds of $2 million
from five investors, who had purchased the Company's Series B convertible
preferred stock in November and December 2002, and from one new investor. The
Company issued to the six investors 200 shares of the Company's convertible
preferred stock, 2,923,077 shares of the Company's common stock, of which
923,077 common shares constituted the first year dividends on the 200 shares of
Series B convertible preferred stock, which dividends were paid in advance. The
investors were also granted warrants to purchase an additional 2,000,000 shares
of common stock, of which warrants to purchase 1,000,000 shares are exercisable
at $1.50 per share and warrants to purchase the other 1,000,000 shares are
exercisable at $2.00 per shares. In March 2003, in addition to cash
compensation, the Company also granted to H.C. Wainwright, and to one of its
designees, for their services in arranging the aforementioned financing,
warrants to purchase an aggregate of 376,923 shares of the Company's common
stock, exercisable at $.001 per share.


                                      F-42




                         STATEMENT OF DIFFERENCES
                         ------------------------
The trademark symbol shall be expressed as.............................. 'TM'
The registered trademark symbol shall be expressed as................... 'r'
The section symbol shall be expressed as................................ 'SS'
Characters normally expressed as superscript shall be preceded by....... 'pp'
The less-than-or-equal-to sign shall be expressed as.................... <=
The greater-than-or-equal-to sign shall be expressed as................. >=
Indicates redacted material............................................ [***]