Document:

Exhibit 10.1 Employment Agreement

    
      

    

     

                                                                                            Exhibit
      10.1

     

    
      EXECUTION
        VERSION

       

    

     

    EMPLOYMENT
      AGREEMENT

     

    THIS
      AGREEMENT (the “Agreement”), made in New York, New York this 31st day of January
      2007 and effective as of March 1, 2007, between SIGA Technologies, Inc., a
      Delaware corporation (the “Company”), and Dr.
      Eric
      A. Rose, M.D. (“Executive”).

     

    WHEREAS,
      the Company desires to employ Executive as its Chief
      Executive Officer, and Executive desires to accept such employment on the terms
      and conditions hereinafter set forth;

     

    NOW,
      THEREFORE, IN CONSIDERATION of the mutual covenants and agreements hereinafter
      set forth, the Company and Executive agree as follows:

     

    1.  Term.
      Unless
      earlier terminated in accordance with Section 4 hereof, the term of this
      Agreement shall be the one-year period commencing March 1, 2007 and ending
      on
      February 29, 2008 (the “Term” and such year, a “Term Year”). In addition, unless
      either party hereto provides notice of its desire not to renew this Agreement
      thirty (30) days prior to the expiration of the Term, this Agreement shall
      automatically renew for additional one (1) year periods commencing upon the
      expiration of the initial Term (or any such subsequent Term), with each such
      additional year thereafter being made part of the Term and each such additional
      year, thereafter a Term Year.

     

    2.  Employment.

     

    (a)  Employment
      by the Company.
      Executive agrees to be employed by the Company during the Term upon the terms
      and subject to the conditions set forth in this Agreement. Executive shall
      serve
      as the Chief Executive Officer of the Company and shall report to the Board
      of
      Directors of the Company.

     

    (b)  Performance
      of Duties.
      Throughout his employment with the Company, Executive shall faithfully and
      diligently perform Executive’s duties in conformity with the directions of the
      Company and serve the Company to the best of Executive’s ability. Except as
      permitted pursuant to Section 2(c) below or as otherwise consented to by the
      Board of Directors of the Company, Executive shall devote his full business
      time
      and best efforts to the business and affairs of the Company. In his capacity
      as
      the Chief Executive Officer of the Company, Executive shall have such duties
      and
      responsibilities as he may be assigned by the Board of Directors of the Company
      not inconsistent with his position as Chief Executive Officer of
      the
      Company.

     

    (c)  Appointment
      at Columbia University.
      Executive shall be permitted to continue with his appointment as a faculty
      member of Columbia University, provided that such duties do not interfere with
      his duties as Chief Executive Officer of the Company and subject in all cases
      to
      ongoing approval of the Board of Directors of the Company. 

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    
      
        	
              	3.	
                Compensation
                  and Benefits.

              

      

    

     

    (a)  Base
      Salary.
      The
      Company agrees to pay to Executive a base salary (“Base Salary”) at the annual
      rate of $400,000, subject to any cost of living adjustments as may be approved
      by the Board of Directors of the Company. Payments of the Base Salary shall
      be
      payable in equal installments in accordance with the Company’s standard payroll
      practices.

     

    (b)  Annual
      Bonus.
      The
      Company may, in its sole discretion, pay to Executive a bonus in an amount
      to be
      determined by the Board of Directors in its sole discretion. Such bonus, if
      any,
      may be payable in cash or options to purchase Common Stock or restricted shares
      of Common Stock, as determined by the Board of Directors in its sole discretion.
      Any such cash bonus shall be paid, and any such options or restricted shares
      shall be issued, no later than March 15 of the year following the year in which
      the Board of Directors determined such bonus, or, if later, by the date that
      is
      21⁄2 months following the end of the Company’s fiscal year in which the Board of
      Directors determined such bonus.

     

    (c)  Benefits
      and Perquisites.
      Executive shall be entitled to participate in, to the extent Executive is
      otherwise eligible under the terms thereof, the benefit plans and programs,
      and
      receive the benefits and perquisites, generally provided by the Company to
      senior executives of the Company, including without limitation family medical
      insurance (subject to applicable employee contributions). Executive shall be
      entitled to receive vacation days in accordance with Company policy, such days
      to be accrued in accordance with Company policy.

     

    (d)  Business
      Expenses.
      The
      Company agrees to reimburse Executive for all reasonable and necessary travel,
      business entertainment and other business expenses incurred by Executive in
      connection with the performance of his duties under this Agreement. Such
      reimbursements shall be made by the Company on a timely basis upon submission
      by
      Executive of vouchers in accordance with the Company’s standard
      procedures.

     

    (e)  Indemnification.
      The
      Company shall indemnify Executive, to the fullest extent permitted by its
      certificate of incorporation, for any and all liabilities to which he may be
      subject as a result of, in connection with or arising out of his employment
      by
      the Company hereunder, as well as the costs and expenses (including reasonable
      attorneys’ fees) of any legal action brought or threatened to be brought against
      him or the Company as a result of, in connection with or arising out of such
      employment or board service. Executive shall be entitled to the full protection
      of any insurance policies which the Company may elect to maintain generally
      for
      the benefit of its officers.

     

    (f)  No
      Other Compensation or Benefits; Payment.
      The
      compensation and benefits specified in this Section 3 and in Section 5 of this
      Agreement shall be in lieu of any and all other compensation and benefits.
      Payment of all compensation and benefits to Executive specified in this Section
      3 and in Section 5 of this Agreement (i) shall be made in accordance with the
      relevant Company policies in effect from time to time to the extent the same
      are
      consistently applied, including normal payroll practices, and (ii) shall be
      subject to all legally required and customary withholdings.

     

     

    
      
        
        

      

      
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    (g)  Cessation
      of Employment.
      In the
      event Executive shall cease to be employed by the Company for any reason,
      Executive’s compensation and benefits shall cease on the date of such event,
      except as otherwise specifically provided herein or in any applicable employee
      benefit plan or program or as required by law.

     

    4.  Termination
      of Employment.
      Executive’s employment hereunder may be terminated prior to the end of the Term
      under the following circumstances.

     

    (a)  Death.
      Executive’s employment hereunder shall terminate upon Executive’s
      death.

     

    (b)  Executive
      Becoming Totally Disabled.
      The
      Company may terminate Executive’s employment hereunder at any time after
      Executive becomes “Totally Disabled.” For purposes of this Agreement, Executive
      shall be “Totally Disabled” in the event Executive is unable to perform the
      duties and responsibilities contemplated under this Agreement for a period
      of
      either (A) 120 consecutive days or (B) 6 months in any 12-month period due
      to
      physical or mental incapacity or impairment. During any period that Executive
      fails to perform Executive’s duties hereunder as a result of incapacity due to
      physical or mental illness (the “Disability Period”), Executive shall continue
      to receive the compensation and benefits provided by Section 3 of this Agreement
      until Executive’s employment hereunder is terminated; provided, however, that
      the amount of base compensation and benefits received by Executive during the
      Disability Period shall be reduced by the aggregate amounts, if any, payable
      to
      Executive under any disability benefit plan or program provided to Executive
      by
      the Company.

     

    (c)  Termination
      by the Company for Cause.
      The
      Company may terminate Executive’s employment hereunder for Cause at any time
      after providing written notice to Executive. For purposes of this Agreement,
      the
      term “Cause” shall mean any of the following: (i) Executive’s neglect or failure
      or refusal to perform his duties under this Agreement (other than as a result
      of
      total or partial incapacity due to physical or mental illness); (ii) any act
      by
      or omission of Executive constituting gross negligence or willful misconduct
      in
      connection with the performance of his duties that could reasonably be expected
      to materially injure the reputation, business or business relationships of
      the
      Company or any of its affiliates; (iii) perpetration of an intentional and
      knowing fraud against or affecting the Company or any of its affiliates or
      any
      customer, client, agent, or employee thereof; (iv) the commission by or
      indictment of Executive for (A) a felony or (B) any misdemeanor involving moral
      turpitude, deceit, dishonesty or fraud (“indictment,” for these purposes,
      meaning a United States-based indictment, probable cause hearing or any other
      procedure pursuant to which an initial determination of probable or reasonable
      cause with respect to such offense is made); (v) the breach of a covenant set
      forth in Section 6; or (vi) any other material breach of this
      Agreement.

     

    (d)  Termination
      by the Company Without Cause.
      The
      Company may terminate Executive’s employment hereunder at any time for any
      reason or no reason by giving Executive thirty (30) days prior written notice
      of
      the termination. Following any such notice, the Company may reduce or remove
      any
      and all of Executive’s duties, positions and titles with the
      Company.

     

     

    
      
        
        

      

      
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    (e)  Termination
      by Executive for Good Reason.
      Executive may terminate his employment hereunder for Good Reason at any time
      after providing written notice to the Company. For purposes of this Agreement,
      the term “Good Reason” shall mean any of the following: (i) the Company fails to
      pay the compensation described in Section 3(a) of this Agreement (in accordance
      with, and subject to, such provisions); (ii) Executive no longer holds the
      office of Chief Executive Officer or
      offices of equivalent stature, or his functions and/or duties as Chief Executive
      Officer are
      materially diminished; or (iii) Executive’s job site is relocated to a location
      which is more than fifty (50) miles from New York City unless the parties
      mutually agree to such relocation.

     

    (f)  Termination
      Upon a Change in Control.
      If the
      Company terminates Executive’s employment hereunder without Cause within
      90
      days after the occurrence of the Change in Control Executive shall be entitled
      to the payments provided for by Section 5(d). For purposes of this Agreement,
      a
“Change in Control” shall be conclusively deemed to have occurred if any of the
      following shall have taken place:

     

    (i)  the
      consummation of a transaction or a series of related transactions pursuant
      to
      which any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the
      Securities Exchange Act of 1934 (“Exchange Act”), other than the Executive, his
      designee(s) or “affiliate(s)” (as defined in Rule 12b-2 under the Exchange Act),
      is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the
      Exchange Act), directly or indirectly, of securities of the Company representing
      forty percent (40%) or more of the combined voting power of the Company’s then
      outstanding securities;

     

    (ii)  stockholders
      of the Company approve a merger or consolidation of the Company with any other
      entity, other than a merger or consolidation which would result in the voting
      securities of the Company outstanding immediately prior thereto continuing
      to
      represent (either by remaining outstanding or by being converted into voting
      securities of the surviving entity) more than eighty percent (80%) of the
      combined voting power of the voting securities of the Company or such surviving
      entity outstanding immediately after such merger or consolidation;
      or

     

    (iii)  the
      stockholders of the Company approve a plan of complete liquidation of the
      Company or an agreement for the sale or disposition by the Company of, or the
      Company sells or disposes of, all or substantially all of the Company’s
      assets.

     

    (g)  Termination
      by Executive Without Good Reason.
      Executive may terminate his employment hereunder at any time for any reason
      or
      no reason by giving the Company thirty (30) days prior written notice of the
      termination. Following any such notice, the Company may reduce or remove any
      and
      all of Executive’s duties, positions and titles with the Company, and any such
      reduction or removal shall not constitute Good Reason.

     

    5.  Compensation
      Following Termination.
      In the
      event that Executive’s employment hereunder is terminated, Executive shall be
      entitled only to the following compensation and benefits upon such
      termination:

     

     

    
      
        
        

      

      
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      (a)  
           General.
        On any termination of Executive’s employment prior to the end of the Term,
        Executive shall be entitled to the following (collectively, the “Standard
        Termination Payments”):

    

     

    (i)  any
      accrued but unpaid Base Salary for services rendered through the date of
      termination; provided, however, that in the event Executive’s employment is
      terminated pursuant to Section 4(b), the amount of Base Salary received by
      Executive during the Disability Period shall be reduced by the aggregate
      amounts, if any, payable to Executive under any disability benefit plan or
      program provided to Executive by the Company;

     

    (ii)   any
      vacation accrued to the date of termination, in accordance with Company
      policy;

     

    (iii)  any
      accrued but unpaid expenses through the date of termination required to be
      reimbursed in accordance with Section 3(d) of this Agreement; and

     

    (iv)  any
      benefits to which he may be entitled upon termination pursuant to the plans,
      programs and grants referred to in Section 3(c) hereof in accordance with the
      terms of such plans, programs and grants.

     

    (b)  Termination
      Prior to the Expiration of the Term by Reason of Death or Executive Becoming
      Totally Disabled; Termination Prior to the Expiration of the Term by the Company
      for Cause; Termination Prior to the Expiration of the Term by Executive Without
      Good Reason.
      In the
      event that Executive’s employment is terminated prior to the expiration of the
      Term (i) by reason of Executive’s death pursuant to Section 4(a) or Executive
      becoming Totally Disabled pursuant to Section 4(b), (ii) by the Company for
      Cause pursuant to Section 4(c) or (iii) by Executive without Good Reason
      pursuant to Section 4(g), Executive (or his estate, as the case may be) shall
      be
      entitled only to the Standard Termination Payments.

     

    (c)  Termination
      Prior to the Expiration of the Term by the Company Without Cause; Termination
      Prior to the Expiration of the Term by Executive for Good Reason.
      In the
      event that Executive’s employment is terminated prior to the expiration of the
      Term by the Company without Cause pursuant to Section 4(d) or by Executive
      for
      Good Reason pursuant to Section 4(e), Executive shall be entitled only to the
      following:

     

    (i)  the
      Standard Termination Payments; and

     

    (ii)  the
      continued payment of the Base Salary (as determined pursuant to Section 3(a))
      for one year 
      (such
      sums to be paid at the times and in the amounts such Base Salary would have
      been
      paid had Executive’s employment not terminated); provided, however, that if
      necessary to comply with Section 409A(a)(2)(B)(i) of the Internal Revenue Code
      of 1986, as amended (the “Code”), and applicable administrative guidance and
      regulations, the payment of such sums shall be made as follows: (A) no payments
      shall be made for a six-month period following the date of termination, (B)
      an
      amount equal to six months of Base Salary shall be paid in a lump sum six months
      following the date of termination, and (C) during the period beginning six
      months following the date of termination through the remainder of the
      twelve-month period,

     

     

    
      
        
        

      

      
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    payment
      of the Base Salary shall be made at the times and in the amounts such Base
      Salary would have been paid had Executive’s employment not
      terminated.

     

    (iii)  the
      Company shall take all such action as is necessary such that all stock options
      and other stock-based grants to Executive shall, immediately and irrevocably
      vest and become exercisable as of the date of termination and shall remain
      exercisable for a period of not less than one (1) year from the date of
      termination.

     

    (d)  Termination
      Upon a Change of Control.
      In the
      event that the Company terminates Executive’s employment upon a Change in
      Control other than for Cause pursuant to Section 4(f), Executive shall be
      entitled only to the following:

     

    (i)  the
      Standard Termination Payments; 

     

    (ii)  the
      continued payment of the Base Salary (as determined pursuant to Section 3(a))
      for one year (such sums to be paid at the times and in the amounts such Base
      Salary would have been paid had Executive’s employment not terminated);
      provided, however, that if necessary to comply with Section 409A(a)(2)(B)(i)
      of
      the Internal Revenue Code of 1986, as amended (the “Code”), and applicable
      administrative guidance and regulations, the payment of such sums shall be
      made
      as follows: (A) no payments shall be made for a six-month period following
      the
      date of termination, (B) an amount equal to six months of Base Salary shall
      be
      paid in a lump sum six months following the date of termination, and (C) during
      the period beginning six months following the date of termination through the
      remainder of the twelve-month period, payment of the Base Salary shall be made
      at the times and in the amounts such Base Salary would have been paid had
      Executive’s employment not terminated; and

     

    (iii)  the
      Company shall take all such action as is necessary such that all stock options
      and other stock-based grants to Executive shall, immediately and irrevocably
      vest and become exercisable as of the date of termination and shall remain
      exercisable for a period of not less than one (1) year from the date of
      termination.

     

    (e)  Effect
      of Material Breach of Section 6 on Compensation and Benefits Following
      Termination of Employment Pursuant to Sections 5(c)(ii) or
      5(d)(ii).
      If, at
      the time of termination of Executive’s employment for any reason prior to the
      expiration of the Term or any time thereafter, Executive is in material breach
      of any covenant contained in Section 6 hereof, Executive (or his estate, as
      applicable) shall not be entitled to any payment (or if payments have commenced,
      any continued payment) under Sections 5(c)(ii) or 5(d)(ii).

     

    (f)  No
      Further Liability; Release.
      Payment
      made and performance by the Company in accordance with this Section 5 shall
      operate to fully discharge and release the Company and its directors, officers,
      employees, affiliates, stockholders, successors, assigns, agents and
      representatives from any further obligation or liability with respect to
      Executive’s employment and termination of employment. Other than providing the
      compensation and benefits provided for in accordance with this Section 5, the
      Company and its directors, officers, employees, affiliates, stockholders,
      successors, assigns, agents and representatives shall have no further obligation
      or liability to Executive or any other person under this Agreement. The
payment
      of any amounts pursuant to this Section 5 (other than payments required by
      law)
      is

     

     

    
      
        
        

      

      
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    expressly
      conditioned upon the delivery by Executive to the Company of a release in form
      and substance reasonably satisfactory to the Company of any and all claims
      Executive may have against the Company and its directors, officers, employees,
      affiliates, stockholders, successors, assigns, agents and representatives
      arising out of or related to Executive’s employment by the Company and the
      termination of such employment.

     

    6.  Exclusive
      Employment; Non-competition; Non-solicitation; Nondisclosure of Proprietary
      Information; Surrender of Records; Inventions and Patents; Code of
      Ethics.

     

    (a)  No
      Conflict; No Other Employment.
      During
      the period of Executive’s employment with the Company, Executive shall not: (i)
      engage in any activity which conflicts or interferes with or derogates from
      the
      performance of Executive’s duties hereunder nor shall Executive engage in any
      other business activity, whether or not such business activity is pursued for
      gain or profit and including service as a director of any other company, except
      as approved in advance in writing by the Company; provided, however, that
      Executive shall be entitled to manage his personal investments and otherwise
      attend to personal affairs, including charitable, social and political
      activities, in a manner that does not unreasonably interfere with his
      responsibilities hereunder, or (ii) accept or engage in any other employment,
      whether as an employee or consultant or in any other capacity, and whether
      or
      not compensated therefor.

     

    (b)  Non-competition;
      Non-solicitation.

     

    (i)  Executive
      acknowledges and recognizes the highly competitive nature of the Company’s
      business and that access to the Company’s confidential records and proprietary
      information renders him special and unique within the Company’s industry. In
      consideration of the payment by the Company to Executive of amounts that may
      hereafter be paid to Executive pursuant to this Agreement (including, without
      limitation, pursuant to Sections 3 and 5 hereof) and other obligations
      undertaken by the Company hereunder, Executive agrees that during (i) his
      employment with the Company and (ii) twenty-four months thereafter (the “Covered
      Time”), Executive shall not, directly or indirectly, engage (as owner, investor,
      partner, stockholder, employer, employee, consultant, advisor, director or
      otherwise) in any Competing Business, provided that the provisions of this
      Section 6(b) will not be deemed breached merely because Executive owns less
      than
      1% of the outstanding common stock of a publicly-traded company. For purposes
      of
      this Agreement, “Competing Business” shall mean (i) any business in which the
      Company or its affiliates are currently engaged anywhere in the world; and
      (ii)
      any other business in which the Company engages in anywhere in the world during
      the Term.

     

    (ii)  In
      further consideration of the payment by the Company to Executive of amounts
      that
      may hereafter be paid to Executive pursuant to this Agreement (including,
      without limitation, pursuant to Sections 3 and 5 hereof) and other obligations
      undertaken by the Company hereunder, Executive agrees that during his employment
      and the Covered Time, he shall not, directly or indirectly, (i) solicit,
      encourage or attempt to solicit or encourage any of the employees, agents,
      consultants or representatives of the Company or any of its
      affiliates to terminate his, her, or its relationship with the Company or such
      affiliate;

     

     

    
      
        
        

      

      
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    (ii) solicit,
      encourage or attempt to solicit or encourage any of the employees, agents,
      consultants or representatives of the Company or any of its affiliates to become
      employees, agents, representatives or consultants of any other person or entity;
      (iii) solicit or attempt to solicit any customer, vendor or distributor of
      the
      Company or any of its affiliates with respect to any product or service being
      furnished, made, sold or leased by the Company or such affiliate; or (iv)
persuade
      or seek to persuade any customer of the Company or any affiliate to cease to
      do
      business or to reduce the amount of business which any customer has customarily
      done or contemplates doing with the Company or such affiliate, whether or not
      the relationship between the Company or its affiliate and such customer was
      originally established in whole or in part through Executive’s efforts. For
      purposes of this Section 6(b) only, the terms “customer,” “vendor” and
“distributor” shall mean a customer, vendor or distributor who has done business
      with the Company or any of its affiliates within twelve months preceding the
      termination of Executive’s employment.

     

    (iii)  During
      Executive’s employment with the Company and during the Covered Time, Executive
      agrees that upon the earlier of Executive’s (i) negotiating with any Competitor
      (as defined below) concerning the possible employment of Executive by the
      Competitor, (ii) receiving an offer of employment from a Competitor, or (iii)
      becoming employed by a Competitor, Executive will (A) immediately provide notice
      to the Company of such circumstances and (B) provide copies of Section 6 of
      this
      Agreement to the Competitor. Executive further agrees that the Company may
      provide notice to a Competitor of Executive’s obligations under this Agreement,
      including without limitation Executive’s obligations pursuant to Section 6
      hereof. For purposes of this Agreement, “Competitor” shall mean any entity
      (other than the Company or any of its affiliates) that engages, directly or
      indirectly, in any Competing Business.

     

    (iv)  Executive
      understands that the provisions of this Section 6(b) may limit his ability
      to
      earn a livelihood in a business similar to the business of the Company or its
      affiliates but nevertheless agrees and hereby acknowledges that the
      consideration provided under this Agreement, including any amounts or benefits
      provided under Sections 3 and 5 hereof and other obligations undertaken by
      the
      Company hereunder, is sufficient to justify the restrictions contained in such
      provisions. In consideration thereof and in light of Executive’s education,
      skills and abilities, Executive agrees that he will not assert in any forum
      that
      such provisions prevent him from earning a living or otherwise are void or
      unenforceable or should be held void or unenforceable.

     

    (c)  Proprietary
      Information.
      Executive acknowledges that during the course of his employment with the Company
      he will necessarily have access to and make use of proprietary information
      and
      confidential records of the Company and its affiliates. Executive covenants
      that
      he shall not during the Term or at any time thereafter, directly or indirectly,
      use for his own purpose or for the benefit of any person or entity other than
      the Company, nor otherwise disclose, any proprietary information to any
      individual or entity, unless such disclosure has been authorized in writing
      by
      the Company or is otherwise required by law. Executive acknowledges and
      understands that the term “proprietary information” includes, but is not limited
      to: (a) inventions, trade secrets, ideas, processes, formulas, source and
      object codes,
      data, programs, other works of authorship, know-how, improvements, research,
      discoveries, developments, designs, and techniques regarding any of the
      foregoing utilized by

     

     

    
      
        
        

      

      
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    the
      Company or any of its affiliates; (b) the name and/or address of any
      customer or vendor of the Company or any of its affiliates or any information
      concerning the transactions or relations of any customer or vendor of the
      Company or any of its affiliates with the Company or such affiliate or any
      of
      its or their partners, principals, directors, officers or agents; (c) any
      information concerning any product, technology, or procedure employed by the
      Company or any of its affiliates but not generally known to its or their
      customers, vendors or competitors, or under development by or being tested
      by
      the Company or any of its affiliates but not at the time offered generally
      to
      customers or vendors; (d) any
      information relating to the pricing or marketing methods, sales margins, cost
      of
      goods, cost of material, capital structure, operating results, borrowing
      arrangements or business plans of the Company or any of its affiliates; (e)
      any
      information which is generally regarded as confidential or proprietary in any
      line of business engaged in by the Company or any of its affiliates; (f) any
      business plans, budgets, advertising or marketing plans; (g) any information
      contained in any of the written or oral policies and procedures or manuals
      of
      the Company or any of its affiliates; (h) any information belonging to customers
      or vendors of the Company or any of its affiliates or any other person or entity
      which the Company or any of its affiliates has agreed to hold in confidence;
      (i)
      any inventions, innovations or improvements covered by this Agreement; and
      (j) all written, graphic and other material relating to any of the
      foregoing. Executive acknowledges and understands that information that is
      not
      novel or copyrighted or patented may nonetheless be proprietary information.
      The
      term “proprietary information” shall not include information generally available
      to and known by the public or information that is or becomes available to
      Executive on a non-confidential basis from a source other than the Company,
      any
      of its affiliates, or the directors, officers, employees, partners, principals
      or agents of the Company or any of its affiliates (other than as a result of
      a
      breach of any obligation of confidentiality).

     

    (d)  Confidentiality
      and Surrender of Records.
      Executive shall not during the Term or at any time thereafter (irrespective
      of
      the circumstances under which Executive’s employment by the Company terminates),
      except as required by law, directly or indirectly publish, make known or in
      any
      fashion disclose any confidential records to, or permit any inspection or
      copying of confidential records by, any individual or entity other than in
      the
      course of such individual’s or entity’s employment or retention by the Company.
      Upon termination of employment for any reason or upon request by the Company,
      Executive shall deliver promptly to the Company all property and records of
      the
      Company or any of its affiliates, including, without limitation, all
      confidential records. For purposes hereof, “confidential records” means all
      correspondence, reports, memoranda, files, manuals, books, lists, financial,
      operating or marketing records, magnetic tape, or electronic or other media
      or
      equipment of any kind which may be in Executive’s possession or under his
      control or accessible to him which contain any proprietary information. All
      property and records of the Company and any of its affiliates (including,
      without limitation, all confidential records) shall be and remain the sole
      property of the Company or such affiliate during the Term and
      thereafter.

     

    (e)  Inventions
      and Patents.
      

     

    (i)  The
      Executive agrees that all processes, technologies and inventions (collectively,
      "Inventions"), including new contributions, improvements, ideas and discoveries,
      whether patentable or not, conceived, developed, invented or made by him during
      the Term shall belong to the Company, provided that such Inventions grew out
      of
      the Executive's

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

     

    work
      with
      the Company or any of its subsidiaries or affiliates, are related in any manner
      to the business (commercial or experimental) of the Company or any of its
      subsidiaries or affiliates or are conceived or made on the Company's time or
      with the use of the Company's facilities or materials. The Executive shall
      further: (a) promptly disclose such Inventions to the Company; (b) assign to
      the
      Company, without additional compensation, all patent and other rights to such
      Inventions for the United States and foreign countries; (c) sign all papers
      necessary to carry out the foregoing; and (d) give testimony in support of
      the
      Executive's inventorship.

     

    (ii)  If
      any
      Invention is described in a patent application or is disclosed to third parties,
      directly or indirectly, by the Executive within two years after the termination
      of the Executive's employment by the Company, it is to be presumed that the
      Invention was conceived or made during the Term.

     

    (iii)  The
      Executive agrees that the Executive will not assert any rights to any Invention
      as having been made or acquired by the Executive prior to the date of this
      Agreement, except for Inventions, if any, disclosed to the Company in writing
      prior to the date hereof.

     

    (iv)  The
      Company shall be the sole owner of all the products and proceeds of the
      Executive's services hereunder, including, but not limited to, all materials,
      ideas, concepts, formats, suggestions, developments, arrangements, packages,
      programs and other intellectual properties that the Executive may acquire,
      obtain, develop or create in connection with and during the Term, free and
      clear
      of any claims by the Executive (or anyone claiming under the Executive) of
      any
      kind or character whatsoever (other than the Executive's right to receive
      payments hereunder). The Executive shall, at the request of the Company, execute
      such assignments, certificates or other instruments as the Company may from
      time
      to time deem necessary or desirable to evidence, establish, maintain, perfect,
      protect, enforce or defend its right, title or interest in or to any such
      properties.

     

    (f)  Enforcement.
      Executive acknowledges and agrees that, by virtue of his position, his services
      and access to and use of confidential records and proprietary information,
      any
      violation by him of any of the undertakings contained in this Section 6 would
      cause the Company and/or its affiliates immediate, substantial and irreparable
      injury for which it or they have no adequate remedy at law. Accordingly,
      Executive agrees and consents to the entry of an injunction or other equitable
      relief by a court of competent jurisdiction restraining any violation or
      threatened violation of any undertaking contained in this Section 6. Executive
      waives posting by the Company or its affiliates of any bond otherwise necessary
      to secure such injunction or other equitable relief. Rights and remedies
      provided for in this Section 6 are cumulative and shall be in addition to rights
      and remedies otherwise available to the parties hereunder or under any other
      agreement or applicable law.

     

    (g)  Code
      of Ethics.
      Nothing
      in this Section 6 is intended to limit, modify or reduce Executive’s obligations
      under the Company’s Code of Ethics. Executive’s obligations under this Section 6
      are in addition to, and not in lieu of, Executive’s obligations under
      the
      Code of Ethics. To the extent there is any inconsistency between this Section
      6
      and the Code of Ethics which would permit Executive to take any action or engage
      in any activity 

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    pursuant
      to this Section 6 which he would be barred
      from taking or engaging in under the Code of Ethics, the Code of Ethics shall
      control.

     

    7.  Assignment
      and Transfer.

     

    (a)  Company.
      This
      Agreement shall inure to the benefit of and be enforceable by, and may be
      assigned by the Company without Executive’s consent to, any purchaser of all or
      substantially all of the Company’s business or assets, or to any successor to
      the Company or any assignee thereof (whether direct or indirect, by purchase,
      merger, consolidation or otherwise).

     

    (b)  Executive.
      The
      parties hereto agree that Executive is obligated under this Agreement to render
      personal services during his employment of a special, unique, unusual,
      extraordinary and intellectual character, thereby giving this Agreement special
      value. Executive’s rights and obligations under this Agreement shall not be
      transferable by Executive by assignment or otherwise, and any purported
      assignment, transfer or delegation thereof shall be void; provided, however,
      that if Executive shall die, all amounts then payable to Executive hereunder
      shall be paid in accordance with the terms of this Agreement to Executive’s
      estate.

     

    8.  Miscellaneous.

     

    (a)  Cooperation.
      Following termination of employment with the Company for any reason, Executive
      shall cooperate with the Company, as requested by the Company, to effect a
      transition of Executive’s responsibilities and to ensure that the Company is
      aware of all matters being handled by Executive.

     

    (b)  Mitigation.
      Executive shall not be required to mitigate damages or the amount of any payment
      provided to him under Section 5 of this Agreement by seeking other employment
      or
      otherwise, nor shall the amount of any payments provided to Executive under
      Section 5 be reduced by any compensation earned by Executive as the result
      of
      employment by another employer after the termination of Executive’s employment
      or otherwise.

     

    (c)  Protection
      of Reputation.
      During
      the Term and thereafter, Executive agrees that he will take no action which
      is
      intended, or would reasonably be expected, to harm the Company or any of its
      affiliates or its or their reputation or which would reasonably be expected
      to
      lead to unwanted or unfavorable publicity to the Company or its affiliates.
      Nothing herein shall prevent Executive from making any truthful statement in
      connection with any legal proceeding or investigation by the Company or any
      governmental authority.

     

    (d)  Governing
      Law; Consent to Jurisdiction.
      This
      Agreement shall be governed by and construed (both as to validity and
      performance) and enforced in accordance with the internal laws of the State
      of
      New York applicable to agreements made and to be performed wholly within such
      jurisdiction, without regard to the principles of conflicts of law or where
      the
      parties are located at the time a dispute arises. In the event of any
      controversy or claim arising out of or relating to this Agreement or the breach
      or alleged breach hereof, each of the parties hereto irrevocably (a) consents
      to
      the jurisdiction of any state court sitting in the County
      of
      New York, State of New York, or federal court sitting in the County of New
      York,
      State of New York. (b) waives any objection which it may have at any time to
      the
      laying of 

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    venue
      of any action or proceeding brought in any such
      court and (c) waives any claim that such action or proceeding has been brought
      in an inconvenient forum. 

     

    (e)  Injunctive
      Relief.
      Notwithstanding anything to the contrary contained herein, the Company and
      any
      affiliate of the Company (if applicable) shall have the right to seek injunctive
      or other equitable relief from a court of competent jurisdiction to enforce
      Section 6 of this Agreement without any obligation to post a bond. 

     

    (f)  Entire
      Agreement.
      This
      Agreement (including the plans referenced in Section 3(c) of this Agreement)
      contain the entire agreement and understanding between the parties hereto in
      respect of Executive’s employment from and after the date hereof and supersede,
      cancel and annul any prior or contemporaneous written or oral agreements,
      understandings, commitments and practices between them respecting Executive’s
      employment from and after the date hereof, including all prior employment
      agreements between the Company and Executive.

     

    (g)  Amendment.
      This
      Agreement may be amended only by a writing which makes express reference to
      this
      Agreement as the subject of such amendment and which is signed by Executive
      and,
      on behalf of the Company, by its duly authorized officer.

     

    (h)  Severability.
      If any
      provision of this Agreement or the application of any such provision to any
      party or circumstances shall be determined by any court of competent
      jurisdiction or arbitration panel to be invalid or unenforceable to any extent,
      the remainder of this Agreement, or the application of such provision to such
      person or circumstances other than those to which it is so determined to be
      invalid or unenforceable, shall not be affected thereby, and each provision
      hereof shall be enforced to the fullest extent permitted by law. If any
      provision of this Agreement, or any part thereof, is held to be invalid or
      unenforceable because of the scope or duration of or the area covered by such
      provision, the parties hereto agree that the court or arbitration panel making
      such determination shall reduce the scope, duration and/or area of such
      provision (and shall substitute appropriate provisions for any such invalid
      or
      unenforceable provisions) in order to make such provision enforceable to the
      fullest extent permitted by law and/or shall delete specific words and phrases,
      and such modified provision shall then be enforceable and shall be enforced.
      The
      parties hereto recognize that if, in any judicial or arbitral proceeding, a
      court or arbitration panel shall refuse to enforce any of the separate covenants
      contained in this Agreement, then that invalid or unenforceable covenant
      contained in this Agreement shall be deemed eliminated from these provisions
      to
      the extent necessary to permit the remaining separate covenants to be enforced.
      In the event that any court or arbitration panel determines that the time period
      or the area, or both, are unreasonable and that any of the covenants is to
      that
      extent invalid or unenforceable, the parties hereto agree that such covenants
      will remain in full force and effect, first, for the greatest time period,
      and
      second, in the greatest geographical area that would not render them
      unenforceable.

     

    (i)  Construction.
      The
      headings and captions of this Agreement are provided for convenience only and
      are intended to have no effect in construing or interpreting this Agreement.
      The
      language in all parts of this Agreement shall be in all cases construed
according
      to its fair meaning and not strictly for or against the Company or Executive.
      As
      used herein, the words “day” or “days” shall mean a calendar day or
      days.

     

     

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

     

    (j)  Non-waiver.
      Neither
      any course of dealing nor any failure or neglect of either party hereto in
      any
      instance to exercise any right, power or privilege hereunder or under law shall
      constitute a waiver of any other right, power or privilege or of the same right,
      power or privilege in any other instance. All waivers by either party hereto
      must be contained in a written instrument signed by the party to be charged
      and,
      in the case of the Company, by its duly authorized officer.

     

    (k)  Notices.
      Any
      notice required or permitted hereunder shall be in writing and shall be
      sufficiently given if personally delivered or if sent by registered or certified
      mail, postage prepaid, with return receipt requested, addressed: 

     

    (i)  in
      the
      case of the Company, to :

     

    
      	
                                       
If
                to the
                Company:

            
	 
	
                                          SIGA
                Technologies, Inc.

            
	
                                          420
                Lexington Avenue, Suite 408

            
	
                                          New
                York, NY 10170

            
	
                                          Attention:
                

            	
              Chief
                Financial Officer

            
	
                                          Telephone Number:

            	
              (212)
                672-9100

            
	
                                          Facsimile
                Number:

            	
              (212)
                697-3130

            

    

    

    
      	
                                          With
                a
                copy to:

            
	 
	
                                          James
                A. Grayer, Esq. 

            
	
                                          Kramer
                Levin Naftalis & Frankel LLP

            
	
                                          1177
                Avenue of the Americas

            
	
                                          New
                York, NY 10036

            
	
                                          Telephone
                Number:

            	
              (212)
                715-7616

            
	
                                          Facsimile
                Number:

            	
              (212)
                715-8050

            

    

    

    (ii)  in
      the
      case of Executive, to Executive’s last known address as reflected in the
      Company’s records, or to such other address as Executive shall designate by
      written notice to the Company. 

     

    Any
      notice given hereunder shall be deemed to have been given at the time of receipt
      thereof by the person to whom such notice is given if personally delivered
      or at
      the time of mailing if sent by registered or certified mail.

    

    (l)  Assistance
      in Proceedings, Etc.
      Executive shall, without additional compensation, during and after the Term,
      upon reasonable notice, furnish such information and proper assistance to the
      Company as may reasonably be required by the Company in connection with
      any
      legal or quasi-legal proceeding, including any external or internal
      investigation, involving the Company or any of its affiliates.

     

    (m)  Survival.
      Cessation or termination of Executive’s employment with the Company shall not
      result in termination of this Agreement. The respective obligations

     

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    of
      Executive and the Company as provided in Sections
      5, 6, 7 and 8 of this Agreement shall survive cessation or termination of
      Executive’s employment hereunder.

     

    (n)  Section
      409A of the Code.

     

    (i)  It
      is the
      parties’ intention that this Agreement not result in any tax being imposed under
      Section 409A of the Code and in the case of any ambiguity the Agreement shall
      be
      construed in such manner.

     

    (ii)  Notwithstanding
      the foregoing, the Company makes no representations regarding the tax
      implications of the compensation and benefits to be paid to Executive under
      this
      Agreement, including, without limitation, under Section 409A of the Code. The
      parties agree that in the event a qualified tax advisor to the Company or to
      Executive (neither party being required to retain such advisor) reasonably
      advises that the terms hereof would result in Executive being subject to tax
      under Section 409A of the Code, Executive and the Company shall negotiate in
      good faith to amend this Agreement to the extent necessary to prevent the
      assessment of any such tax, including by delaying the payment dates of any
      amounts hereunder.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     

     

     

     

    
 

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    
 

    IN
      WITNESS WHEREOF, the Company has caused this Agreement to be duly executed
      on
      its behalf by an individual thereunto duly authorized and Executive has duly
      executed this Agreement, all as of the date and year first written
      above.

     

    
      	
                                                      SIGA
                TECHNOLOGIES, INC.

            
	
               

                                                      By:   
                

            	
              /s/
                Thomas N.
                Konatich                                               
                

            
	 	
              Name: 

            	
              Thomas
                N.
                Konatich                                        
                

            
	 	
              Title:

            	
              Chief
                Financial Officer and
                Acting                
                

              Chief
                Executive
                Officer                                   
                

            

    

    

    

    
      	
                                                       
/s/
                Eric A.
                Rose                                                                   
                                                                                   
                

            
	
                                                      Name:

            	
               
                Dr. Eric A. Rose, M.D.

            

    

     

     

     

     

     

    
15EXCHANGE AGREEMENT

Exchange Agreement (this "Agreement") entered into this 29th day of January 2007 by and between Ortec International, Inc., a Delaware corporation ("Ortec"), and Paul Royalty Fund, L.P. (formerly known as Paul Capital Royalty Acquisition Fund, L.P.), a Delaware limited partnership ("Paul Capital").

R E C I T A L S

A.         Ortec's certificate of incorporation permits amendments to such certificate of incorporation to be adopted by Ortec's Board of Directors to create new classes of Ortec preferred stock up to an authorized 1,000,000 shares of Ortec preferred stock, and in such amendment to set forth the rights and preferences of the class of preferred stock thus created.

B.         Paul Capital and/or Ortec and/or Orcel LLC have heretofore entered into the Revenue Interests Assignment Agreement and the Related Agreements and pursuant to the provisions of the Revenue Interests Assignment Agreement Ortec and Orcel LLC assigned the Revenue Interests to Paul Capital.

C.         The provisions of the Revenue Interests Assignment Agreement permit Paul Capital to compel Ortec to repurchase Paul Capital's Revenue Interests in certain events, some of which events have occurred.  Such Ortec obligation is secured by Ortec's assignment to Paul Capital of Ortec's intellectual property (including certain Ortec patents and trademarks registered in the United States, Mexico and Canada) and other assets of Ortec.

	
            D.
 	
            Ortec has advised Paul Capital that:
 

(i)         it has completed a confirmatory clinical trial for the use of its cryopreserved OrCel product for the treatment of venous leg ulcers;

 

 

(ii)           it does not have the funds necessary (x) to continue its business operations or (y) to prepare the PMA;

(iii)          Ortec's ability to issue and sell more of its equity securities or to enter into other transactions to secure the funds needed to carry on its business operations and to prepare and file the PMA would be enhanced if Paul Capital's Revenue Interests were converted into Ortec preferred equity securities.

E.          Paul Capital is willing, subject to fulfillment of the terms and conditions in this Agreement hereafter set forth, to convert its Revenue Interests into Ortec preferred equity securities so as to eliminate the treatment of Paul Capital's Revenue Interests as a secured liability on Ortec's balance sheet.

NOW, THEREFORE, in consideration of the foregoing and the respective covenants, agreements, representations and warranties set forth herein, the parties hereto agree as follows:

1.              Definitions.  As used in this Agreement, the following terms shall have the meanings ascribed to them below:

 

	
             
  	
            (a)
 	
            "Affiliate" means, with respect to any person, any other person that, directly or indirectly, controls, is controlled by, or is under common control with, such person.
 

 
 

	
             
  	
            (b)
 	
            "Bridge Notes" means the following notes evidencing loans made and to be made by the holders of such notes to Ortec, from which loans Ortec has received or will receive no more than $2,000,000 in the aggregate:
 

 
 

	
             
  	
            (i)
 	
            Note held by Valley Forge Investments Limited dated October 10, 2006 and evidencing a loan of $200,000;
 

 

 

 

	
             
  	
            (ii)
 	
            Note held by BIP Venture Partners SICAR SA dated November 10, 2006 and evidencing a loan of $150,000;
 

 
 

	
             
  	
            (iii)
 	
            Note held by Andreas Vogler also dated November 10, 2006 and evidencing a loan of $30,000;
 

 
 

	
             
  	
            (iv)
 	
            Note held by Andreas Vogler also dated November 10, 2006 and evidencing a loan of $70,000;
 

 
 

	
             
  	
            (v)
 	
            Note held by Tony Kamin (25/110) and Patrick J. O'Donnell (85/110) dated November 29, 2006 and evidencing a loan of $110,000;
 

 
 

	
             
  	
            (vi)
 	
            Note held by SDS Capital Group dated November 30, 2006 and evidencing a loan of $190,000;
 

 
 

	
             
  	
            (vii)
 	
            Note held by CIPHER 06 LLC dated December 5, 2006 and evidencing a loan of $50,000;
 

 
 

	
             
  	
            (viii)
 	
            Note held by Patrick J. O'Donnell dated December 8, 2006 and evidencing a loan of $50,000;
 

 
 

	
             
  	
            (ix)
 	
            Note held by CIPHER 06 LLC dated December 22, 2006 and evidencing a loan of $50,000;
 

 
 

	
             
  	
            (x)
 	
            Note held by Steven Katz dated December 22, 2006 and evidencing a loan of $25,000;
 

 
 

	
             
  	
            (xi)
 	
            Note held by Tammy Sweet dated December 22, 2006 and evidencing a loan of $50,000;
 

 
 

	
             
  	
            (xii)
 	
            Note held by Steven Katz dated December 27, 2006 and evidencing a loan of $85,000;
 

 

 

 

	
             
  	
            (xiii)
 	
            Note held by G. F. Holcombe dated January 2, 2007 and evidencing a loan of $50,000;
 

 
 

	
             
  	
            (xiv)
 	
            Note held by CIPHER 06 LLC dated January 5, 2007 and evidencing a loan of $60,000;
 

 
 

	
             
  	
            (xv)
 	
            Note held by Hadasit dated January 9, 2007 and evidencing a loan of $20,000;
 

 
 

	
             
  	
            (xvi)
 	
            Note held by Andreas Vogler dated January 25, 2007 and evidencing a loan of $92,000; and
 

 
 

	
             
  	
            (xvii)
 	
            Notes hereafter issued by Ortec evidencing loans to be hereafter made to Ortec aggregating no more than $718,000.
 

 
 

	
             
  	
            (c)
 	
            "Cancellation Agreements" means the Katz Cancellation Agreement and the Lipstein Cancellation Agreement.
 

 
 

	
             
  	
            (d)
 	
            "Common Stock" means the common stock of Ortec, par value $0.001 per share.
 

 
 

	
             
  	
            (e)
 	
            "Exchange Closing" means the closing referred to in Section 12 hereof.
 

 
 

	
             
  	
            (f)
 	
            "FDA" means the United States Food and Drug Administration.
 

 
 

	
             
  	
            (g)
 	
            "Financial Statements" means (a) the consolidated balance sheets, statements of operations, statements of shareholders' equity (deficit) and statements of cash flows of Ortec and its subsidiaries at December 31, 2005, and the accompanying notes thereto, which financial statements and notes are included in Ortec's Annual Report on Form 10-KSB filed with the SEC on April 17, 2006, and (b) the condensed consolidated balance sheets, statements of operations, statements of shareholders' equity (deficit) and statements of cash flows of Ortec and its subsidiaries at September 30, 2006, and the accompanying notes thereto, which 
 

 

 

condensed financial statements and notes are included in Ortec's Quarterly Report on Form 10-QSB filed with the SEC on November 13, 2006.

 

	
             
  	
            (h)
 	
            "Forbearance Agreement" means the letter agreements between Ortec and Paul Capital dated December 13, 2004 and October 19, 2006, wherein Paul Capital agreed that until July 1, 2006, and later until January 1, 2007, it would not exercise certain rights under Section 5.07(a) of the Revenue Interests Assignment Agreement that would otherwise be triggered to compel Ortec to purchase Paul Capital's Revenue Interests, because of certain defaults on Ortec's part of its covenants in the Revenue Interests Assignment Agreement.
 

 
 

	
             
  	
            (i)
 	
            "Government Authority" means any government, court, regulatory or administrative agency or commission, or other governmental authority, agency or instrumentality, whether federal, state or local (domestic or foreign), including, without limitation, the U.S. Patent and Trademark Office, the FDA, the U.S. National Institute of Health or any other government authority located in North America.
 

 
 

	
             
  	
            (j)
 	
            "Katz" means Steven Katz, having an office at 3960 Broadway, New York, New York 10032.
 

 
 

	
             
  	
            (k)
 	
            "Katz Cancellation Agreement" means the Cancellation Agreement to be entered into by Ortec and Katz prior to the Exchange Closing, such agreement to replace any and all pre-existing agreements between Ortec and Katz and to be in a form acceptable to Paul Capital and to the investors representing a majority of the gross proceeds constituting the New Funding Amount (including the holders of 
 

 

 

the Bridge Notes (and based on the gross proceeds received therefrom) that are converted into Series A-1 Preferred Stock).

 

	
             
  	
            (l)
 	
            "Lien" means any lien, encumbrance, security interest, mortgage or charge of any kind.
 

 
 

	
             
  	
            (m)
 	
            "Lipstein" means Ron Lipstein having an office at 3960 Broadway, New York, New York 10032.
 

 
 

	
             
  	
            (n)
 	
            "Lipstein Cancellation Agreement" means the Cancellation Agreement to be entered into by Ortec and Lipstein prior to the Exchange Closing, such agreement to replace any and all pre-existing agreements between Ortec and Lipstein and to be in a form acceptable to Paul Capital and to the investors representing a majority of the gross proceeds constituting the New Funding Amount (including the holders of the Bridge Notes (and based on the gross proceeds received therefrom) that are converted into Series A-1 Preferred Stock).
 

 
 

	
             
  	
            (o)
 	
            "New Funding Amount" means additional gross cash proceeds from the sale of Ortec preferred equity securities (which shall comprise substantially all the Ortec consideration provided in return for such proceeds), in an amount aggregating (i) not less than $8,000,000 (or $6,000,000 but only if Section 5 hereof becomes applicable), less the gross proceeds heretofore received and to be received by Ortec from loans evidenced by the Bridge Notes, except for the gross proceeds received and to be received by Ortec from those Bridge Notes that are repaid and not converted into Series A-1 Preferred Stock in accordance with this Agreement, in which case the gross proceeds from such Bridge Notes that are repaid and not converted shall not be deducted, and (ii) not more than $20,000,000.  
 

 

 

 

	
             
  	
            (p)
 	
            "New Investors" means the entities or persons providing the New Funding Amount.
 

 
 

	
             
  	
            (q)
 	
            "Ortec" means Ortec International, Inc., a corporation created under the laws of Delaware and having an office at 3960 Broadway, New York, New York 10032.
 

 
 

	
             
  	
            (r)
 	
            "Paul Capital" means Paul Royalty Fund, L.P., a limited partnership created under the laws of Delaware and having an office at Two Grand Central Tower, 140 East 45th Street, 44th Floor, New York, New York 10017, formerly known as Paul Capital Acquisition Fund, L.P.
 

 
 

	
             
  	
            (s)
 	
            "PMA" means Ortec's application for Pre-Market Approval to be filed by Ortec with the FDA for FDA clearance for the commercial sale of Ortec's cryopreserved OrCel product for the treatment of venous leg ulcers, in which application Ortec will, inter alia, report the results of Ortec's confirmatory clinical trial of its cryopreserved OrCel product for the treatment of venous leg ulcers.
 

 
 

	
             
  	
            (t)
 	
            "PRF Entitlement" has the meaning provided in Section 8(a).
 

 
 

	
             
  	
            (u)
 	
            "Related Agreements" means the following agreements entered into between Paul Capital, and/or Ortec and/or Orcel LLC, and/or JP Morgan Chase Bank, in connection with, and as contemplated by, the Revenue Interests Assignment Agreement, all of which, except as indicated below, are dated as of August 29, 2001:
 

 
 

	
             
  	
            (i)
 	
            Amended and Restated Security Agreement dated October 18, 2004 between Orcel LLC and Ortec, each as grantor, and Paul Capital, as grantee.
 

 

 

 

	
             
  	
            (ii)
 	
            The Membership Interest Pledge Agreement between Ortec and Paul Capital.
 

 
 

	
             
  	
            (iii)
 	
            Patent Security Agreement between Orcel LLC, as grantor, and Paul Capital, as grantee, as amended as of October 27, 2004.
 

 
 

	
             
  	
            (iv)
 	
            The Limited Liability Company Agreement of Orcel LLC.
 

 
 

	
             
  	
            (v)
 	
            The Security Agreement between Ortec and Orcel LLC.
 

 
 

	
             
  	
            (vi)
 	
            Management and Licensing Agreement between Orcel LLC, as licensor, and Ortec, as licensee.
 

 
 

	
             
  	
            (vii)
 	
            The Lock Box Agreement dated February 28, 2002 among JPMorgan Chase Bank, Paul Capital, Orcel LLC and Ortec. 
 

 
 

	
             
  	
            (v)
 	
            "Revenue Interests" means Paul Capital's right to receive a portion of Ortec's revenue from the sale in the United States, Canada and Mexico of Ortec's products that Ortec may sell in such countries, as set forth and defined in the Revenue Interests Assignment Agreement.
 

 
 

	
             
  	
            (w)
 	
            "Revenue Interests Assignment Agreement" means the Amended and Restated Revenue Interests Assignment Agreement dated as of February 26, 2003 among Orcel LLC, Ortec and Paul Capital, and the agreement which it amends dated August 29, 2001, as amended as of December 19, 2001 and as of January 15, 2002.
 

 
 

	
             
  	
            (x)
 	
            "SEC" means the U.S. Securities and Exchange Commission.
 

 
 

	
             
  	
            (y)
 	
            "Series A Certificate of Designation" means the Certificate of Designation of the rights and preferences of the Series A Convertible Preferred Stock to be 
 

 

 

adopted by Ortec's Board of Directors as an amendment to Ortec's certificate of incorporation.

 

	
             
  	
            (z)
 	
            "Series A Preferred Stock" means a new series of Ortec convertible preferred stock to be created by the Series A Certificate of Designation.
 

 
 

	
             
  	
            (aa)
 	
            "Series A-1 Certificate of Designation" means the Certificate of Designation of the rights and preferences of the Series A-1 Convertible Preferred Stock to be adopted by Ortec's Board of Directors as an amendment to Ortec's certificate of incorporation.
 

 
 

	
             
  	
            (bb)
 	
            "Series A-1 Preferred Stock" means another new series of Ortec convertible preferred stock to be created by the Series A-1 Certificate of Designation.
 

 

2.              Representations and Warranties of Ortec.  Ortec hereby represents and warrants to Paul Capital as of the date of this Agreement and as of the date of the Exchange Closing the following:

 

	
             
  	
            (a)
 	
            Organization.  Ortec is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all licenses, authorizations, consents and approvals required to carry on its business as now conducted and as proposed to be conducted in connection with the transactions contemplated hereby.
 

 
 

	
             
  	
            (b)
 	
            Corporate Authorization.  Ortec has all necessary power and authority to enter into, execute and deliver this Agreement and to perform all of the obligations to be performed by it hereunder and to consummate the transactions contemplated hereunder.  This Agreement has been duly authorized, executed and delivered by Ortec and constitutes its valid and binding obligation, enforceable against Ortec in 
 

 

 

accordance with its terms subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or general equitable principles.

 

	
             
  	
            (c)
 	
            Capitalization.  The entire authorized capital stock of Ortec consists of 200,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.  As of December 31, 2006, 8,962,538 shares of Common Stock and 5,948.6148 shares of Series D-1 Preferred Stock were issued and outstanding.  As of December 31, 2006, no shares of Common Stock or Preferred Stock were held in Ortec's treasury.  All such shares of Ortec have been duly authorized and are fully paid and non-assessable.  Except as set forth in Ortec's Financial Statements, or in its reports filed with the Securities and Exchange Commission, there are no outstanding options, warrants or other equity securities, or debt or similar instruments, that are convertible into, or exercisable for, shares of Ortec's capital stock.
 

 
 

	
             
  	
            (d)
 	
            Governmental Authorization.  The execution and delivery by Ortec of this Agreement, and the performance by Ortec of its obligations hereunder, does not require any notice to, action or consent by, or in respect of, or filing with, any Government Authority.
 

 
 

	
             
  	
            (e)
 	
            Compliance with Laws.  Each of Ortec and Orcel LLC (i) is not in violation of, has not violated, or to the knowledge of Ortec, is not under investigation with respect to, and (ii) has not been threatened to be charged with and been given notice of any violation of, with respect to clauses (i) and (ii) above, any law, rule, ordinance or regulation, judgment, order, writ, decree, permit or license of any 
 

 

 

Government Authority applicable to Ortec or Orcel LLC, which could reasonably be expected to have a material adverse effect on its business, condition (financial or otherwise) or operations.

 

	
             
  	
            (f)
 	
            Conflicts.  Neither the execution and delivery of this Agreement nor the performance or consummation of the transactions contemplated hereby will:  (i) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any material respects, any provisions of: (A) any law, rule, ordinance or regulation of any Government Authority, or any judgment, order, writ, decree, permit or license of any Government Authority, to which Ortec, Orcel LLC or any of their respective assets or properties may be subject or bound; or (B) any material contract, agreement, commitment or instrument to which Ortec or Orcel LLC is a party or by which Ortec or Orcel LLC or any of their respective assets or properties is bound or committed; (ii) contravene,
conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any respects, any provisions of the certificate of incorporation or by-laws (or other organizational or constitutional documents) of Ortec or Orcel LLC; (iii) require any notification to, filing with, or consent of, any person (including, without limitation, any party to any existing agreement to which Ortec or Orcel LLC is a party) or Government Authority; (iv) constitute a breach of or default under any agreement to which either Ortec or Orcel LLC is a party or give rise to any right of termination, cancellation or acceleration of any right or obligation of Ortec, Orcel LLC or any other person under any such agreement; or (v) result in the 
 

 

 

creation or imposition of any Lien on the assets or properties of Ortec or Orcel LLC.

 

	
             
  	
            (g)
 	
            No Undisclosed Liabilities.  Except for those liabilities (a) identified in the Financial Statements, and (b) incurred by Ortec in the ordinary course of business since September 30, 2006, in which period Ortec has had no revenue but continued and continues to incur expenses, because it is still in the development stage, there are no material liabilities of Ortec and any of its subsidiaries or Orcel LLC separately of any kind whatsoever, whether accrued, contingent, absolute, determined or determinable, and there is no condition, situation or set of circumstances, except for Ortec's inability to pay its obligations as they become due, which could reasonably be expected to result in such a material liability.
 

 
 

	
             
  	
            (h)
 	
            Accuracy of Reports.  All reports required to be filed by Ortec on or after January 1, 2005 under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, have been duly filed, were in substantial compliance with the requirements of their respective forms, were complete and correct in all material respects as of the dates at which the information was furnished, and contained (as of such dates) no untrue statement of a material fact nor omitted to state a material fact necessary in order to make the statements made therein in light of the circumstances under which they were made not misleading.
 

 

Provided, however, that with respect to the representations in paragraphs (g) and (h) of this Section 2, Ortec has advised Paul Capital that the Financial Statements in Ortec's annual report on Form 10-KSB for the year ended December 31, 2005, and its quarterly report on Form 10-QSB for the quarter ended June 30, 2006, both filed with the Securities and Exchange 

 

Commission, may have to be modified pursuant to a letter of comment Ortec has received from the SEC dated November 9, 2006 and submitted a response to the SEC dated December 26, 2006.

3.              Representations and Warranties of Paul Capital.  Paul Capital hereby represents and warrants to Ortec as of the date of this Agreement and as of the date of the Exchange Closing the following:

 

	
             
  	
            (a)
 	
            Organization.  Paul Capital is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware, and has all partnership powers and all licenses, authorizations, consents and approvals required to carry on its business as now conducted.
 

 
 

	
             
  	
            (b)
 	
            Authorization.  Paul Capital has all necessary power and authority to enter into, execute and deliver this Agreement and to perform all of the obligations to be performed by it hereunder.  This Agreement has been duly authorized, executed and delivered by Paul Capital and constitutes its valid and binding obligation, enforceable against Paul Capital in accordance with its terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and general equitable principles.
 

 
 

	
             
  	
            (c)
 	
            Conflicts.  Neither the execution and delivery of this Agreement nor the performance or consummation of the transactions contemplated hereby will:  (i) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any material respects, any provisions of:  (A) any law, rule, ordinance or regulation of any Government 
 

 

 

Authority, or any judgment, order, writ, decree, permit or license of any Government Authority, to which Paul Capital or any of its assets or properties may be subject or bound; or (B) any material contract, agreement, commitment or instrument to which Paul Capital is a party or by which Paul Capital or any of its assets or properties is bound or committed; (ii) contravene, conflict with, result in a breach or violation of, constitute a default under, or accelerate the performance provided by, in any respects, any provisions of organizational or constitutional documents of Paul Capital; or (iii) except for UCC financing statements or termination statements that may be required hereunder, require any notification to, filing with, or consent of any person or Government Authority.

4.              Exchange of Paul Capital's Revenue Interests.  Upon Ortec securing the minimum amount of cash proceeds required by the New Funding Amount, provided that such amount is secured on or before June 30, 2007, and subject to all other terms and conditions of this Agreement, Paul Capital will exchange its Revenue Interests for shares of Ortec's Series A Preferred Stock having an aggregate stated value of $10,000,000.  To effect such exchange Paul Capital, Ortec and Orcel LLC shall simultaneously with the issuance to Paul Capital of such shares of Ortec's Series A Preferred Stock having a stated value of $10,000,000, cancel the Revenue Interests Assignment Agreement as amended, and all the Related Agreements and Paul Capital shall
assign, reassign or release to Ortec or to Orcel LLC any and all interest in Ortec's intellectual property that Paul Capital may have and any and all interest that Paul Capital may have in Orcel LLC.  Without limiting the generality of the preceding sentence, the interests in intellectual property Paul Capital will in such event assign, reassign or release to Ortec or to Orcel LLC shall include the (i) the interest which is the subject of the Patent Security Agreement 

 

dated August 29, 2001 between Orcel LLC, as grantor, and Paul Capital, as grantee, (ii) any interest Paul Capital may have in the unregistered intellectual property assigned by Ortec to Orcel LLC by assignment dated September 29, 2001 and (iii) any interest Paul Capital may have in the intellectual property assigned by Ortec to Orcel LLC in the Trademark Assignment also dated August 29, 2001.  At the same time Paul Capital shall file with the appropriate governmental agencies UCC termination statements for all security interests Paul Capital may have in Ortec's or Orcel LLC's assets, including their intellectual property.  Ortec agrees that of the gross proceeds Ortec may receive as the New Funding Amount prior to the Exchange Closing and of the gross proceeds Ortec has heretofore received or may hereafter receive from the loans evidenced by the Bridge Notes, Ortec will use its best efforts to
allocate substantially all of such funds to support the clearance of the PMA by the FDA and further commercialization of Ortec's OrCel product and related supporting expenses, including existing contractual obligations.  

5.              A Different Reason for an Exchange of Revenue Interests.  Subject to the terms and conditions of this Agreement, Paul Capital agrees to exchange its Revenue Interests for Ortec's Series A Preferred Stock having a stated value of $10,000,000 if:

 

	
             
  	
            (a)
 	
            such exchange of Paul Capital's Revenue Interests is required for the listing of Ortec's common stock on any domestic or foreign securities exchange, including, without limitation, listing on Nasdaq or Nasdaq Small Cap, but only if Ortec's Board of Directors have voted for such listing, and
 

 
 

	
             
  	
            (b)
 	
            prior to such exchange of Paul Capital's Revenue Interests, Ortec shall hereafter receive the minimum amount of cash proceeds required by the New Funding 
 

 

 

Amount if this Section 5 is applicable, provided such amount is secured on or before June 30, 2007.

6.              Terms of the Series A Preferred Stock.  It is contemplated by the parties to this Agreement that substantially all of the New Funding Amount, including any of such amount that may be obtained after the Exchange Closing, will be obtained by means of Ortec's sale of its Series A-1 Preferred Stock, the rights, preferences and other terms of which will be set forth in the Series A-1 Certificate of Designation, the provisions of which will be negotiated by Ortec with all, or with the lead, investors who purchase the Series A-1 Preferred Stock prior to the Exchange Closing.  The provisions of the Series A Certificate of Designation will be identical to the provisions of the Series A-1 Certificate of Designation, so that the
rights, preferences and other terms governing the Series A Preferred Stock will be identical to the rights, preferences and other terms governing the Series A-1 Preferred Stock to be sold in securing the New Funding Amount, except that:

 

	
             
  	
            (a)
 	
            the stated amounts of the shares of the Series A-1 Preferred Stock shall be the gross amounts paid therefor by the purchasers thereof, and the stated amount of the Series A Preferred Stock shall, as set forth above, be $10,000,000, and such $10,000,000 stated dollar amount of the Series A Preferred Stock shall be convertible into shares of Ortec's common stock at the same dollar per share of common stock conversion price as the stated amounts of the Series A-1 Preferred Stock will be convertible into Ortec's common stock.
 

 
 

	
             
  	
            (b)
 	
            the liquidation preferences of the Series A and the Series A-1 Preferred Stocks shall be as follows:
 

 

 

 

	
             
  	
            (i)
 	
            the first $15,000,000 shall be paid to the holder or holders of the Series A Preferred Stock (that is Paul Capital or its successors or assigns) regardless of the stated amount thereof,
 

 
 

	
             
  	
            (ii)
 	
            thereafter such liquidation preference payments shall be paid to the holders of the Series A-1 Preferred Stock that Ortec sells to New Investors no later than 45 days after Ortec's OrCel product for treatment of venous leg ulcers has received FDA approval for commercial sales, up to the lesser of (A) the stated amounts thereof or (B) $20,000,000 in aggregate, and
 

 
 

	
             
  	
            (iii)
 	
            thereafter the next $5,000,000 shall be paid to the holders of the Series A Preferred Stock (that is Paul Capital or its successors or assigns) regardless of the stated amount thereof.
 

 

The circumstances under which a liquidation of Ortec will be deemed to have occurred will be the same in both the Series A Preferred Stock and the Series A-1 Preferred Stock, but will include any merger, reorganization, sale of all or substantially all the assets, exclusive license, acquisition of securities or other acquisition-type transaction, where any such merger, reorganization, license or sale of assets or acquisition-type transaction results in a change of control of Ortec or of all or substantially all of Ortec's assets.

 

	
             
  	
            (c)
 	
            The anti-dilution terms of the Series A Preferred Stock will be no less favorable to the holders thereof than the anti-dilution provisions provided in Section 4 of Series F Warrants to purchase shares of Common Stock of Ortec issued in October 2005.
 

 

 

 

	
             
  	
            (d)
 	
            The separate class voting rights of the Series A Preferred Stock will be no less favorable to the holders thereof than the following:  separate class voting rights of the Series A Preferred Stock for any changes to the provisions of the Series A Preferred Stock, to authorize any class of stock ranking senior to or pari passu with the Series A Preferred as to dividends and distributions, redemption rights, or rights upon a liquidation, to issue any additional Series A Preferred Stock, to enter into any recapitalization transaction or other transaction in which the common stockholders are required or permitted to exchange their shares for other securities, cash or property, any change of control transaction, or any sale transaction involving all or substantially all Ortec's assets, or before entering into any agreement with respect to
the foregoing.
 

 
 

	
             
  	
            (e)
 	
            The Series A Preferred Stock will have the same Ortec negative covenants as those included in the Series A-1 Preferred, including covenants covering additional indebtedness for money borrowed; additional Liens; dividends or distributions on junior securities; repurchases of junior securities; and amendments to charter or by-laws materially adversely affecting the preferred.
 

 
 

	
             
  	
            (f)
 	
            The Series A Preferred Stock will not be redeemable at the option of Ortec, unless (i) the redemption payment equals $20,000,000 in the aggregate for all Series A Preferred Stock, (ii) Ortec provides 30 days notice of the date any redemption will be effective, (iii) prior to the redemption time, the holders of the Series A Preferred will have the right to exercise any conversion rights they may have, (iv) such redemption is for all and not less than all the outstanding Series A Preferred Stock,  (v) any warrants granted to the holders of the Series A Preferred Stock are 
 

 

 

not affected by such redemption, and (vi) at the time Ortec provides notice of the redemption, it shall deposit in escrow the aggregate redemption amount for all then outstanding Series A Preferred Stock as well as any amounts necessary to repay any and all expenses of Paul Capital required to be repaid by Ortec pursuant to Section 10 hereof, and such escrowed amounts are applied to make the required payments at the redemption time.

 

	
             
  	
            (g)
 	
            The Series A Preferred Stock shall rank senior to Ortec's Series D-1 Preferred Stock.
 

 
 

	
             
  	
            (h)
 	
            the Series A Preferred Stock will be freely transferable by the holders thereof provided such transfers are in accordance with applicable laws.
 

 

7.              Other Covenants Related to Issuance of the Preferred Stock.  Ortec hereby agrees as follows:

 

	
             
  	
            (a)
 	
            Warrants.  If in consideration for the purchase of its Series A-1 Preferred Stock Ortec issues warrants to such purchasers to purchase Ortec's securities, Ortec shall issue identical warrants on identical terms to Paul Capital (except that warrants issued to Paul Capital shall be immediately detachable from the Series A Preferred Stock), but only as if Paul Capital had paid only $5,000,000 for the $10,000,000 stated amount of its Series A Preferred Stock.  For example, if Ortec sold its Series A-1 Preferred Stock with an aggregate stated amount of $15,000,000 for aggregate gross cash proceeds to Ortec from such sales of $15,000,000, and Ortec issued to such purchasers of its Series A-1 Preferred Stock warrants to purchase one share of Ortec's common stock for every $2 such purchaser had paid for its Series
A-1 Preferred Stock, that is warrants to purchase 
 

 

 

an aggregate of 7,500,000 shares of Ortec's common stock to all the purchasers who paid such aggregate of $15,000,000 for Ortec's Series A-1 Preferred Stock, then Ortec shall issue identical warrants (including an identical warrant exercise price) to Paul Capital or its successors or assigns to purchase an aggregate of 2,500,000 shares of Ortec's common stock as if Paul Capital had paid $5,000,000 for all its Series A Preferred Stock.

 

	
             
  	
            (b)
 	
            Incorporation of Additional Terms.  Ortec agrees to provide to Paul Capital all representations and warranties, affirmative and negative covenants and conditions obtained by the New Investors in any purchase agreement they enter into with Ortec prior to the Exchange Closing in connection with their commitment to provide any portion of the New Funding Amount, whether paid prior to, on or after the Exchange Closing, by incorporating such representations, warranties, covenants and conditions by reference in this Agreement.  On the date any such representations and warranties are made to such investors, Ortec shall deliver to Paul Capital an officer's certificate identifying them and confirming that they are incorporated by reference herein.  Ortec shall also identify and confirm, by delivering to Paul Capital
an officer's certificate to that effect, any other covenants and conditions that are incorporated by reference in this Agreement on the date of such incorporation.  
 

 
 

	
             
  	
            (c)
 	
            Additional Agreements.  Ortec agrees to enter into with Paul Capital any related agreements (e.g., registration rights agreements, shareholders agreements) that Ortec is required to enter into with the New Investors in connection with obtaining any portion of the New Funding Amount, whether paid prior to, on or 
 

 

 

after the Exchange Closing, which agreements with Paul Capital shall contain the same rights as those afforded to the New Investors in their agreements; provided, however, that the terms of any warrants provided to Paul Capital shall be governed by Section 7(a) hereof and the terms of any such agreements with Paul Capital shall not include any requirement for Paul Capital to invest any further funds in Ortec, whether in return for additional notes or equity (except for payment of the warrant exercise price in the event of an exercise of warrants issued pursuant to Section 7(a)), or any restrictive covenant binding on Paul Capital or any other provision that would have an adverse impact on Paul Capital's rights under this Agreement, notwithstanding the inclusion of such terms, if any,
in the agreements with the New Investors.  Paul Capital will have the right not to enter into any such related agreement offered by Ortec.

 

	
             
  	
            (d)
 	
            Consideration for New Funding Amount; Process.  Ortec acknowledges and agrees that Paul Capital will exchange its Revenue Interests for Series A Preferred Stock in accordance with all the terms and conditions of this Agreement only if substantially all the consideration provided by Ortec to the New Investors providing the minimum amount required by the New Funding Amount prior to the Exchange Closing is the issuance of Series A-1 Preferred Stock and warrants (and agreements entered into with the New Investors related to such Series A-1 Preferred Stock issuance which are also made available to Paul Capital) after good faith, arms-length negotiations.  If any other form of consideration is provided by Ortec to the New Investors in connection with obtaining such New Funding Amount, unless such consideration is
also offered to Paul Capital, Paul 
 

 

 

Capital will have the right to terminate this Agreement and will have no continuing liability or obligation hereunder thereafter.  Ortec agrees to use its best efforts to obtain at least the minimum amount required by the New Funding Amount on or before June 30, 2007, shall seek third parties who are not Affiliates of Ortec as sources for such funding, and shall engage in good faith, arms length negotiations with such parties to obtain such funding as promptly as possible.

 

	
             
  	
            (e)
 	
            Ortec Funding Limitations.  Ortec acknowledges and agrees that until termination of this Agreement, or if the Exchange Closing has occurred, until 45 days after Ortec's OrCel product for treatment of venous leg ulcers has received FDA approval for commercial sales, Ortec shall not seek or obtain any funding, or issue any debt or equity, other than the proceeds received in exchange for Bridge Notes or Series A-1 Preferred Stock as permitted by this Agreement.
 

 
 

	
             
  	
            (f)
 	
            Bi-Weekly Information Reports.  Until the Exchange Closing, Ortec shall cause its senior management to provide its Board and Board observers bi-weekly reports showing aggregate amounts of cash raised after the date hereof, uses of cash during the latest two week period and anticipated cash requirements and uses during the upcoming two week period. 
 

 

	
            8.
 	
            Preference for Bridge Notes.  Until the Exchange Closing:
 

 

	
             
  	
            (a)
 	
            if all or some of the Bridge Notes are outstanding at the time of  a liquidation of Ortec, and/or the disposition of Ortec's assets in which Paul Capital has a security interest under the Revenue Interest Assignment Agreement and Related Agreements, if and to the extent that any amounts are required to be paid to Paul Capital under the terms of the Revenue Interests Assignment Agreement or any of 
 

 

 

the Related Agreements as a result of such liquidation or disposition (the "PRF Entitlement"), there shall be paid out of the PRF Entitlement to the holders of the Bridge Notes pro rata up to the lesser of (i) the principal amount of the outstanding Bridge Notes Ortec has issued and sold between October 2006 and February 2007 and (ii) $2,000,000 (the lesser of the amounts in clause (i) and (ii) being referred to herein as the "Priority Repayment Amount"); provided that if any payment by Paul Capital to the holders of the Bridge Notes of  any portion of the PRF Entitlement paid to Paul Capital, or any payment by Ortec directly to such holders out of the PRF Entitlement, reduces the PRF Entitlement, then, before and as a condition to such payment, each holder of the Bridge Note to be paid shall (x) have agreed that Paul Capital shall be subrogated to the rights of such holder
under the applicable note to the extent of such payment to such holder and (y) have assigned to Paul Capital an undivided percentage interest in such holder's note equal to (A) the amount paid to such holder, divided by (B) the total principal and accrued interest evidenced by the applicable note; provided, further, that if any portion of the Priority Repayment remains unpaid, such unpaid portion shall be paid to such lenders by Ortec before payment by Ortec to Paul Capital pursuant to rights obtained by Paul Capital under clauses (x) and (y) above, and

 

	
             
  	
            (b)
 	
            Paul Capital hereby agrees to share the benefit of its security (and where applicable, ownership) interest in such Ortec intellectual property and other assets with the holders of the Bridge Notes by granting to the holders of the Bridge Notes a security interest in its contract rights (including its security interest) under the Revenue Interest Assignment Agreement and the Related Agreements to 
 

 

 

secure Paul Capital's payment obligations under Section 8(a) above.  Paul Capital shall execute such UCC filing statements and other documents as may be reasonably required to create and perfect such security arrangement.

Provided, however, that (i) the security interest in Paul Capital's contract rights described above and (ii) Paul Capital's agreement to pay over, or have Ortec pay over directly, to the holders of the Bridge Notes amounts received as part of the PRF Entitlement, shall terminate upon Paul Capital's exchange of its Revenue Interests for Series A Preferred Stock.  

9.              Change of Directors.  Katz, Lipstein, Dr. Mark Eisenberg, Dr. Steven Lilien and Dr. Allen Schiff have each separately agreed that upon the Exchange Closing he will resign any and all positions as an officer and/director of Ortec and any of its subsidiaries.  Katz and Lipstein have also separately agreed to use their best efforts to have Constantin Papastephanou, Ortec's president, and a person designated by Paul Capital, elected directors of Ortec.  In addition, Paul Capital shall have the continuing right to designate one other person to attend meetings of Ortec's Board of Directors as an observer.  It is also contemplated that up to two other potential nominees for board membership will be designated by the investors
representing a majority of the gross proceeds constituting the New Funding Amount (including the holders of the Bridge Notes (and based on the gross proceeds received therefrom) that are converted into Series A-1 Preferred Stock), unless such investors require that they be permitted to designate a larger number of directors.  Nothing in this Section 9, nor in any other provision in this Agreement, shall be interpreted to be an agreement by Katz or Lipstein or by Ortec that this Agreement creates a "voluntary termination" or an "involuntary termination" (as such terms are defined in the agreements between Ortec and Katz, and between Ortec and Lipstein, both dated December 

 

5, 2002) or any other termination of either of Katz's or Lipstein's employment by Ortec nor a waiver of any rights that any such party may have with respect to termination of employment.

10.           Payment of Paul Capital's Legal Expenses.  Upon Ortec hereafter receiving gross proceeds from holders of the Bridge Notes and the New Investors of not less than $4,000,000, Ortec shall promptly reimburse Paul Capital:

 

	
             
  	
            (a)
 	
            for expenses for legal services and disbursements previously incurred by Paul Capital which Ortec has agreed to reimburse per prior agreements, and
 

 
 

	
             
  	
            (b)
 	
            for expenses for legal services and disbursements reasonably incurred by Paul Capital in connection with the negotiation, drafting and execution of this Agreement and other agreements and documents contemplated by this Agreement, and the Revised Term Sheet upon which this Agreement is based, and the performance by Paul Capital of its obligations hereunder and thereunder, provided that Ortec's obligations under this sub-paragraph 10(b) shall not exceed $200,000.  Paul Capital will use its best efforts to limit the amount of such legal expenses.
 

 

11.           Extension of Forbearance Periods.  The definition of "Forbearance Period" provided in the Forbearance Agreements is hereby amended by changing the date "January 1, 2007" to "May 1, 2007."  If the PMA is accepted by the FDA for filing and Katz, Lipstein and Ortec have entered into the Cancellation Agreements on or before May 1, 2007, and Ortec is otherwise complying with its obligations under this Agreement, such definition of "Forbearance Period" shall at such time be further modified by changing the "May 1, 2007" date to January 1, 2008.

 

 

Exchange Closing and Delivery.

 

	
             
  	
            (a)
 	
            The closing of the issuance of the Series A Preferred Stock by Ortec to Paul Capital and the transfer, assignment and conveyance of the Revenue Interests by Paul Capital to Ortec shall be held at the offices of Chadbourne & Parke LLP, New York, New York USA at 1:00 p.m., local time on a day on or before June 30, 2007 (the "Exchange Closing") or at such other time and place upon which Ortec and Paul Capital shall agree.  Ortec shall provide at least 10 business days notice of a possible Exchange Closing.  
 

 
 

	
             
  	
            (b)
 	
            At the Exchange Closing, Ortec shall deliver to Paul Capital a certificate or certificates, registered in Paul Capital's name, representing the number of shares of the Series A Preferred Stock to be issued to Paul Capital pursuant to this Agreement.
 

 

	
            12.
 	
            Conditions to Exchange Closing.  
 

 

	
             
  	
            (a)
 	
            The obligations of Paul Capital to effect the Exchange Closing shall be subject to the satisfaction of each of the following conditions:
 

 
 

	
             
  	
            (i)
 	
            The representations and warranties made by Ortec in Section 2 hereof shall be true and correct on the date of this Agreement and the date of the Exchange Closing and the representations and warranties made by Ortec and incorporated by reference in this Agreement pursuant to Section 7(b) hereof shall be true and correct on the date of such incorporation and on the date of the Exchange Closing.
 

 
 

	
             
  	
            (ii)
 	
            All covenants, agreements and conditions contained in this Agreement (or incorporated by reference herein pursuant to Section 7(b)) to be performed 
 

 

 

by Ortec prior to the Exchange Closing shall have been performed or complied with in all material respects.

 

	
             
  	
            (iii)
 	
            Ortec shall have delivered to Paul Capital a certificate of Ortec executed by an authorized officer of Ortec, dated the date of the Exchange Closing, and certifying, among other things, to the fulfillment of the conditions specified in Sections 13(a)(i) and 13(a)(ii) of this Agreement.
 

 
 

	
             
  	
            (iv)
 	
            Ortec shall have obtained all permits and qualifications required by any state for the issuance of the Series A Preferred Stock, or shall have the availability of exemptions therefrom.
 

 
 

	
             
  	
            (v)
 	
            The certificates of amendment to the certificate of incorporation creating the Series A Preferred Stock and the Series A-1 Preferred Stock shall have been filed with the Secretary of State of the State of Delaware.
 

 
 

	
             
  	
            (vi)
 	
            Paul Capital shall have received customary opinions of counsel to Ortec, dated as of the date of the Exchange Closing, in form and substance reasonably satisfactory to Paul Capital.
 

 
 

	
             
  	
            (vii)
 	
            Ortec shall have received cash proceeds at least equal to the minimum amount required by the New Funding Amount and, as substantially all the  consideration therefor, shall have issued and delivered to the New Investors shares of the Series A-1 Preferred Stock and the warrants and related agreements permitted by this Agreement.
 

 
 

	
             
  	
            (viii)
 	
            In the event of an Exchange Closing in connection with the listing of Ortec's common stock on any domestic or foreign securities exchange contemplated by Section 5 hereof, such listing shall have been completed.
 

 

 

 

	
             
  	
            (ix)
 	
            Ortec shall have paid Paul Capital's legal expenses pursuant to Section 10 of this Agreement.
 

 
 

	
             
  	
            (x)
 	
            Ortec shall have executed and delivered to Paul Capital the warrants (if applicable pursuant to Section 7(a)) and the agreements required to be entered into with Paul Capital pursuant to Section 7(c) hereof.
 

 
 

	
             
  	
            (xi)
 	
            Ortec shall have either repaid and cancelled or arranged for the conversion into Series A-1 Preferred Stock of all outstanding Bridge Notes.
 

 
 

	
             
  	
            (xii)
 	
            Ortec shall have received at least (a) $8,000,000 in gross proceeds, or (b) in the event of an Exchange Closing in connection with the listing of Ortec's common stock on any domestic or foreign securities exchange contemplated by Section 5 hereof, $6,000,000 in gross proceeds, plus, in the case of either clause (a) or (b), any amounts necessary to repay and cancel the Bridge Notes that are not converted into Series A-1 Preferred Stock.
 

 
 

	
             
  	
            (xiii)
 	
            Katz, Lipstein, Dr. Mark Eisenberg, Dr. Steven Lilien and Dr. Allen Schiff shall have resigned as officers and members of the Boards of Directors of Ortec and any committees thereof as well as all Board of Director and Board committee positions of all Ortec subsidiaries, as applicable, and agreed that they will not seek or accept any such position in the future.
 

 
 

	
             
  	
            (xiv)
 	
            A newly constituted executive management team and Board of Directors of Ortec acceptable to Paul Capital and to the investors representing a majority of the gross proceeds constituting the New Funding Amount (including the holders of the Bridge Notes (and based on the gross 
 

 

 

proceeds received therefrom) that are converted into Series A-1 Preferred Stock), which Board shall include Costa Papastephanou, Andreas Vogler, Raphael Hofstein, and another member designated by Paul Capital, shall have been elected.

 

	
             
  	
            (xv)
 	
            The Cancellation Agreements shall have been entered into by Katz, Lipstein and Ortec and shall remain in full force and effect as entered into.  
 

 
 

	
             
  	
            (b)
 	
            The obligations of Ortec to effect the Exchange Closing shall be subject to the satisfaction of each of the following conditions:
 

 
 

	
             
  	
            (i)
 	
            The representations and warranties made by Paul Capital in Section 3 hereof shall be true and correct on the date of this Agreement and the date of the Exchange Closing.
 

 
 

	
             
  	
            (ii)
 	
            All covenants, agreements and conditions contained in this Agreement to be performed by Paul Capital prior to the Exchange Closing shall have been performed or complied with in all material respects.
 

 
 

	
             
  	
            (iii)
 	
            Paul Capital shall have delivered to Ortec a certificate of Paul Capital executed by an authorized person of Paul Capital, dated the date of the Exchange Closing, and certifying, among other things, to the fulfillment of the conditions specified in Sections 13(b)(i) and 13(b)(ii) of this Agreement.
 

 

13.           Termination.  This Agreement may be terminated at any time prior to the Exchange Closing by mutual written agreement, or by Paul Capital if (a) there is a substantial breach by Ortec that has not been cured within 15 days following written notification thereof, or (b) if the Exchange Closing shall not have occurred prior to June 30, 2007.  Upon any such 

 

termination, Paul Capital shall not have any continuing liability or obligation, except its obligation to forbear pursuant to Section 11 hereof.

14.           Notice.  Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery, by telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.

 

	
            Address of Paul Capital:
 	
            Paul Royalty Fund, L.P.
 

 

c/o Paul Capital Advisors, L.L.C.

Two Grand Central Tower

140 East 45th Street, 44th Floor

New York, New York  10017

Attention:  Lionel Leventhal

Telephone:  (646) 264-1106

	
            Facsimile:  
 	
            (646) 264-1101
 

 

	
            With a copy to:
 	
            Chadbourne & Parke LLP
 

 

30 Rockefeller Plaza

New York, New York  10012

Attention:  Morton E. Grosz, Esq.

Telephone:  (212) 408-5592

Facsimile:  (212) 408-5369

 

 

	
            Address of Ortec:
 	
            Ortec International, Inc.
 

 

3960 Broadway

New York, New York  10032

Attention:  Ron Lipstein or Alan Schoenbart

Telephone: (212) 740-6999

Facsimile:  (212) 740-2570

 

	
            With a copy to:
 	
            Feder, Kaszovitz, Isaacson, Weber, Skala,
 

 

  Bass & Rhine, LLP

750 Lexington Avenue

New York, New York  10022

Attention:  Gabriel Kaszovitz, Esq.

Telephone:  (212) 888-8200

	
            Facsimile:  
 	
            (212) 888-7776
 

15.           Governing Law; Dispute Resolution.  This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of the State of New York without regard to principles of choice of law or conflict of laws.  Each party to this Agreement (i) submits to the jurisdiction of the courts of the State of New York, located in New York County, New York, and, to the extent it can and does obtain jurisdiction, to the jurisdiction of the United States District Court for the Southern District of New York, with respect to the enforcement of any matter arising out of this Agreement, (ii) waives any objection to venue in the County of New York, State of New York, or such District Court, and (iii) agrees that service of any summons,
complaint, notice or other process relating to such proceeding may be effected in the manner for notice provided by Section 15 above.

16.           Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original and which together shall constitute one and the same agreement.

17.           Titles and Captions.  The titles and captions of the sections of this Agreement are for convenience of reference only and do not in any way define or interpret the intent of the parties or modify or otherwise affect any of the provisions hereof.

 

 

18.           No Presumptions.  Each party hereto acknowledges that it has had an opportunity to consult with counsel and has participated in the preparation of this Agreement.  No party hereto is entitled to any presumption with respect to the interpretation of any provision hereof or the resolution of any alleged ambiguity herein based on any claim that another party hereto drafted or controlled the drafting of this Agreement.

19.           Entire Agreement.  This Agreement embodies the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, commitments or arrangements relating thereto.

 

 

IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written.

	
            Ortec International, Inc.
 
	
             
 
	
             
 
	
            By:                                          
      /s/ Ron Lipstein                
 Print Name: Ron Lipstein                                          
              
 Title: CEO                                                                                                                                                                                                                                                                    
 
	
             
 
	
             
 
	
             
 
	
            Paul Royalty Fund, L.P. (formerly known as Paul Capital Royalty Acquisition Fund, L.P.)
 
	
             
 
	
             
 
	
            By:        Paul Capital Management, LLC,
 its General Partner
 
	
             
 
	
            By:        Paul Capital Advisors, LLC,
 its Manager
 
	
             
 
	
             
 
	
            By:                                       /s/ Lionel Leventhal                
 Print Name:  Lionel Leventhal
 Title:  Manager

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